9. Income Taxes
The provision for income taxes includes the following:
| Year Ended August 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | |||||||||
| Current Tax Provision Federal |
$ | 9,681,000 | $ | 10,829,000 | $ | 7,729,000 | |||||
| State | 1,432,000 | 953,000 | 1,060,000 | ||||||||
| Foreign | 2,062,000 | 2,393,000 | 2,709,000 | ||||||||
| Total current | 13,175,000 | 14,175,000 | 11,498,000 | ||||||||
| Deferred Tax Provision United States |
2,285,000 | 401,000 | 3,190,000 | ||||||||
| Foreign | 181,000 | 170,000 | 379,000 | ||||||||
| Total deferred | 2,466,000 | 571,000 | 3,569,000 | ||||||||
| $ | 15,641,000 | $ | 14,746,000 | $ | 15,067,000 | ||||||
Income before income taxes includes approximately $8,130,000, $6,395,000 and $7,480,000 related to foreign operations for the fiscal years ended August 31, 2007, 2006 and 2005, respectively.
Deferred tax assets and deferred tax liabilities are comprised of the following:
| As of August 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2007 | 2006 | ||||||
| Deferred Tax Assets Accrued payroll and related expenses |
$ | 690,000 | $ | 697,000 | |||
| State income taxes paid | 287,000 | 233,000 | |||||
| Accounts receivable | 778,000 | 929,000 | |||||
| Accounts payable and accrued liabilities | 2,134,000 | 2,098,000 | |||||
| Deferred employee benefits and other long-term liabilities | 760,000 | 668,000 | |||||
| Stock-based compensation expense | 953,000 | 494,000 | |||||
| Net operating loss | 203,000 | 120,000 | |||||
| Other | 453,000 | 540,000 | |||||
| Valuation allowance | (162,000 | ) | — | ||||
| Total deferred tax assets | 6,096,000 | 5,779,000 | |||||
| Deferred Tax Liabilities Property, plant and equipment, net |
(154,000 | ) | (198,000 | ) | |||
| Amortization of tax goodwill and intangibles | (16,529,000 | ) | (13,551,000 | ) | |||
| Investment in low income housing partnerships | (786,000 | ) | (813,000 | ) | |||
| Investment in VML partnership | (289,000 | ) | (323,000 | ) | |||
| Other | (198,000 | ) | (174,000 | ) | |||
| Total deferred tax liabilities | (17,956,000 | ) | (15,059,000 | ) | |||
| Net deferred tax liabilities | $ | (11,860,000 | ) | $ | (9,280,000 | ) | |
As of August 31, 2007, the Company had foreign and state net operating loss (NOL) carryforwards of approximately $492,000 and $595,000, respectively, which begin to expire in fiscal years 2013 and 2014. The foreign net operating loss created a deferred tax asset of approximately $162,000. Utilization of this deferred tax asset is dependent upon the generation of future taxable income in this jurisdiction. At this time, management has concluded that it is not “more likely than not” that this will occur, and accordingly, has placed a valuation allowance against this deferred tax asset. In the current fiscal year, the Company used state NOL carryforwards of $1,389,000.
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate follows for the fiscal years ended August 31, 2007, 2006 and 2005:
| Year Ended August 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | |||||||||
| Amount computed at U.S. statutory federal tax rate | $ | 16,511,000 | $ | 15,000,000 | $ | 15,003,000 | |||||
| State income taxes, net of federal benefit | 1,083,000 | 1,010,000 | 654,000 | ||||||||
| Low income housing and research and experimentation credits | (106,000 | ) | (177,000 | ) | (474,000 | ) | |||||
| Benefit from qualified domestic production deduction | (268,000 | ) | (218,000 | ) | — | ||||||
| Benefit from extra territorial income deductions | (54,000 | ) | (212,000 | ) | (211,000 | ) | |||||
| Benefit from municipal bond interest | (435,000 | ) | (106,000 | ) | — | ||||||
| Effect of foreign operations | (815,000 | ) | (362,000 | ) | (141,000 | ) | |||||
| Other | (275,000 | ) | (189,000 | ) | 236,000 | ||||||
| $ | 15,641,000 | $ | 14,746,000 | $ | 15,067,000 | ||||||
The Company has provided for U.S. income taxes and foreign withholding taxes on the undistributed earnings of certain foreign subsidiaries not indefinitely reinvested. As of August 31, 2007, the Company has not provided for U.S. income taxes and foreign withholding taxes on $33,113,000 of undistributed earnings of certain foreign subsidiaries indefinitely reinvested outside of the U.S. The amount of unrecognized deferred U.S. income tax liability would substantially be offset by unrecognized foreign tax credits that would be available to reduce a large portion of the U.S. liability.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. It applies to all tax positions accounted for in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt this interpretation as required beginning September 1, 2007. Management is currently evaluating the impact that the implementation of FIN 48 may have on the Company’s consolidated results of operations and financial position.