Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.21.2
Income Taxes
 12 Months Ended
Aug. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes
Note 12.    Income Taxes
Earnings (loss) before income taxes from continuing operations, are summarized as follows (in thousands):
   Year Ended August 31,
  2021 2020 2019
Domestic $ 1,292  $ (9,058) $ (715)
Foreign 42,683  16,907  19,439 
$ 43,975  $ 7,849  $ 18,724 
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 2021, domestic and foreign earnings included non-cash impairment and other divestiture charges of $4.7 million and $1.5 million, respectively. 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 $9.0 million and $13.8 million of non-cash impairment and other divestiture costs.
Income tax expense from continuing operations is summarized as follows (in thousands):
  Year ended August 31,
  2021 2020 2019
Currently payable:
Federal $ (18,243) $ (35) $ (2,040)
Foreign 12,441  10,004  9,370 
State 539  142  1,347 
(5,263) 10,111  8,677 
Deferred:
Federal 9,677  (7,791) (400)
Foreign 185  (1,632) 2,172 
State (836) 1,604  208 
9,026  (7,819) 1,980 
Income tax expense $ 3,763  $ 2,292  $ 10,657 
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,
  2021 2020 2019
Federal statutory rate 21.0  % 21.0  % 21.0  %
State income taxes, net of Federal effect (0.2) (0.6) (4.0)
Tax on foreign earnings (1)
2.8  38.7  20.6 
Foreign derived intangible income deduction (3.2) —  (9.3)
Compensation adjustment 3.1  6.6  4.4 
Impairment and other divestiture charges (2)
1.6  3.3  19.3 
Valuation allowance additions and releases (3)
7.1  (8.1) 3.9 
Changes in liability for unrecognized tax benefits (18.5) (5.3) 4.1 
U.S. legislative changes, net impact (9.8) (32.5) (31.1)
Taxable liquidation of subsidiaries (4)
—  52.6  — 
Foreign non-deductible expenses 1.2  7.4  18.2 
Changes in tax rates (3.4) (9.0) 1.7 
Audits and adjustments (5)
8.0  (27.4) 10.0 
Research and development tax credit (1.8) (11.5) (5.2)
Other items 0.7  (6.0) 3.3 
Effective income tax rate 8.6  % 29.2  % 56.9  %
(1) The Company generated $1.7 million, $5.4 million and $2.6 million of withholding tax expense for fiscal 2021, 2020 and 2019, respectively, and $4.6 million, $4.0 million and $3.5 million of foreign-derived tax credits, excluding the impact of tax reform for fiscal 2021, 2020 and 2019, respectively.
(2) Fiscal 2021, 2020 and 2019 pretax earnings include $6.2 million, $(3.2) million and $22.8 million, respectively, in impairment & divestiture charges (benefits) related to goodwill, intangible assets, tangible assets and the cumulative effect of foreign currency rate changes of which $3.5 million, $0.3 million and $14.0 million, respectively, are not deductible for income tax purposes.
(3) Incremental valuation allowances of $4.9 million and $9.4 million and $1.7 million were recorded in fiscal 2021, 2020 and 2019, respectively, due to uncertainty regarding realization of tax assets, which were offset by a reduction of $9.1 million, $12.3 million and $2.9 million of valuation allowances for fiscal 2021, 2020 and 2019, respectively. These amounts exclude valuation allowances against tax assets related to the tax reform.
(4) During fiscal 2020, the Company generated a net expense of $4.1 million as a result of taxable liquidations of subsidiaries.
(5) During fiscal 2021, the Company generated $3.5 million of tax benefit related to audits and adjustments as compared to a tax benefit of $2.2 million in fiscal 2020 and a tax expense of $1.9 million in fiscal 2019.
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
  August 31,
  2021 2020
Deferred income tax assets:
Operating loss and tax credit carryforwards $ 77,691  $ 99,905 
Compensation related liabilities 6,110  5,941 
Postretirement benefits 8,364  9,068 
Inventory 3,177  1,793 
Lease liabilities 11,609  10,526 
Book reserves and other items 11,471  6,752 
Total deferred income tax assets 118,422  133,985 
Valuation allowance (66,155) (70,414)
Net deferred income tax assets 52,267  63,571 
Deferred income tax liabilities:
Depreciation and amortization (29,444) (31,457)
Lease assets (11,609) (10,526)
Other items (781) (702)
Deferred income tax liabilities (41,834) (42,685)
Net deferred income tax asset (1)
$ 10,433  $ 20,886 
(1) The net deferred income tax asset is reflected on the balance sheet in two categories: an asset of $14.8 million and $22.6 million for fiscal 2021 and 2020, respectively, is included in "Other long-term assets" and a liability of $4.4 million and $1.7 million for fiscal 2021 and 2020, respectively, is included in "Deferred income taxes".
The Company has $65.1 million and $2.4 million of gross state net operating loss and credit carryforwards, respectively, which are available to reduce future state tax liabilities. These state net operating loss carryforwards expire at various times through 2041. The Company also has $86.3 million and $7.8 million of foreign loss and credit carryforwards, respectively, and $3.4 million of U.S. credit carryforwards which are available to reduce certain future foreign and U.S. tax liabilities. Over half of the foreign loss carryforwards are not subject to any expiration dates, while the other balances expire at various times through 2031. The U.S. credit carryforwards expire at various times through 2040. The valuation allowance represents a reserve for deferred tax assets, including loss carryforwards and foreign tax credits, for which utilization is uncertain.
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 $3.7 million would have been necessary as of August 31, 2021.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):
2021 2020 2019
Beginning balance $ 23,205  $ 24,167  $ 24,359 
Increases based on tax positions related to the current year 381  869  2,169 
Increase for tax positions taken in a prior period 7  304  1,422 
Decrease due to lapse of statute of limitations (7,931) (2,334) (3,212)
Decrease due to settlements —  —  (324)
Changes in foreign currency exchange rates (4) 199  (247)
Ending balance $ 15,658  $ 23,205  $ 24,167 
Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2021, 2020 and 2019, the Company recognized $3.9 million, $4.5 million and $3.7 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 $1.0 million throughout fiscal 2022.        
Cash paid for income taxes, net of refunds, totaled $7.8 million, $13.2 million and $15.4 million during the years ended August 31, 2021, 2020 and 2019, respectively.