Income Taxes

12 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

12.    Income Taxes

The components of the income tax provision (benefit) from continuing operations for the fiscal years are as follows (in thousands):

	Year Ended September 30,
	2019		2018		2017
Current income tax provision (benefit):
Federal	$	963	$	—	$	—
State		510		917		402
Foreign		15,860		7,608		7,499
Total current income tax provision		17,333		8,525		7,901
Deferred income tax provision (benefit):
Federal		(8,633)		(48,815)		(4,247)
State		(2,138)		(5,518)		(249)
Foreign		(6,673)		(1,443)		(25)
Total deferred income tax provision (benefit)		(17,444)		(55,776)		(4,521)
Income tax provision (benefit)	$	(111)	$	(47,251)	$	3,380

The components of income (loss) from continuing operations before income taxes and equity in earnings of equity method investments for the fiscal years are as follows (in thousands):

	Year Ended September 30,
	2019		2018		2017
Domestic	$	(37,160)	$	3,122	$	(13,211)
Foreign		46,603		17,344		27,731
	$	9,443	$	20,466	$	14,520

The differences between the income tax provision (benefit) on income (loss) from continuing operations including income from equity in earnings (losses) of equity method investments and income taxes computed using the applicable U.S. statutory federal tax rates for the fiscal years ended September 30, 2019, 2018 and 2017 are as follows (in thousands):

	Year Ended September 30,
	2019		2018		2017
Income tax provision computed at federal statutory rate	$	1,983	$	5,014	$	4,923
State income taxes, net of federal benefit		(630)		692		137
Foreign income taxed at different rates		550		920		(1,644)
Impact of investments in subsidiaries		(536)		(729)		(965)
Change in deferred tax asset valuation allowance		(2,264)		(75,918)		319
Net increase (reduction) in uncertain tax positions		720		220		731
Global intangible low taxed income, net of foreign tax credits		942		—		—
Impact of U.S. federal tax rate change		—		15,287		—
Compensation		(1,103)		(701)		579
Tax credits		(2,741)		(1,633)		(1,151)
Merger costs		572		1,405		—
Other taxes		764		70		98
Non-deductible expenses		174		176		220
Transition tax		2,836		8,027		—
Deferred state rate change due to acquisition		(1,360)		—		—
Other		(18)		(81)		133
Income tax provision (benefit)	$	(111)	$	(47,251)	$	3,380

The Company has not provided deferred income taxes on the outside basis differences of its foreign subsidiaries. The Company maintains its assertion of indefinite reinvestment as of September 30, 2019. The foreign earnings are

expected to be reinvested in foreign operations and acquisitions. Unremitted foreign earnings total approximately $190 million. We did not calculate estimated deferred tax liabilities related to these earnings because such calculations would not be practicable. The taxes on these earnings would primarily consist of foreign withholding taxes and minimal U.S. state income taxes. It is not practicable to estimate the tax impact of the reversal of the outside basis difference, or the repatriation of cash due to the complexity of its hypothetical calculation.

The significant components of the net deferred tax assets and liabilities as of September 30, 2019 and 2018 are as follows (in thousands):

	September 30,
	2019		2018
Accruals and reserves not currently deductible	$	14,286	$	11,699
Federal, state and foreign tax credits		5,952		27,923
Other assets		2,487		175
Equity compensation		5,360		5,926
Net operating loss carryforwards		18,987		16,790
Deferred revenue		4,038		2,882
Inventory reserves and valuation		5,626		6,520
Deferred tax assets		56,736		71,915
Depreciation and intangible amortization		(57,634)		(19,476)
Deferred tax liabilities		(57,634)		(19,476)
Valuation allowance		(16,093)		(18,581)
Net deferred tax asset (liability)	$	(16,991)	$	33,858

The deferred tax assets on the balance sheet for September 30, 2019 also includes a $1.5 million deferred tax charge related to the company’s intercompany profit elimination.

ASC Topic 740, Income Taxes, requires that all available evidence, both positive and negative, be considered in determining, based on the weight of that evidence, whether a valuation allowance is needed. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or the entire deferred tax asset. A cumulative loss in recent years is considered a significant piece of negative evidence that is difficult to overcome in assessing the need for a valuation allowance.

The Company evaluates the realizability of its deferred tax assets by tax-paying component and assesses the need for a valuation allowance on an annual and quarterly basis. The Company evaluates the profitability of each tax-paying component on a historic cumulative basis and a forward-looking basis in the course of performing this analysis. The Company evaluated all positive and negative evidence in concluding it was appropriate to establish a full valuation allowance against U.S. net deferred tax assets during fiscal year 2016. The Company maintained this position throughout fiscal year 2017 and the first quarter of fiscal year 2018.

After evaluating all the relevant positive and negative evidence as of March 31, 2018, the Company concluded that it was more likely than not that a substantial portion of the U.S. deferred tax assets would be realized. In the second quarter of fiscal year 2018 the Company reached a significant level of cumulative profitability in the U.S., coupled with an improved outlook of U.S. earnings. During the full fiscal year 2018, the Company reduced its U.S. valuation against its U.S. net deferred tax assets resulting in a tax benefit of $77.2 million. The remaining portion of the Company’s U.S. valuation allowance is related to the realizability of certain state tax credits and net operating loss carry-forwards. The Company continues to maintain valuation allowances against net deferred tax assets in certain foreign tax-paying components as of the end of fiscal year 2018.

As of September 30, 2019, the Company has federal, state and foreign net operating loss carry-forwards of approximately $26.4 million, $21.8 million and $52.3 million, respectively. Included in the federal gross net operating loss carry-forwards are $21.7 million of losses that can be carried forward indefinitely, while the remaining losses expire at various dates through 2038.

As of September 30, 2019, the Company had federal research and development tax credit carry-forwards of $1.6 million. These credit carry-forwards will expire at various dates beginning in 2037 through 2038. The Company also has $6.8 million of state credits which begin to expire in 2020, while some of these credits have an unlimited carryover period.

During the fiscal year 2018, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted in the U.S., making significant tax law changes affecting the Company.

In accordance with international tax reform regulations, the Company recorded a toll charge in the U.S. on its previously untaxed accumulated foreign earnings. The Company recorded a tax impact of $8.0 million, net of foreign tax credits, related to the toll charge during the fiscal year ended September 30, 2018. The Company completed final calculations in accordance with Staff Accounting Bulletin No.118 during the first quarter of fiscal year 2019 and recorded a reduction in the toll charge of $1.1 million. During the third quarter of fiscal year 2019, the U.S. government issued final regulations that clarified certain rules related to the toll charge that impacted fiscal year taxpayers. As a result of this clarification, the Company recorded an increase to the toll charge of $4.1 million. After all adjustments had been recorded, the Company realized a toll charge of $11.0 million, net of foreign tax credits.

The Company has performed studies to determine if there are any annual limitations on the federal net operating losses under the Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. As a result of these studies, the Company has determined that ownership changes have occurred primarily in connection with acquisitions when the Company has issued stock to the sellers, as well as ownership changes in the subsidiaries acquired by the Company. Certain limitations have been calculated, and the benefits of the net operating losses that will expire before utilization have not been recorded as deferred tax assets in the accompanying Consolidated Balance Sheets. Limitations on current year use of net operating loss carryovers have also been recorded in the tax provision.

The Company maintains liabilities for unrecognized tax benefits. These liabilities involve judgment and estimation, and they are monitored based on the best information available. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the fiscal years ended September 30, 2019, 2018 and 2017 is as follows (in thousands):

	Total
Balance at September 30, 2016	$	5,427
Additions for tax positions in current year		1,869
Reduction for tax positions in prior year		(3,485)
Net reductions from lapses in statutes of limitations		(431)
Foreign exchange rate adjustment		(2)
Balance at September 30, 2017		3,378
Additions for tax positions in current year		874
Reduction for tax positions in prior year		(656)
Reductions from lapses in statutes of limitations		(353)
Balance at September 30, 2018		3,243
Additions for tax positions in current year		901
Additions for tax positions in prior year		13,400
Reductions from lapses in statutes of limitations		(68)
Reductions from settlements with taxing authorities		(166)
Balance at September 30, 2019	$	17,310

All of the unrecognized tax benefits for the fiscal year ended September 30, 2019 would impact the effective tax rate if recognized. The Company recognizes interest related to unrecognized benefits as a component of the income tax provision (benefit), of which $1.1 million, $0.1 million and $0.1 million, respectively, was recognized for the fiscal years ended September 30, 2019, 2018 and 2017. The Company recorded $13.4 million of unrecognized tax benefit with the acquisition of GENEWIZ. All liabilities associated with the unrecognized tax benefits recorded with the acquisition of GENEWIZ are part of an indemnification agreement with the sellers.

The Company is subject to U.S. federal income tax and state, local and international income taxes in various jurisdictions. The amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.

In the normal course of business, the Company is subject to income tax audits in various global jurisdictions in which it operates. The years subject to examination vary for the U.S. and international jurisdictions, with the earliest tax year being 2012. Based on the outcome of these examinations or the expiration of statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the Company’s Consolidated Balance Sheets. The Company currently anticipates that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $0.1 million in the next 12 months.