| INCOME TAXES | 9. INCOME TAXES
For the years ended May 31, 2015, 2014 and 2013, we were taxed
on income from continuing operations at an effective tax rate of
36%, 35% and 37%, respectively. Our income tax provision for
May 31, 2015, 2014 and 2013 was $22.8 million, $16.2 million
and $19.2 million, respectively, and includes federal, state and
foreign taxes. The components of our tax provision were as follows
(in thousands):
Current Deferred Total
Year ended May 31, 2015:
U.S. Federal $ 17,183 $ 606 $ 17,789
State & local 2,634 (141 ) 2,493
Foreign jurisdictions 3,598 (1,087 ) 2,511
$ 23,415 $ (622 ) $ 22,793
Year ended May 31, 2014:
U.S. Federal $ 11,933 $ 358 $ 12,291
State & local 1,759 319 2,078
Foreign jurisdictions 3,573 (1,706 ) 1,867
$ 17,265 $ (1,029 ) $ 16,236
Year ended May 31, 2013:
U.S. Federal $ 7,947 $ 4,873 $ 12,820
State & local 1,847 236 2,083
Foreign jurisdictions 4,328 (20 ) 4,308
$ 14,122 $ 5,089 $ 19,211
The components of pre-tax income for the years ended May 31,
2015, 2014 and 2013 were as follows (in thousands):
Twelve Months Ended
May 31,
2015 2014 2013
Domestic $ 51,784 $ 38,214 $ 37,445
Foreign 11,506 8,171 14,480
$ 63,290 $ 46,385 $ 51,925
Income tax expense attributable to income differed from the amounts
computed by applying the U.S. Federal income tax rate of 35% to
pre-tax income from continuing operations as a result of the
following (in thousands):
Twelve Months Ended
May 31,
2015 2014 2013
Pre-tax income $ 63,290 $ 46,385 $ 51,925
Computed income taxes at statutory rate $ 22,153 $ 16,235 $ 18,174
State income taxes, net of federal benefit 1,670 1,505 1,570
Foreign tax rate differential (1,318 ) (1,004 ) (1,261 )
Production activity deduction (136 ) (174 ) (113 )
Deferred taxes on investment in foreign subsidiaries 819 (1,133 ) 712
Non-deductible expenses 513 510 473
Foreign tax credits (11 ) (1,942 ) (3 )
Other tax credits (223 ) (244 ) (337 )
Dividend from foreign subsidiaries — 2,062 —
Valuation allowance (394 ) 414 65
Other (280 ) 7 (69 )
Total provision for income tax $ 22,793 $ 16,236 $ 19,211
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in thousands):
May 31,
2015 2014
Deferred tax assets:
Accrued compensation and benefits $ 5,752 $ 3,625
Receivables 513 1,180
Inventory 553 560
Stock options 3,110 3,299
Foreign currency translation and other equity adjustments 2,897 1,242
Net operating loss carry forwards 1,198 352
Other 3,474 2,675
Deferred tax assets 17,497 12,933
Less: Valuation allowance (85 ) (479 )
Deferred tax assets, net 17,412 12,454
Deferred tax liabilities:
Property, plant and equipment (11,679 ) (11,248 )
Goodwill and intangible costs (7,775 ) (6,619 )
Unremitted earnings of foreign subsidiaries (2,004 ) (1,185 )
Prepaids (1,610 ) (1,318 )
Other (552 ) (588 )
Deferred tax liabilities (23,620 ) (20,958 )
Net deferred tax liability $ (6,208 ) $ (8,504 )
As of May 31, 2015, we had a valuation allowance of $0.1
million to reduce our deferred tax assets to an amount more likely
than not to be recovered. This valuation allowance relates to net
operating loss carry forwards related to closure of foreign
subsidiaries in the amount of $0.1 million. In assessing the
realizability of deferred tax assets, we consider 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. We consider the reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
As of May 31, 2015, we had net operating loss carry forwards
totaling $4.0 million that were expected to be realized in fiscal
year 2016. A total of $3.3 million has an unlimited carry forward
period and will therefore not expire.
At May 31, 2015, undistributed earnings of foreign operations
totaling $17.1 million were considered to be permanently
reinvested. We have recognized no deferred tax liability for the
remittance of such earnings to the U.S. since it is our intention
to utilize those earnings in the foreign operations. Generally,
such earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. Determination of
the unrecognized deferred U.S. income tax liability is not
practicable due to uncertainties related to the timing and source
of any potential distribution of such funds, along with other
important factors such as the amount of associated foreign tax
credits.
At May 31, 2015, we have established liabilities for uncertain
tax positions of $0.5 million, inclusive of interest and penalties.
To the extent these uncertainties are ultimately resolved
favorably, the resulting reduction of recorded liabilities would
have an effect on our effective tax rate. In accordance with ASC
740-10, our policy is to recognize interest and penalties related
to unrecognized tax benefits through the tax provision.
We file income tax returns in the U.S. with federal and state
jurisdictions as well as various foreign jurisdictions. With few
exceptions, we are no longer subject to U.S. Federal, state and
local or non-U.S. income tax examinations by tax authorities for
fiscal years prior to fiscal year 2011. We are currently in the
examination phase of IRS audits for the tax years ended
May 31, 2011 and May 31, 2012 and expect these audits to
be completed within the next six to twelve months. The income tax
laws and regulations are voluminous and are often ambiguous. As
such, we are required to make certain subjective assumptions and
judgments regarding our tax positions that may have a material
effect on our results of operations, financial position or cash
flows. We believe, however, that there is appropriate support for
the income tax positions taken, and to be taken, on our returns,
and that our accruals for tax liabilities are adequate for all open
tax years based on an assessment of many factors including past
experience and interpretations of tax law applied to the facts of
each matter.
Set forth below is a reconciliation of the changes in our
unrecognized tax benefits associated with uncertain tax positions
(in thousands):
Year Ended May 31,
2015 2014 2013
Balance at beginning of year $ 715 $ 697 $ 624
Additions based on tax positions related to prior years 68 110 191
Reductions based on tax positions related to prior years (306 )
—
—
Reductions resulting from a lapse of the applicable statute of
limitations
— (92 ) (118 )
Balance at end of year $ 477 $ 715 $ 697
We believe that in the next eighteen months it is reasonably
possible $0.1 million of liabilities recorded for tax uncertainties
will be effectively settled.
Recent Legislation
The Tax Increase Prevention Act of 2014 was signed into law on
December 19, 2014 and included an extension for one year of
the 50% bonus depreciation allowance. The provision specifically
applies to qualifying property placed in service before
January 1, 2015. The acceleration of deductions for the year
ended May 31, 2015 on qualifying capital expenditures
resulting from the bonus depreciation provision had no impact on
our current period effective tax rate because the acceleration of
deductions does not result in permanent differences between asset
bases for financial reporting purposes and income tax purposes.
However, the ability to accelerate depreciation deductions
decreased our cash taxes relating to fiscal year 2015 by
approximately $1.4 million. Taking the accelerated tax depreciation
will result in increased cash taxes in subsequent periods when the
deductions for these capital expenditures would have otherwise been
taken. The act also reinstated the research and development credit
retroactively from January 1, 2014 through December 31,
2014. This change in legislation resulted in a permanent decrease
in income tax expense for the year ended May 31, 2015 of
$0.2 million. |
