Income Taxes

12 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The provision for income taxes was as follows during fiscal 2020, 2019 and 2018: 

	Year ended September 30,
	2020			2019			2018
	(In thousands)
Current:
Federal	$	14,566		$	1,299		$	8,071
State	2,180			(423		)	2,236
Foreign	12,482			15,371			9,559
	29,228			16,247			19,866
Deferred:
Federal	(8,575		)	7,003			13,987
State	(957		)	947			132
Foreign	893			(249		)	(3,535		)
	(8,639		)	7,701			10,584
Total provision	$	20,589		$	23,948		$	30,450

The foreign provision was based on foreign pre-tax earnings of $42.2 million, $36.0 million and $10.8 million in fiscal 2020, 2019 and 2018, respectively. Current foreign tax expense related to foreign tax withholdings was $6.4 million, $6.5 million and $6.0 million in fiscal 2020, 2019 and 2018, respectively. Foreign withholding tax and related foreign tax credits are included in current tax expense above.

Deferred tax assets and liabilities at September 30, 2020 and 2019 were as follows: 

	September 30,
	2020			2019
	(In thousands)
Deferred tax assets:
Loss and credit carryforwards	$	31,015		$	26,702
Compensation benefits	29,640			23,931
Operating lease liabilities	21,827			—
Other assets	9,000			9,393
	91,482			60,026
Less: valuation allowance	(24,563		)	(19,231		)
Total deferred tax assets	66,919			40,795
Deferred tax liabilities:
Intangible assets	(14,715		)	(15,114		)
Deferred commission	(9,027		)	(7,920		)
Property and equipment	(3,135		)	(3,511		)
Operating lease right-of-use assets	(13,719		)	—
Other liabilities	(11,694		)	(8,244		)
Total deferred tax liabilities	(52,290		)	(34,789		)
Deferred tax assets, net	$	14,629		$	6,006

Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowance at September 30, 2020.

As of September 30, 2020, we had available U.S. federal, state and foreign net operating loss (“NOL”) carryforwards of approximately $7.6 million, $0.1 million, and $31.3 million, respectively. The U.S. federal NOLs were acquired in connection with our acquisitions of Adeptra in fiscal 2012 and Infoglide in fiscal 2013. The U.S. federal NOL carryforward will expire at various dates beginning in fiscal 2024, if not utilized. The state NOL carryforward will expire at various dates beginning in fiscal 2021, if not utilized. The $31.3 million of foreign NOL includes $5.5 million related to China and $19.5 million related to Germany. Due to a limited ability to utilize the China and Germany NOLs, a full valuation allowance has been recorded on the China and Germany NOLs, resulting in no tax benefit. Utilization of the U.S. federal and state NOLs are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. In fiscal 2020 we generated approximately $4.7 million of excess federal research credits which are expected to be utilized fully in future tax years. We also have available excess California state research credit of approximately $16.6 million. The California state research credit does not have an expiration date; however, based on enacted law and expected future cash taxes, we have recorded a valuation allowance of $16.6 million.

A reconciliation of the provision for income taxes, with the amount computed by applying the U.S. federal statutory income tax rate (21% in each of fiscal 2020 and fiscal 2019, and 24.5% in fiscal 2018) to income before provision for income taxes for fiscal 2020, 2019 and 2018 is shown below:

	Year Ended September 30,
	2020			2019			2018
	(In thousands)
Income tax provision at U.S. federal statutory rate	$	53,970		$	45,375		$	38,495
State income taxes, net of U.S. federal benefit	4,619			4,194			2,755
Foreign tax rate differential	493			839			(649		)
Research credits	(5,868		)	(5,761		)	(3,486		)
Domestic production deduction	—			—			(2,421		)
Amended returns/audit settlements/statute expirations	(1,085		)	(2,268		)	(2,349		)
Foreign	7,513			11,177			4,040
Valuation allowance	5,332			(333		)	1,907
Foreign tax credit and foreign withholding tax	2,086			(464		)	1,320
Excess tax benefits relating to stock-based compensation	(45,086		)	(24,891		)	(22,253		)
Tax effect of the Tax Act	—			—			16,719
GILTI, FDII and BEAT	5,050			1,931			—
Other	(6,435		)	(5,851		)	(3,628		)
Recorded income tax provision	$	20,589		$	23,948		$	30,450

The decrease in our income tax provision in fiscal 2020 compared to fiscal 2019 was due to an increase in the excess tax benefits related to stock-based compensation in fiscal 2020.

The decrease in our income tax provision in fiscal 2019 compared to fiscal 2018 was due to the decrease in the overall federal tax rate from the blended 24.5% in fiscal 2018 to 21% in fiscal 2019 and the recording of several one-time items in fiscal 2018 related to the enactment of the Tax Act.

As of September 30, 2020, we had approximately $111.7 million of unremitted earnings of non-U.S. subsidiaries. The Company generates substantial cash flow in the U.S. and does not have a current need for the cash to be returned to the U.S. from the foreign entities. In the event these earnings are later remitted to the U.S., any estimated withholding tax and state income tax due upon remittance of those earnings is expected to be immaterial to the income tax provision.

Unrecognized Tax Benefit for Uncertain Tax Positions

We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for fiscal years prior to 2015.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 

	Year Ended September 30,
	2020			2019			2018
	(In thousands)
Gross unrecognized tax benefits at beginning of year	$	5,834		$	6,113		$	6,480
Gross increases for tax positions in prior years	883			509			404
Gross decreases for tax positions in prior years	(65		)	(611		)	—
Gross increases based on tax positions related to the current year	2,260			1,439			1,625
Decreases for settlements and payments	—			(637		)	—
Decreases due to statute expiration	(918		)	(979		)	(2,396		)
Gross unrecognized tax benefits at end of year	$	7,994		$	5,834		$	6,113

We had $8.0 million of total unrecognized tax benefits as of September 30, 2020, including $7.8 million of tax benefits that, if recognized, would impact the effective tax rate. Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a significant reduction of the uncertain tax benefits in the next twelve months.

We recognize interest expense and penalties related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income. We recognize interest earned related to income tax matters as interest income in our consolidated statements of income and comprehensive income. As of September 30, 2020, we had accrued interest of $0.4 million related to the unrecognized tax benefits.