Income Taxes

12 Months Ended

Sep. 27, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes Income before income taxes, by geographic area, was as follows:

	Fiscal Year Ended
	September 27, 2020		September 29, 2019		September 30, 2018
	(in thousands)
Income before income taxes:
United States	$	209,443	$	185,535	$	180,034
Foreign	18,548		(10,399)		(5,472)
Total income before income taxes	$	227,991	$	175,136	$	174,562

Income tax expense consisted of the following:

	Fiscal Year Ended
	September 27, 2020		September 29, 2019		September 30, 2018
			(in thousands)
Current:
Federal	$	24,102	$	30,051	$	46,840
State	6,872		8,923		9,228
Foreign	20,398		15,016		10,897
Total current income tax expense	51,372		53,990		66,965
Deferred:
Federal	2,187		(9,108)		(22,072)
State	870		(1,195)		(1,471)
Foreign	(328)		(27,312)		(5,817)
Total deferred income tax expense	2,729		(37,615)		(29,360)
Total income tax expense	$	54,101	$	16,375	$	37,605

Total income tax expense was different from the amount computed by applying the U.S. federal statutory rate to pre-tax income as follows:

	Fiscal Year Ended
	September 27, 2020	September 29, 2019	September 30, 2018
Tax at federal statutory rate	21.0%	21.0%	24.5%
State taxes, net of federal benefit	2.7	3.4	4.2
Research and Development ("R&D") credits	(2.2)	(4.7)	(1.4)
Domestic production deduction	—	—	(0.2)
Tax differential on foreign earnings	0.7	1.0	0.5
Non-taxable foreign interest income	(1.1)	(1.7)	(2.0)
Goodwill	1.5	0.9	1.7
Stock compensation	(2.2)	(2.4)	(2.7)
Valuation allowance	1.6	(13.5)	(0.5)
Change in uncertain tax positions	0.4	2.4	1.9
Revaluation of deferred taxes	—	(1.4)	(8.4)
Deferred tax adjustments	(1.3)	(0.4)	2.1
Transition tax on foreign earnings	—	1.4	—
Other	2.6	3.3	1.8
Total income tax expense	23.7%	9.3%	21.5%

The effective tax rates for fiscal 2020, 2019 and 2018 were 23.7%, 9.3% and 21.5%, respectively. The goodwill impairment charges in fiscal 2020 and fiscal 2019 and certain of the transaction charges in fiscal 2019 did not have related tax benefits. Income tax expense was reduced by $8.3 million, $6.4 million, $5.1 million of excess tax benefits on share-based payments in fiscal 2020, 2019, and 2018, respectively. Additionally, we analyzed our deferred tax liabilities for the Tax Cuts and Jobs Act's ("TCJA's") lower tax rates and recorded a deferred tax benefit of $2.6 million and $10.1 million in fiscal 2019 and fiscal 2018, respectively. Also, valuation allowances of $22.3 million in Australia were released due to sufficient positive evidence obtained during the second quarter of fiscal 2019. The valuation allowances were primarily related to net operating loss and research and development credit carryforwards and other temporary differences. We evaluated the positive evidence against any negative evidence and determined that it was more likely than not that the deferred tax assets would be realized. The factors used to assess the likelihood of realization were the past performance of the related entities, our forecast of future taxable income, and available tax planning strategies that could be implemented to realize the deferred tax assets.

Excluding the impact of the non-deductible goodwill impairment charges and transaction costs, the excess tax benefits on share-based payments, the net deferred tax benefits from the TCJA, and the valuation allowance release, our effective tax rates in fiscal 2020, 2019, and 2018 were 25.6%, 24.6%, and 30.3% respectively.

We are currently under examination by the Internal Revenue Service for fiscal year 2018, the Canada Revenue Agency for fiscal years 2011 through 2016, and the California Franchise Tax Board for fiscal years 2014 through 2016. We are also subject to various other state audits.

Temporary differences comprising the net deferred income tax asset shown on the accompanying consolidated balance sheets were as follows:

	Fiscal Year Ended
	September 27, 2020		September 29, 2019
	(in thousands)
Deferred Tax Assets:
State taxes	$	1,146	$	764
Reserves and contingent liabilities	6,262		5,500
Allowance for doubtful accounts	6,283		7,506
Accrued liabilities	28,223		28,232
Lease liabilities, operating leases	66,941		—
Stock-based compensation	5,905		6,700
Loss carry-forwards	43,475		39,782
Valuation allowance	(24,395)		(20,543)
Total deferred tax assets	133,840		67,941
Deferred Tax Liabilities:
Unbilled revenue	(14,451)		(21,886)
Prepaid expense	(5,967)		(3,026)
Right-of-use assets, operating leases	(66,941)		—
Intangibles	(29,130)		(26,482)
Property and equipment	(1,615)		(1,133)
Total deferred tax liabilities	(118,104)		(52,527)
Net deferred tax assets	$	15,736	$	15,414

At September 27, 2020, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $66.9 million are expected to be permanently reinvested. Accordingly, no provision for foreign withholding taxes has been made. Upon distribution of those earnings, we would be subject to foreign withholding taxes. Assuming the permanently reinvested foreign earnings were repatriated under the laws and rates applicable at September 27, 2020, the incremental foreign withholding taxes applicable to those earnings would be approximately $2.0 million.

At September 27, 2020, we had available unused state net operating loss ("NOL") carry forwards of $43.7 million that expire at various dates from 2024 to 2037; and available foreign NOL carry forwards of $138.4 million, of which $31.6 million expire at various dates from 2024 to 2040, and $106.8 million have no expiration date. In addition, we had foreign capital loss

carryforwards of $13.8 million and foreign research and development credits of $4.3 million that do not have expiration dates. We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, availability of carrybacks, cumulative losses in recent years, estimates of projected future taxable income, and tax planning strategies. Although realization is not assured, based on our assessment, we have concluded that it is more likely than not that the assets will be realized except for the assets related to the loss carry-forwards and certain foreign intangibles for which a valuation allowance of $24.4 million has been provided.

At September 27, 2020, we had $9.2 million of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of our unrecognized tax positions may significantly decrease in the next 12 months. These changes would be the result of ongoing examinations. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Fiscal Year Ended
	September 27, 2020		September 29, 2019		September 30, 2018
	(in thousands)
Beginning balance	$	9,169	$	8,328	$	9,337
Additions for current year tax positions	700		1,342		1,928
Additions for prior year tax positions	—		356		1,116
Reductions for prior year tax positions	(641)		(100)		—
Settlements	—		(757)		(4,053)
Ending balance	$	9,228	$	9,169	$	8,328

We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal years 2020, 2019 and 2018, we accrued additional interest and penalties of $0.8 million, $2.6 million and $0.6 million, respectively, and recorded reductions in accrued interest and penalties of $0, $0.2 million and $0.3 million, respectively, as a result of audit settlements and other prior-year adjustments. The amount of interest and penalties accrued at September 27, 2020, September 29, 2019 and September 30, 2018 was $4.4 million, $3.6 million and $1.2 million, respectively.