INCOME TAXES

12 Months Ended

Oct. 31, 2018

6. INCOME TAXES

In December 2017, the Tax Reform Act was enacted. The Tax Reform Act, among other things, lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax system from a worldwide system and imposed a one

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time tax on deemed repatriation of accumulated earnings and profits of foreign subsidiaries. In fiscal 2018, our U.S. taxable income was taxed at a 23% federal tax rate; thereafter, the 21% rate will apply. During fiscal 2018, we revalued our deferred tax assets to the lower statutory rate of 21%, which resulted in expense of $596,000. The transition tax, required by the Tax Reform Act was also recorded in fiscal 2018 based on current guidance and available information, adding $2.2 million to income tax expense. The transition tax is eligible to be paid in unequal installments over 8 years. We plan to make that election.

On December 22, 2017, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act. In accordance with ASC Topic 740, Income Taxes, SAB 118 and available guidance from the SEC, FASB and the U.S. Treasury Department as of October 31, 2018, we have completed our accounting for the income tax effects of the Tax Reform Act with the exception of the provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”).

In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands):

	Year Ended October 31,
	2018			2017			2016
Current:
U.S. taxes	$	6,333		$	308		$	1,362
Foreign taxes		5,203			4,185			4,456
		11,536			4,493			5,818
Deferred:
U.S. taxes		(326	)		1,236			(176	)
Foreign taxes		(204	)		(128	)		(49	)
		(530	)		1,108			(225	)
	$	11,006		$	5,601		$	5,593

A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as follows (dollars in thousands):

	Year Ended October 31,
	2018			2017			2016
Income before income taxes:
Domestic	$	14,101		$	5,477		$	2,703
Foreign		18,395			15,239			16,182
	$	32,496		$	20,716		$	18,885
Tax rates:
U.S. statutory rate		23	%		34	%		34	%
Effect of tax rate of international jurisdictions different than U.S. statutory rates		2	%		(5	)%		(7	)%
Valuation allowance		0	%		1	%		3	%
State taxes		0	%		0	%		0	%
Tax Credits		(1	)%		(3	)%		(2	)%
Effect of Tax Rate Changes		4	%		0	%		4	%
Transition Tax		7	%		0	%		0	%
Other		(1	)%		0	%		(2	)%
Effective tax rate		34	%		27	%		30	%

We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries beginning January 1, 2018 based upon our determination that such earnings will be indefinitely reinvested abroad. Additionally, the Tax Reform Act required a transition tax on any net accumulated earnings and profits generated by foreign subsidiaries as of the two required measurement dates, November 2, 2017 and December 31, 2017 while providing for future tax

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free repatriation of such earnings through a 100% dividends–received deduction. As such, as of December 31, 2017, all of the Company’s accumulated earnings and profits were deemed repatriated.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

As of October 31, 2018, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.3 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research and development tax credits of $0.7 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2018 and 2017, the balance of this valuation allowance was $2.1 million and $2.3 million, respectively.

Significant components of our deferred tax assets and liabilities at October 31, 2018 and 2017 were as follows (in thousands):

	October 31,
	2018			2017
Deferred Tax Assets:
Accrued inventory reserves	$	1,325		$	1,965
Accrued warranty expenses		499			438
Compensation related expenses		2,644			2,952
Net derivative instruments		–			417
Unrealized exchange gain/loss		159			–
Other accrued expenses		170			187
Net operating loss carryforwards		1,316			1,722
Other credit carryforwards		686			517
Other		350			404
		7,149			8,602
Less: Valuation allowance – net operating loss and other credit carryforwards		(2,106	)		(2,282	)
Deferred tax assets		5,043			6,320

Deferred Tax Liabilities:
Net derivative instruments		(208	)		–
Property and equipment and capitalized software development costs		(2,370	)		(3,241	)
Unrealized exchange gain/loss		–			(116	)
Other		(231	)		(624	)
Net deferred tax assets	$	2,234		$	2,339

As of October 31, 2018, we had net operating losses carryforwards for international and U.S. income tax purposes of $6.1 million, of which $4.9 million will expire within 5 years beginning in fiscal 2019 and $1.2 million will expire between 5 and 20 years. We also had tax credits of $870,000 which will expire between years 2022 and 2029.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):

	2018			2017			2016
Balance, beginning of year	$	1,101		$	1,102		$	1,034
Additions based on tax positions related to the current year		37			37			52
Additions (reductions) related to prior year tax positions		(945	)		(20	)		19
Reductions due to statute expiration		(18	)		(74	)		–
Other		5			56			(3	)
Balance, end of year	$	180		$	1,101		$	1,102

The entire balance of the unrecognized tax benefits and related interest at October 31, 2018, if recognized, could affect the effective tax rate in future periods.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision. As of October 31, 2018, the amount of interest accrued, reported in other liabilities, was approximately $25,000, which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between July 2019 and July 2022.

We file income tax returns in the U.S. federal jurisdiction and various states, local, and non–U.S. jurisdictions. Currently, our Germany subsidiary is under tax audit for the fiscal year 2013 to 2016.

A summary of open tax years by major jurisdiction is presented below:

United States federal		Fiscal 2015 through the current period
Germany¹		Fiscal 2013 through the current period
Taiwan		Fiscal 2015 through the current period

¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable.