Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Sep. 30, 2017

INCOME TAXES

The provision for income taxes consists of the following (in thousands):



	Period ended
	September 30, 2017			October 1, 2016		October 3, 2015
Current:
Federal	$	215		$	36	$	—
State	47			78		60
Foreign	127			179		186
Total current	$	389		$	293	$	246
Deferred:
Federal	$	(112	)	$	1,462	$	1,320
State	380			326		439
Total deferred	268			1,788		1,759
Provision for income taxes	$	657		$	2,081	$	2,005

For financial reporting purposes our income before provision for income taxes includes the following components (in thousands):



	Period ended
	September 30, 2017		October 1, 2016		October 3, 2015
United States	$	1,767	$	3,966	$	3,434
Foreign	9,401		7,079		6,664
	$	11,168	$	11,045	$	10,098

A reconciliation between actual provision for income taxes and the provision for income taxes computed using the federal statutory income tax rate of 34.0% is as follows (in thousands):



	Period ended
	September 30, 2017			October 1, 2016			October 3, 2015
Income tax expense at the statutory rate	$	3,797		$	3,755		$	3,433
State income tax (benefit) expense, net of federal income tax effect	(80		)	447			374
Impact of state rate changes	115			116			—
Rate difference and nondeductible items in foreign jurisdictions	33			54			(30		)
Impact of foreign earnings in tax-free zone	(3,052		)	(2,319		)	(2,168		)
Valuation allowance adjustments	362			(71		)	—
Nondeductible compensation	—			—			335
Nondeductible amortization and other permanent differences	(496		)	96			81
Other	(22		)	3			(20		)
Provision for income taxes	$	657		$	2,081		$	2,005

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. We have not provided deferred taxes on the $75.5 million of undistributed earnings of our foreign subsidiaries where the earnings are considered to be permanently reinvested. The undistributed earnings would become taxable in the United States if we decided to repatriate earnings for business, tax or foreign exchange reasons. If we made that decision, U.S. income taxes would be provided for net of foreign taxes already paid. The determination of the unrecognized deferred tax liability associated with these unremitted earnings is not practical at this time.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):



	September 30, 2017			October 1, 2016
Deferred tax assets:
Federal net operating loss carryforwards	$	2,902		$	6,256
State net operating loss carryforwards	1,573			1,784
Derivative — interest rate contracts	21			70
Alternative minimum tax credit carryforward	404			135
Inventories and reserves	3,681			3,426
Accrued compensation and benefits	3,139			3,331
Receivable allowances and reserves	543			767
Other	98			89
Gross deferred tax assets	12,361			15,858
Less valuation allowance — state net operating loss	(493		)	(131		)
Net deferred tax assets	11,868			15,727

Deferred tax liabilities:
Depreciation	(3,501		)	(2,868		)
Goodwill and intangibles	(3,319		)	(7,463		)
Other	(46		)	(150		)
Gross deferred tax liabilities	(6,866		)	(10,481		)
Net deferred tax asset	5,002			5,246

As of September 30, 2017, and October 1, 2016, we had federal net operating loss carryforwards of approximately $8.5 million and $18.3 million, respectively. The deferred tax assets resulting from federal net operating losses for September 30, 2017, and October 1, 2016, were $2.9 million and $6.3 million, respectively. There is no carryback opportunity for these losses and the carryforwards expire at various intervals from 2033 to 2035. We determined that no valuation allowance is required, as we expect that all such carryforwards more likely than not will be realized within statutory periods of carryover and utilization.

As of September 30, 2017, and October 1, 2016, we had state net operating loss carryforwards of approximately $41.6 million and $45.4 million, respectively. These carryforwards expire at various intervals from 2019 through 2036. Our deferred tax asset related to state net operating loss carryforwards is reduced by a valuation allowance to result in deferred tax assets we consider more likely than not to be realized.

For both federal and state purposes, the ultimate realization of deferred tax assets depends upon the generation of future taxable income or tax planning strategies during the periods in which those temporary differences become deductible or when the carryforwards are available.

FASB Codification No. 740, Income Taxes (“ASC 740”) requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% percent likely of being realized upon ultimate settlement. Accrued interest and penalties related to unrecognized tax benefits would also be recorded. We did not have any material unrecognized tax benefits as of September 30, 2017, or October 1, 2016.

The tax years 2013 to 2015, according to statute and with few exceptions, remain open to examination by various federal, state, local and foreign jurisdictions.