Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Sep. 29, 2018

INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted. The New Tax Legislation significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax on deemed repatriated cumulative earnings of foreign subsidiaries. The New Tax Legislation creates a new requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder.

Global intangible low-taxed income (“GILTI”) is the excess of the shareholder’s net CFC-tested income over the net deemed tangible income return. We are continuing to evaluate the GILTI provision of the New Tax Legislation and the application of ASC 740, as it is not applicable until our 2019 fiscal year. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements.

In the quarter ended December 30, 2017, when the New Tax Legislation was enacted, we made reasonable estimates of the effects on our existing deferred tax balances and the one-time transition tax, recording $10.6 million of tax expense based on an estimate of our total earnings and profits (E&P) from our foreign subsidiaries which were previously deferred from U.S. taxes. During the quarter ended September 29, 2018, the provisional amount was adjusted by $0.1 million to record $10.7 million based on our E&P study. The $10.7 million of transition tax remains provisional as we continue to refine our calculations during the measurement period. We do not expect the changes to the amount recorded to be material. This will be paid over eight years. We intend to reinvest all of our unremitted earnings of our foreign subsidiaries and therefore, outside of the transition tax mentioned previously, we have provided no provision for income taxes which may result from withholding taxes and/or other outside basis differences. We believe that the determination of such income taxes is impracticable. We anticipate that the benefit resulting from the reduction of the federal tax rate from 34% to 21% will offset the future payments of the transition tax, resulting in minimal cash flow impact. Excluding the effect of this discrete item, the effective tax rate on operations for the fiscal year ended September 29, 2018, was a benefit of 1.7%. This compares to an effective income tax rate of 5.9% for the fiscal year ended September 30, 2017.

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



	Period ended
	September 29, 2018			September 30, 2017
Current:
Federal	$	4,629		$	215
State	16			47
Foreign	121			127
Total current	$	4,766		$	389
Deferred:
Federal	$	5,927		$	(112	)
State	(233		)	380
Total deferred	5,694			268
Provision for income taxes	$	10,460		$	657

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



	Period ended
	September 29, 2018		September 30, 2017
United States, net of loss attributable to non-controlling interest	$	156	$	1,767
Foreign	11,534		9,401
	$	11,690	$	11,168

The change in the federal statutory rate from 34% to 21% as a result of the New Tax Legislation is effective as of December 22, 2017, in our fiscal year 2018. As such, the blended federal statutory tax rate for the fiscal year was 24%. We remeasured our deferred tax assets and liabilities based on an estimated scheduling of when we anticipate these amounts will reverse and by applying estimated rates based on the period in which we believe they will reverse. The amount of expense related to the remeasurement of our deferred tax balance was approximately $0.6 million.

We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than those in the United States. Our annual income tax rate for the fiscal year ending September 29, 2018, excluding the discrete tax expense associated with the New Tax Legislation, was a benefit of 1.7%. However, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a significant impact on our overall effective tax rate. In addition, the impact of the New Tax Legislation may differ from our initial provisional estimates, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the New Tax Legislation, guidance that may be issued and actions we may take as a result of the New Tax Legislation.

A reconciliation between actual provision for income taxes and the provision for income taxes computed using the federal statutory income tax rate of 24.25% for fiscal year 2018 and 34.0% for fiscal year 2017 is as follows (in thousands):



	Period ended
	September 29, 2018			September 30, 2017
Income tax expense at the statutory rate of 24.25% and 34.0%	$	2,861		$	3,797
State income tax benefit, net of federal income tax effect	16			(80		)
Impact of Federal rate change	624			—
Federal transition tax	10,039			—
Impact of state rate changes	(236		)	115
Rate difference and nondeductible items in foreign jurisdictions	—			33
Impact of foreign earnings in tax-free zone	(2,676		)	(3,052		)
Valuation allowance adjustments	—			362
Nondeductible compensation	—			—
Nondeductible amortization and other permanent differences	(163		)	(496		)
Other	(5		)	(22		)
Provision for income taxes	$	10,460		$	657

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



	September 29, 2018			September 30, 2017
Deferred tax assets:
Federal net operating loss carryforwards	$	—		$	2,902
State net operating loss carryforwards	1,870			1,573
Derivative — interest rate contracts	—			21
Alternative minimum tax credit carryforward	397			404
Inventories and reserves	3,277			3,681
Accrued compensation and benefits	1,881			3,139
Receivable allowances and reserves	371			543
Other	67			98
Gross deferred tax assets	7,863			12,361
Less valuation allowance — state net operating loss	(493		)	(493		)
Net deferred tax assets	7,370			11,868

Deferred tax liabilities:
Depreciation	(5,459		)	(3,501		)
Goodwill and intangibles	(2,529		)	(3,319		)
Derivative — interest rate contracts	(46		)	—
Other	(94		)	(46		)
Gross deferred tax liabilities	(8,128		)	(6,866		)
Net deferred tax (liability) asset	(758		)	5,002

As of September 30, 2017, we had federal net operating loss carryforwards of approximately $8.5 million. The deferred tax assets resulting from federal net operating losses for September 30, 2017, was $2.9 million. As of September 29, 2018, there were no federal net operating loss carryforwards, as these were utilized in connection with settling the transition tax.

As of September 29, 2018, and September 30, 2017, we had state net operating loss carryforwards of approximately $42.7 million and $41.6 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% 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 29, 2018, or September 30, 2017.

We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Tax years 2014, 2015 and 2016, according to statute and with few exceptions, remain open to examination by various federal, state, local and foreign jurisdictions.