Central Garden & Pet Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Sep. 30, 2017

The provision for income tax expense (benefit) consists of the following:



	Fiscal Year Ended
	September 30, 2017			September 24, 2016			September 26, 2015
	(in thousands)
Current:
Federal	$	32,755		$	18,592		$	2,301
State	3,034			2,140			643
Foreign	121			110			25
Total	35,910			20,842			2,969
Deferred:
Federal	11,227			2,796			14,843
State	(1,038		)	463			625
Foreign	600			(48		)	98
Total	10,789			3,211			15,566
Total	$	46,699		$	24,053		$	18,535

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:



	Fiscal Year Ended
	September 30, 2017		September 24, 2016		September 26, 2015
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.4		2.1		2.4
Other permanent differences	0.3		(1.6	)	(0.5	)
Adjustment of prior year accruals	(0.3	)	(0.6	)	(0.5	)
Credits	(0.6	)	(1.0	)	(0.3	)
Change in valuation allowances	—		0.5		—
Foreign rate differential	0.1		0.1		(0.1	)
Effective income tax rate (benefit)	36.9	%	34.5	%	36.0	%

Deferred income taxes reflect the impact of “temporary differences” between asset and liability amounts for financial reporting purposes and such amounts as determined based on existing tax laws. The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:



	September 30, 2017					September 24, 2016
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
	(in thousands)
Allowance for doubtful accounts	$	7,790		$	—	$	7,634		$	—
Inventory write-downs	10,406			—		9,869			—
Prepaid expenses	—			1,740		—			1,188
Nondeductible reserves	1,485			—		1,632			—
State taxes	276			—		19			—
Employee benefits	10,007			—		10,544			—
Depreciation and amortization	—			84,059		—			62,778
Equity loss	4,243			—		5,070			—
State net operating loss carryforward	5,182			—		4,939			—
Stock based compensation	3,097			—		2,642			—
State credits	2,403			—		2,317			—
Other	5,768			—		5,303			—
Valuation allowance	(6,527		)	—		(6,583		)	—
Total	$	44,130		$	85,799	$	43,386		$	63,966

The Company has state tax net operating losses of $109.1 million, which expire at various times between 2017 and 2037, and foreign losses of $3.0 million, which do not expire. Pursuant to authoritative guidance, the benefit of stock options will only be recorded to stockholders’ equity when cash taxes payable are reduced.

The Company has state income tax credits of $3.7 million, which expire at various times beginning in 2017 through 2033. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including past operating results, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against any deferred tax assets. The Company has determined there will be insufficient future separate state taxable income for the separate parent company to realize its deferred tax assets. Therefore, valuation allowances of $6.5 million and $6.6 million (net of federal impact) at September 30, 2017 and September 24, 2016, respectively, have been provided to reduce state deferred tax assets to amounts considered recoverable.

The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year. The Company recognizes interest and/or penalties related to income tax matters as a component of pretax income. As of September 30, 2017 and September 24, 2016, accrued interest was less than $0.1 million and no penalties were accrued related to uncertain tax positions.

The following table, which excludes interest and penalties, summarizes the activity related to the Company’s unrecognized tax benefits for fiscal years ended September 30, 2017 and September 24, 2016 (in thousands):




Balance as of September 26, 2015	$	138
Increases related to prior year tax positions	51
Increases related to current year tax positions	66
Decreases related to prior year tax positions	—
Settlements	(1		)
Decreases related to lapse of statute of limitations	—
Balance as of September 24, 2016	$	254
Increases related to prior year tax positions	4
Increases related to current year tax positions	67
Decreases related to prior year tax positions	—
Settlements	—
Decreases related to lapse of statute of limitations	—
Balance as of September 30, 2017	$	325

As of September 30, 2017, unrecognized income tax benefits totaled approximately $0.3 million and all of the unrecognized tax benefits would, if recognized, impact the Company’s effective income tax rate.

The Company is principally subject to taxation by the United States and various states within the United States. The Company’s tax filings in major jurisdictions are open to examination by tax authorities by the Internal Revenue Service from fiscal year ended 2014 forward and in various state taxing authorities generally from fiscal year ended 2013 forward.

The Company does not believe there will be any significant change in its unrecognized tax benefits within the next twelve months.