Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
 12 Months Ended
Aug. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes
Note 12.    Income Taxes
Income tax (benefit) expense is summarized as follows (in thousands):
 
Year ended August 31,
 
2017
 
2016
 
2015
Currently payable:
 
 
 
 
 
Federal
$
(14,769
)
 
$
2,205

 
$
(126
)
Foreign
15,665

 
11,838

 
21,200

State
(850
)
 
912

 
(1,616
)
 
46

 
14,955

 
19,458

Deferred:
 
 
 
 
 
Federal
603

 
(12,470
)
 
(4,416
)
Foreign
(16,837
)
 
(23,797
)
 
(9,199
)
State
(290
)
 
(3,858
)
 
(324
)
 
(16,524
)
 
(40,125
)
 
(13,939
)
Income tax (benefit) expense
$
(16,478
)
 
$
(25,170
)
 
$
5,519


 
Income tax (benefit) expense recognized in the accompanying consolidated statements of operations differs from the amounts computed by applying the federal income tax rate to (loss) earnings before income tax (benefit) 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,
 
2017
 
2016
 
2015
Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of Federal effect
1.1

 
1.2

 
(0.2
)
Net effects of foreign tax rate differential and credits (1)
(2.7
)
 
1.6

 
(58.4
)
Domestic manufacturing deduction
0.6

 
0.3

 
(5.1
)
Foreign branch currency (gains) losses
(0.3
)
 
4.9

 
—

Impairment and other divestiture charges (2)
(11.2
)
 
(27.0
)
 
78.6

Valuation allowance additions and releases (3)
(16.2
)
 
(0.7
)
 
15.5

Changes in liability for unrecognized tax benefits (4)
(3.7
)
 
(0.9
)
 
(42.1
)
Taxable liquidation of foreign subsidiaries (5)
22.1

 
—

 
—

Foreign non-deductible expenses
(4.6
)
 
—

 
—

Changes in tax rates
(2.1
)
 
—

 
—

Business divestitures
—

 
3.9

 
—

Other items
1.9

 
1.0

 
(1.6
)
Effective income tax rate
19.9
 %
 
19.3
 %
 
21.7
 %

(1) During fiscal 2015, the Company generated $10.0 million of foreign tax credits, the result of a non-recurring non-permanent loan from a foreign subsidiary (which were utilized to reduce fiscal 2015 tax obligations) and had a higher proportion of non-U.S. earnings.
(2) Fiscal 2017, 2016 and fiscal 2015 net (loss) earnings include $117.0 million, $186.5 million and $84.4 million, respectively, in impairment and other divestiture charges related to goodwill, intangible assets, tangible assets and the cumulative effect of foreign currency rate changes of which $47.9 million, $68.0 million and $6.3 million, respectively, are deductible for income tax purposes.
(3) Incremental valuation allowances of $15.1 million and $5.7 million were recorded in fiscal 2017 and 2015, respectively, due to uncertainty regarding utilization of foreign operating loss carryforwards, which were partially offset by a reduction of $0.6 million and $2.3 million of reserves for fiscal 2017 and 2015, respectively.
(4) The liability for unrecognized tax benefits decreased $9.5 million in fiscal 2015 primarily due to settlements and lapsing of tax audit statutes.
(5) During fiscal 2017, the Company generated a net benefit of $14.9 million, the result of taxable liquidations of foreign subsidiaries.
    
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
 
August 31,
 
2017
 
2016
Deferred income tax assets:
 
 
 
Operating loss and tax credit carryforwards
$
41,985

 
$
36,761

Compensation related liabilities
17,319

 
25,086

Postretirement benefits
14,359

 
8,727

Inventory
2,958

 
3,044

Book reserves and other items
14,224

 
8,317

Total deferred income tax assets
90,845

 
81,935

Valuation allowance
(22,671
)
 
(8,147
)
Net deferred income tax assets
68,174

 
73,788

Deferred income tax liabilities:
 
 
 
Depreciation and amortization
(77,548
)
 
(83,020
)
Other items
(1,910
)
 
(5,493
)
Deferred income tax liabilities
(79,458
)
 
(88,513
)
Net deferred income tax liability
$
(11,284
)
 
$
(14,725
)

The Company has $62.7 million of state loss carryforwards, which are available to reduce future state tax liabilities. These state net operating loss carryforwards expire at various times through 2037. The Company also has $112.0 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 2027. The valuation allowance represents a reserve for deferred tax assets, including loss carryforwards, 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):
 
2017
 
2016
 
2015
Beginning balance
$
29,174

 
$
29,924

 
$
39,509

Increases based on tax positions related to the current year
6,057

 
1,050

 
2,183

Increase for tax positions taken in a prior period
297

 
475

 
8,935

Decrease for tax positions taken in a prior period
(627
)
 
—

 
(633
)
Decrease due to lapse of statute of limitations
(4,008
)
 
(1,027
)
 
(4,464
)
Decrease due to settlements
—

 
—

 
(14,180
)
Changes in foreign currency exchange rates
553

 
(1,248
)
 
(1,426
)
Ending balance
$
31,446

 
$
29,174

 
$
29,924


Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2017, 2016 and 2015, the Company recognized $2.9 million, $2.3 million and $1.8 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 2007. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $4.6 million throughout fiscal 2018.    
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. Accordingly, 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. Undistributed earnings on which additional income taxes have not been provided amounted to $213.7 million at August 31, 2017. If all such undistributed earnings were no longer permanently reinvested, the Company would incur additional tax expense of $21.7 million to record the related deferred tax liability.     
(Loss) earnings before income taxes, are summarized as follows (in thousands):
  
Year Ended August 31,
 
2017
 
2016
 
2015
Domestic
$
12,635

 
$
(19,182
)
 
$
14,593

Foreign
(95,326
)
 
(111,162
)
 
10,798

 
$
(82,691
)
 
$
(130,344
)
 
$
25,391


Both domestic and foreign pre-tax earnings 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 2017, domestic earnings included $7.8 million of transition costs while foreign earnings included $117.0 million of impairment and other divestiture charges. In fiscal 2016, domestic earnings included a non-cash impairment charge of $49.0 million and a $5.1 million loss on the Sanlo divestiture while foreign earnings included a $137.5 million non-cash impairment charge. Fiscal 2015 domestic and foreign earnings included a non-cash impairment charge of $20.3 million and $64.1 million, respectively. Approximately 63%, 53% and 68% of pre-tax earnings (excluding impairment and other divestiture charges) were generated in foreign jurisdictions with tax rates lower than the U.S. federal income tax rate during fiscal 2017, 2016 and 2015, respectively.
Cash paid for income taxes, net of refunds totaled $11.8 million, $21.4 million, and $26.4 million (including tax due on divestitures) during the years ended August 31, 2017, 2016 and 2015, respectively.