Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.2.2
Income Taxes
 12 Months Ended
Aug. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes
Note 13.    Income Taxes
Earnings (loss) before income taxes from continuing operations, are summarized as follows (in thousands):
   Year Ended August 31,
  2022 2021 2020
Domestic $ 10,176  $ 1,292  $ (9,058)
Foreign 13,816  42,683  16,907 
$ 23,992  $ 43,975  $ 7,849 
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 2022, domestic and foreign earnings included non-cash impairment and other divestiture charges of $1.3 million and $1.1 million, respectively. 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 $(2.6) million and $(0.6) million of non-cash impairment and other divestiture benefits.
Income tax expense from continuing operations is summarized as follows (in thousands):
  Year ended August 31,
  2022 2021 2020
Currently payable:
Federal $ 1,765  $ (18,243) $ (35)
Foreign 7,824  12,441  10,004 
State 164  539  142 
9,753  (5,263) 10,111 
Deferred:
Federal 1,580  9,677  (7,791)
Foreign (7,538) 185  (1,632)
State 606  (836) 1,604 
(5,352) 9,026  (7,819)
Income tax expense $ 4,401  $ 3,763  $ 2,292 
Income tax expense from continuing operations recognized in the accompanying consolidated statements of earnings 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,
  2022 2021 2020
Federal statutory rate 21.0  % 21.0  % 21.0  %
State income taxes, net of Federal effect 2.3  (0.2) (0.6)
Tax on foreign earnings (1)
1.3  2.8  38.7 
Foreign derived intangible income deduction (4.5) (3.2) — 
Compensation adjustment 6.6  3.1  6.6 
Impairment and other divestiture charges (2)
1.1  1.6  3.3 
Valuation allowance additions and releases (3)
2.1  7.1  (8.1)
Changes in liability for unrecognized tax benefits 3.4  (18.5) (5.3)
U.S. legislative changes, net impact —  (9.8) (32.5)
Taxable liquidation of subsidiaries (4)
(11.4) —  52.6 
Foreign non-deductible expenses 8.5  1.2  7.4 
Changes in tax rates (3.6) (3.4) (9.0)
Audits and adjustments (5)
(6.7) 8.0  (27.4)
Research and development tax credit (2.5) (1.8) (11.5)
Other items 0.7  0.7  (6.0)
Effective income tax rate 18.3  % 8.6  % 29.2  %
(1) The Company generated $1.3 million, $1.7 million and $5.4 million of withholding tax expense for fiscal 2022, 2021 and 2020, respectively, and $2.3 million, $4.6 million and $4.0 million of foreign-derived tax credits for fiscal 2022, 2021 and 2020, respectively.
(2) Fiscal 2022, 2021 and 2020 pretax earnings include $2.4 million, $6.2 million and $(3.2) 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 $1.3 million, $3.5 million and $0.3 million, respectively, are not deductible for income tax purposes.
(3) Incremental valuation allowances of $0.9 million and $4.9 million and $9.4 million were recorded in fiscal 2022, 2021 and 2020, respectively, due to uncertainty regarding realization of tax assets, which were offset by a reduction of $5.5 million, $9.1 million and $12.3 million of valuation allowances for fiscal 2022, 2021 and 2020, respectively.
(4) During fiscal 2022 and 2020, the Company generated a net benefit of $2.7 million and a net expense of $4.1 million, respectively, as a result of taxable liquidations of subsidiaries.
(5) During fiscal 2022, the Company generated $1.6 million of tax benefit related to audits and adjustments as compared to a tax expense of $3.5 million in fiscal 2021 and a tax benefit of $2.2 million in fiscal 2020.
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
  August 31,
  2022 2021
Deferred income tax assets:
Operating loss and tax credit carryforwards $ 78,717  $ 77,691 
Compensation related liabilities 6,002  6,110 
Postretirement benefits 5,995  8,364 
Inventory 2,780  3,177 
Lease liabilities 9,637  11,609 
Book reserves and other items 9,873  11,471 
Total deferred income tax assets 113,004  118,422 
Valuation allowance (61,630) (66,155)
Net deferred income tax assets 51,374  52,267 
Deferred income tax liabilities:
Depreciation and amortization (30,149) (29,444)
Lease assets (9,637) (11,609)
Other items (1,024) (781)
Deferred income tax liabilities (40,810) (41,834)
Net deferred income tax asset (1)
$ 10,564  $ 10,433 
(1) The net deferred income tax asset is reflected on the balance sheet in two categories: an asset of $17.9 million and $14.8 million for fiscal 2022 and 2021, respectively, is included in "Other long-term assets" and a liability of $7.3 million and $4.4 million for fiscal 2022 and 2021, respectively, is included in "Deferred income taxes".
The Company has $72.7 million and $2.5 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 $93.4 million and $6.7 million of foreign loss and credit carryforwards, respectively, and $2.5 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 2032. The U.S. credit carryforwards expire at various times through 2032. 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 $3.5 million would have been necessary as of August 31, 2022.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):
2022 2021 2020
Beginning balance $ 15,658  $ 23,205  $ 24,167 
Increases based on tax positions related to the current year 433  381  869 
Increase for tax positions taken in a prior period 1,084  7  304 
Decrease for tax positions taken in a prior period (57) —  — 
Decrease due to lapse of statute of limitations (1,271) (7,931) (2,334)
Decrease due to settlements (31) —  — 
Changes in foreign currency exchange rates (436) (4) 199 
Ending balance $ 15,380  $ 15,658  $ 23,205 
Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2022, 2021 and 2020, the Company recognized $4.5 million, $3.9 million and $4.5 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 $2.2 million throughout fiscal 2023.        
Cash paid for income taxes, net of refunds, totaled $5.7 million, $7.8 million and $13.2 million during the years ended August 31, 2022, 2021 and 2020, respectively.