Enerpac Tool Group Corp. 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

Aug. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 12. Income Taxes

Income tax expense from continuing operations is summarized as follows (in thousands):


	Year ended August 31,
	2020		2019		2018
Currently payable:
Federal	$	(35)	$	(2,040)	$	291
Foreign	10,004		9,370		9,223
State	142		1,347		358
	10,111		8,677		9,872
Deferred:
Federal	(7,791)		(400)		(1,143)
Foreign	(1,632)		2,172		5,807
State	1,604		208		(86)
	(7,819)		1,980		4,578
Income tax expense	$	2,292	$	10,657	$	14,450

Income tax expense from continuing operations recognized in the accompanying consolidated statements of operations differs from the amounts computed by applying the federal income tax rate to earnings from continuing operations before income tax expense. A reconciliation of income taxes at the federal statutory rate to the effective tax rate is summarized in the following table:


	Year ended August 31,
	2020		2019		2018
Federal statutory rate	21.0	%	21.0	%	25.7	%
State income taxes, net of Federal effect	(0.6)		(4.0)		(0.5)
Net effects of foreign tax rate differential and credits ⁽¹⁾	38.7		11.3		(12.2)
Domestic manufacturing deduction	—		—		(1.3)
Foreign branch currency losses	(0.4)		—		(2.1)
Compensation adjustment	6.6		4.4		7.0
Impairment and other divestiture charges ⁽²⁾	3.3		19.3		39.1
Valuation allowance additions and releases ⁽³⁾	(8.1)		3.9		20.3
Changes in liability for unrecognized tax benefits	(5.3)		4.1		(34.1)
U.S. tax reform, net impact ⁽⁴⁾	(32.5)		(31.1)		2.4
Taxable liquidation of subsidiaries ⁽⁵⁾	52.6		—		7.7
Foreign non-deductible expenses	7.4		16.2		12.0
Changes in tax rates	(9.0)		1.7		(1.4)
R&D credit, audits and adjustments ⁽⁶⁾	(38.9)		4.8		15.3
Other items	(5.6)		5.3		(2.6)
Effective income tax rate	29.2	%	56.9	%	75.3	%

⁽¹⁾The Company generated $5.4 million, $2.6 million and $1.5 million of withholding tax expense for fiscal 2020, 2019 and 2018, respectively, and $4.0 million, $3.5 million and $13.3 million of foreign-derived tax credits, excluding the impact of tax reform for fiscal 2020, 2019 and 2018, respectively.

⁽²⁾ Fiscal 2020, 2019 and 2018 pretax earnings include $(3.2) million, $22.8 million and $3.0 million, respectively, in impairment & divestiture (benefits) charges related to goodwill, intangible assets, tangible assets and the cumulative effect of foreign currency rate changes of which $0.3 million, $14.0 million and $0.7 million, respectively, are not deductible for income tax purposes.

⁽³⁾ Incremental valuation allowances of $9.4 million and $1.7 million and $20.4 million were recorded in fiscal 2020, 2019 and 2018, respectively, due to uncertainty regarding realization of tax assets, which were offset by a reduction of $12.3 million, $2.9 million and $11.8 million of valuation allowances for fiscal 2020, 2019 and 2018, respectively. These amounts exclude valuation allowances against tax assets related to the tax reform.

⁽⁴⁾During fiscal 2020, legislative changes and additional guidance related to proposed foreign tax credit regulations resulted in adjustments of $(2.6) million related to the fiscal 2019 results.

⁽⁵⁾ During fiscal 2020 and 2018, the Company generated a net expense of $4.1 million and $1.5 million, respectively, as a result of taxable liquidations of subsidiaries.

⁽⁶⁾ During fiscal 2020, the Company generated $3.1 million of tax benefit related to R&D credits, audits and adjustments as compared to $0.9 million tax expense in fiscal 2019 and $2.9 million tax expense in fiscal 2018.

Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):


	August 31,
	2020		2019
Deferred income tax assets:
Operating loss and tax credit carryforwards	$	99,905	$	88,198
Compensation related liabilities	5,941		7,752
Postretirement benefits	9,068		9,289
Inventory	1,793		629
Lease liabilities	10,526		—
Book reserves and other items	6,752		11,465
Total deferred income tax assets	133,985		117,333
Valuation allowance	(70,414)		(73,255)
Net deferred income tax assets	63,571		44,078
Deferred income tax liabilities:
Depreciation and amortization	(31,457)		(26,248)
Lease assets	(10,526)		—
Other items	(702)		(862)
Deferred income tax liabilities	(42,685)		(27,110)
Net deferred income tax asset ⁽¹⁾	$	20,886	$	16,968

⁽¹⁾ The net deferred income tax asset is reflected on the balance sheet in two categories: an asset of $22.6 million and $18.4 million for fiscal 2020 and 2019, respectively, is included in "Other long-term assets" and a liability of $1.7 million and $1.6 million for fiscal 2020 and 2019, respectively, is included in "Deferred income taxes".

The Company has $77.6 million of state net operating loss carryforwards, which are available to reduce future state tax liabilities. These state net operating loss carryforwards expire at various times through 2040. The Company also has $89.3 million of foreign loss carryforwards which are available to reduce certain future foreign tax liabilities. Approximately one-half of the foreign loss carryforwards are not subject to any expiration dates, while the other balances expire at various times through 2030. The valuation allowance represents a reserve for deferred tax assets, including loss carryforwards and foreign tax credits, for which utilization is uncertain.

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):


	2020		2019		2018
Beginning balance	$	24,167	$	24,359	$	31,446
Increases based on tax positions related to the current year	869		2,169		2,599
Increase for tax positions taken in a prior period	304		1,422		359
Decrease for tax positions taken in a prior period	—		—		(349)
Decrease due to lapse of statute of limitations	(2,334)		(3,212)		(9,163)
Decrease due to settlements	—		(324)		—
Changes in foreign currency exchange rates	199		(247)		(533)
Ending balance	$	23,205	$	24,167	$	24,359

Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2020, 2019 and 2018, the Company recognized $4.5 million, $3.7 million and $3.0 million, respectively, for interest and penalties related to unrecognized tax benefits. The Company recognizes interest and penalties related to underpayment of income taxes as a component of income tax expense. With few exceptions, the Company is no longer subject to U.S. federal, state and foreign income tax examinations by tax authorities in major tax jurisdictions for years prior to fiscal 2010. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $1.7 million throughout fiscal 2021.

The Company’s policy is to remit earnings from foreign subsidiaries only to the extent the remittance does not result in an incremental U.S. tax liability. The Company does not currently provide for the additional U.S. and foreign income taxes which would become payable upon remission of undistributed earnings of foreign subsidiaries. If all undistributed earnings were remitted, an additional income tax provision of $2.4 million would have been necessary as of August 31, 2020.

Earnings (loss) before income taxes from continuing operations, are summarized as follows (in thousands):


	Year Ended August 31,
	2020		2019		2018
Domestic	$	(9,058)	$	(715)	$	5,337
Foreign	16,907		19,439		13,859
	$	7,849	$	18,724	$	19,196

Both domestic and foreign pre-tax earnings from continuing operations are impacted by changes in operating earnings, acquisition and divestiture activities, restructuring charges and the related benefits, growth investments, debt levels and the impact of changes in foreign currency exchange rates. In fiscal 2020, domestic and foreign earnings included non-cash impairment and other divestiture benefits of $(2.6) million and $(0.6) million, respectively. In fiscal 2019, domestic and foreign earnings included non-cash impairment and other divestiture costs of $9.0 million and $13.8 million, respectively. In fiscal 2018, foreign earnings included $3.0 million of non-cash impairment & divestiture charges. Over 75% of pre-tax earnings from continuing operations (excluding impairment & other divestiture charges) were generated in foreign jurisdictions with tax rates different than the U.S. federal income tax rate.

Cash paid for income taxes, net of refunds, totaled $13.2 million, $15.4 million and $(1.5) million (refund) during the years ended August 31, 2020, 2019 and 2018, respectively.

- 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.

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