Note 5 – Income Taxes

For financial reporting purposes earnings (losses) before income taxes include the following components:


	For the years ended August 31,
($ in thousands)	2017		2016		2015
United States	$	21,969	$	17,805	$	49,668
Foreign		13,746		11,483		(2,917)
	$	35,715	$	29,288	$	46,751

Significant components of the income tax provision are as follows:


	For the years ended August 31,
($ in thousands)	2017		2016		2015
Current:
Federal	$	7,873	$	10,570	$	15,908
State		781		976		1,426
Foreign		4,785		3,230		2,830
Total current		13,439		14,776		20,164
Deferred:
Federal		(688)		(5,456)		(406)
State		(43)		(268)		45
Foreign		(172)		(31)		639
Total deferred		(903)		(5,755)		278
Total income tax provision	$	12,536	$	9,021	$	20,442

Total income tax provision resulted in effective tax rates differing from that of the statutory United States federal income tax rates. The reasons for these differences are:


	For the years ended August 31,
($ in thousands)	2017			2016			2015
	Amount		%	Amount		%	Amount		%
U.S. statutory rate	$	12,500	35.0	$	10,251	35.0	$	16,363	35.0
State and local taxes, net of federal tax benefit		480	1.3		350	1.2		911	1.9
Foreign tax rate differences		(486)	(1.4)		(195)	(0.7)		1,478	3.2
Domestic production activities deduction		(700)	(2.0)		(960)	(3.3)		(1,548)	(3.3)
Deferred tax asset valuation allowance		—	—		—	—		2,949	6.3
Other		742	2.2		(425)	(1.4)		289	0.6
Effective rate	$	12,536	35.1	$	9,021	30.8	$	20,442	43.7

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:


	August 31,
($ in thousands)	2017		2016
Deferred tax assets:
Accrued expenses and allowances	$	12,459	$	13,053
Warranty		2,957		2,708
Defined benefit pension plan		2,666		2,917
Inventory		2,101		1,898
Share-based compensation		1,578		1,845
Vacation		1,422		1,365
Net operating loss carry forwards		1,420		1,174
Deferred revenue		793		1,501
Other		2,834		2,603
Gross deferred tax assets		28,230		29,064
Valuation allowance		(2,804)		(2,825)
Net deferred tax assets	$	25,426	$	26,239

Deferred tax liabilities:
Intangible assets	$	(15,422)	$	(16,426)
Property, plant, and equipment		(5,706)		(6,609)
Inventory		(178)		(203)
Total deferred tax liabilities	$	(21,306)	$	(23,238)

Net deferred tax assets	$	4,120	$	3,001

In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Because the Company has a recent history of generating cumulative losses in a certain foreign tax jurisdiction, management did not consider projections of future taxable income as persuasive evidence for the recoverability of deferred tax assets in that jurisdiction. Therefore, the Company recorded a valuation allowance of $2.9 million as of August 31, 2015. The Company did not record an additional allowance in fiscal 2017 or 2016.

The Company does not intend to repatriate earnings of its foreign subsidiaries and accordingly, has not provided a U.S. deferred income tax liability on these undistributed earnings that are indefinitely reinvested. The Company would recognize a deferred income tax liability if the Company were to determine that such earnings are no longer indefinitely reinvested. At August 31, 2017, undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $43.9 million. Determination of the estimated amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.

The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

A reconciliation of changes in unrecognized tax benefits is as follows:


	August 31,
($ in thousands)	2017		2016
Unrecognized tax benefits at September 1	$	1,260	$	3,836
Increases for positions taken in current year		371		33
Increases for positions taken in prior years		129		153
Reduction resulting from lapse of applicable statute of limitations		(224)		(299)
Decreases for settlements with tax authorities		(38)		(2,463)
Unrecognized tax benefits at August 31	$	1,498	$	1,260

The net amount of unrecognized tax benefits at August 31, 2017 and 2016 that, if recognized, would impact the Company’s effective tax rate was $1.5 million and $1.3 million, respectively. Recognition of these tax benefits would have a favorable impact on the Company’s effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. Total accrued liabilities for interest and penalties included in the unrecognized tax benefits liability were $0.8 million for each of the years ended August 31, 2017 and 2016.

While it is expected that the amount of unrecognized tax benefits will change in the next twelve months as a result of the expiration of statutes of limitations, the Company does not expect this change to have a significant impact on its results of operations or financial position.

The Company files income tax returns in the United States and in state, local, and foreign jurisdictions. The Company is no longer subject to examination by tax authorities in most jurisdictions for years prior to 2014.