Enerpac Tool Group Corp. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes (Tables)

Income Taxes (Tables)

12 Months Ended

Aug. 31, 2020

Income Tax Expense from Continuing Operations


	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

Reconciliation of Income Taxes at Federal Statutory Rate to Effective Tax Rate

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 of Deferred Tax Assets and Liabilities

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".

Changes in Gross Liability for Unrecognized Tax benefits, Excluding Interest and Penalties

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

Earnings before Income Taxes, Including both Continuing and Discontinued Operations

arnings (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