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Income Taxes | 12 Months Ended
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Jan. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Note 15—Income Taxes The components of income before income taxes are as follows:
|  | January 31 |
|  | 2019 |  |  | 2018 |  |  | 2017 |
(In thousands) |  |  |  |  |  |  |  |  |
Domestic |  | $ | 6,859 |  |  | $ | 2,110 |  |  | $ | 4,026 |
Foreign |  |  | 449 |  |  |  | 3,047 |  |  |  | 2,579 |
|  | $ | 7,308 |  |  | $ | 5,157 |  |  | $ | 6,605 |
The components of the provision for income taxes are as follows:
|  | January 31 |
|  | 2019 |  |  | 2018 |  |  | 2017 |
(In thousands) |  |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 1,807 |  |  | $ | 592 |  |  | $ | 1,269 |
State |  |  | 457 |  |  |  | 251 |  |  |  | 209 |
Foreign |  |  | 952 |  |  |  | 284 |  |  |  | 725 |
|  |  | 3,216 |  |  |  | 1,127 |  |  |  | 2,203 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (843 | ) |  | $ | 903 |  |  | $ | 150 |
State |  |  | (170 | ) |  |  | (25 | ) |  |  | 37 |
Foreign |  |  | (625 | ) |  |  | (134 | ) |  |  | (13 | )
|  |  | (1,638 | ) |  |  | 744 |  |  |  | 174 |
|  | $ | 1,578 |  |  | $ | 1,871 |  |  | $ | 2,377 |
On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of January 31, 2018 by $1.0 million to reflect the impact of the Tax Act and recorded a corresponding provisional net one-time non-cash charge of $1.0 million. The Company filed its 2017 federal income tax return in November 2018, which increased the tax expense related to the one-time non-cash charge by $0.1 million as a result of certain provision to return adjustments. The Tax Act taxes certain unrepatriated earnings and profits (E&P) of our foreign subsidiaries (“transition tax”). In order to determine the transition tax, we were required to determine, along with other information, the amount of our accumulated post-1986 E&P for our foreign subsidiaries, as well as the non-U.S. income tax paid by those subsidiaries on such E&P. We were capable of reasonably estimating the one-time deemed repatriation tax and recorded a provisional expense of $0.1 million. The U.S. Treasury issued certain notices and proposed regulations (“interpretative guidance”) during fiscal 2019 which provided additional guidance to assist companies in calculating the one-time deemed repatriation tax. The U.S. Treasury issued final regulations in January 2019. The final regulations did not impact the computation of the final income tax expense. The final one-time deemed repatriation tax remained $0.1 million. The SEC issued Staff Accounting Bulletin 118 (“SAB 118”) in December 2017, which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period in which to finalize the accounting under ASC 740, Income Taxes (“ASC 740”) as it relates to the Tax Act. This measurement period should not extend beyond one year from the Tax Act enactment date. In accordance with SAB 118, the Company has properly reflected the income tax effects of all aspects of the legislation for which the accounting under ASC 740 was impacted. All conclusions under SAB 118 were finalized during the fourth quarter of 2018 with no material changes to the provisional amounts. The Company’s effective tax rate for 2019 was 21.6% compared to 36.3% in 2018 and 36.0% in 2017. The decrease in 2019 from 2018 is primarily related to the Tax Act. This includes the reduction in the U.S. corporate income tax rate from 35% to 21%, the absence of the one-time U.S. deferred tax asset and liability remeasurement and transition tax. This decrease was offset by the absence of R&D credits from amended tax returns and the absence of the non-taxable TrojanLabel earn out liability adjustment in TrojanLabel ApS. The increase in the effective tax rate in 2018 from 2017 is primarily related to provisional Tax Act tax expenses related to the remeasurement of U.S. deferred tax assets and liabilities and the transition tax, substantially offset by increased R&D credits resulting from a completed study, a decrease in non-deductible transaction costs, the non-taxable TrojanLabel earn out liability adjustment in TrojanLabel ApS, and a decrease in unrecognized tax benefits. The increase in 2017 from 2016 is primarily related to non-deductible transaction costs and increased unrecognized tax benefits. The provision for income taxes differs from the amount computed by applying the United States federal statutory income tax rate of 21.0% (32.9% for FY18 and 34% FY17) to income before income taxes. The reasons for this difference were due to the following:
|  | January 31 |
|  | 2019 |  |  | 2018 |  |  | 2017 |
(In thousands) |  |  |  |  |  |  |  |  |
Income Tax Provision at Statutory Rate |  | $ | 1,534 |  |  | $ | 1,697 |  |  | $ | 2,246 |
U.S Corporate Rate Change |  |  | 52 |  |  |  | 1,010 |  |  |  | — |
State Taxes, Net of Federal Tax Effect |  |  | 226 |  |  |  | 149 |  |  |  | 162 |
Transition Tax on Repatriated Earnings |  |  | 14 |  |  |  | 104 |  |  |  | — |
Capitalized Transaction Costs |  |  | — |  |  |  | — |  |  |  | 179 |
Unrecognized State Tax Benefits |  |  | (34 | ) |  |  | (20 | ) |  |  | 165 |
Domestic Production Deduction |  |  | — |  |  |  | (47 | ) |  |  | (103 | )
Return to Provision Adjustment |  |  | 58 |  |  |  | (122 | ) |  |  | (75 | )
TrojanLabel Earn Out Liability Adjustment |  |  | — |  |  |  | (316 | ) |  |  | — |
R&D Credits |  |  | (218 | ) |  |  | (537 | ) |  |  | (168 | )
Foreign Deferred Intangible Income |  |  | (53 | ) |  |  | — |  |  |  | — |
Other |  |  | (1 | ) |  |  | (47 | ) |  |  | (29 | )
|  | $ | 1,578 |  |  | $ | 1,871 |  |  | $ | 2,377 |
The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:
|  | January 31 |
|  | 2019 |  |  | 2018 |
(In thousands) |  |  |  |  |  |
Deferred Tax Assets: |  |  |  |  |  |  |  |
Inventory |  | $ | 1,800 |  |  | $ | 1,648 |
Honeywell Royalty Liability |  |  | 3,146 |  |  |  | 3,382 |
State R&D Credits |  |  | 1,305 |  |  |  | 1,161 |
Share-Based Compensation |  |  | 493 |  |  |  | 399 |
Compensation Accrual |  |  | 155 |  |  |  | 194 |
Warranty Reserve |  |  | 201 |  |  |  | 139 |
Unrecognized State Tax Benefits |  |  | 133 |  |  |  | 138 |
Deferred Service Contract Revenue |  |  | 91 |  |  |  | 84 |
Bad Debt |  |  | 101 |  |  |  | — |
Net Operating Loss |  |  | 505 |  |  |  | — |
Other |  |  | 142 |  |  |  | 176 |
|  |  | 8,072 |  |  |  | 7,321 |
Deferred Tax Liabilities: |  |  |  |  |  |  |  |
Intangibles |  |  | 2,660 |  |  |  | 3,679 |
Accumulated Tax Depreciation in Excess of Book Depreciation |  |  | 982 |  |  |  | 1,028 |
Other |  |  | 238 |  |  |  | 322 |
|  |  | 3,880 |  |  |  | 5,029 |
Subtotal |  |  | 4,192 |  |  |  | 2,292 |
Valuation Allowance |  |  | (1,304 | ) |  |  | (1,161 | )
Net Deferred Tax Assets |  | $ | 2,888 |  |  | $ | 1,131 |
The valuation allowance of $1.3 million at January 31, 2019 and $1.2 million at January 31, 2018 related to state research and development tax credit carryforwards, which are expected to expire unused. The valuation allowance increased $0.1 million in 2019 and $0.5 million in 2018 due to the decrease in the federal tax effect of state taxes from the federal rate reduction provided for in the Tax Act and the generation of research and development credits in excess of the Company’s ability to currently utilize them. The Company has reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future state taxable income and credits exclusive of reversing temporary differences and carryforwards in the relevant state jurisdiction. We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as follows:
|  | 2019 |  |  | 2018 |  |  | 2017 |
(In thousands) |  |  |  |  |  |  |  |  |
Balance at February 1 |  | $ | 665 |  |  | $ | 708 |  |  | $ | 591 |
Increases in prior period tax positions |  |  | — |  |  |  | — |  |  |  | 75 |
Increases in current period tax positions |  |  | 7 |  |  |  | 55 |  |  |  | 133 |
Reductions related to lapse of statute of limitations |  |  | (54 | ) |  |  | (98 | ) |  |  | (91 | )
Balance at January 31 |  | $ | 618 |  |  | $ | 665 |  |  | $ | 708 |
During fiscal 2019, 2018 and 2017, the Company recognized $8,000, $24,000 and $52,000, respectively, of expenses related to a change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income. The Company has accrued potential interest and penalties of $0.5 million and $0.4 million at the end of January 31, 2019 and 2018, respectively. The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years ended prior to January 2014. The Company is currently under audit by the IRS for the tax years ended January 31, 2014, 2015, and 2016. No proposed adjustments have been raised at this time. U.S. income taxes have not been provided on $6.6 million of undistributed earnings of the Company’s foreign subsidiaries since it is the Company’s intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. Tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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