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. 28, 2019

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



	Fiscal Year Ended
	September 28, 2019		September 29, 2018			September 30, 2017
	(in thousands)
Current:
Federal	$	17,048	$	5,728		$	32,755
State	2,728		2,319			3,034
Foreign	169		91			121
Total	19,945		8,138			35,910
Deferred:
Federal	4,278		(3,676		)	11,227
State	2,380		(1,162		)	(1,038		)
Foreign	1		5			600
Total	6,659		(4,833		)	10,789
Total	$	26,604	$	3,305		$	46,699

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



	Fiscal Year Ended
	September 28, 2019		September 29, 2018		September 30, 2017
Statutory federal income tax rate	21.0	%	24.5	%	35.0	%
State income taxes, net of federal benefit	4.3		0.9		2.4
Other permanent differences	0.7		(0.1	)	0.3
Adjustment of prior year accruals	(0.6	)	—		(0.3	)
Credits	(0.9	)	(0.8	)	(0.6	)
Rate change - Tax reform	—		(16.9	)	—
Stock based compensation	(1.6	)	(5.4	)	—
Other	(0.6	)	0.4		0.1
Effective income tax rate	22.3	%	2.6	%	36.9	%

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 28, 2019					September 29, 2018
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
	(in thousands)
Allowance for doubtful accounts	$	5,029		$	—	$	5,613		$	—
Inventory write-downs	8,374			—		6,819			—
Prepaid expenses	—			2,060		—			1,408
Nondeductible reserves	3,968			—		983			—
State taxes	39			—		74			—
Employee benefits	5,704			—		5,578			—
Depreciation and amortization	—			77,901		—			65,983
Equity loss	884			—		2,053			—
State net operating loss carryforward	6,579			—		6,722			—
Stock based compensation	3,538			—		2,541			—
State credits	2,819			—		2,742			—
Other	4,774			—		4,240			—
Valuation allowance	(7,179		)	—		(6,809		)	—
Total	$	34,529		$	79,961	$	30,556		$	67,391

The Company has state tax net operating losses of $109.6 million, which expire at various times between 2019 and 2039, and foreign losses of $4.5 million, which do not expire.

The Company has state income tax credits of $3.6 million, which expire at various times beginning in 2019 through 2039. 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 and foreign taxable income for the separate parent company and foreign subsidiaries to realize the deferred tax assets. Therefore, valuation allowances of $7.2 million and $6.8 million (net of federal impact) at September 28, 2019 and September 29, 2018, 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 28, 2019 and September 29, 2018, 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 28, 2019 and September 29, 2018 (in thousands):




Balance as of September 30, 2017	$	325
Increases related to prior year tax positions	138
Increases related to current year tax positions	83
Decreases related to prior year tax positions	(28		)
Settlements	—
Decreases related to lapse of statute of limitations	—
Balance as of September 29, 2018	$	518
Increases related to prior year tax positions	8
Increases related to current year tax positions	81
Decreases related to prior year tax positions	—
Settlements	(124		)
Decreases related to lapse of statute of limitations	—
Balance as of September 28, 2019	$	483

As of September 28, 2019, unrecognized income tax benefits totaled approximately $0.5 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 2016 forward and in various state taxing authorities generally from fiscal year ended 2015 forward.

The Company believes there is a reasonable chance that its unrecognized tax benefits will decrease by $0.2 million within the next twelve months.