Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.10.0.1
Income Taxes
 12 Months Ended
Aug. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Note 12.    Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
 
Year ended August 31,
 
2018
 
2017
 
2016
Currently payable:
 
 
 
 
 
Federal
$
919

 
$
(14,769
)
 
$
2,205

Foreign
12,532

 
15,665

 
11,838

State
120

 
(850
)
 
912

 
13,571

 
46

 
14,955

Deferred:
 
 
 
 
 
Federal
(7,837
)
 
603

 
(12,470
)
Foreign
3,905

 
(16,837
)
 
(23,797
)
State
(663
)
 
(290
)
 
(3,858
)
 
(4,595
)
 
(16,524
)
 
(40,125
)
Income tax expense (benefit)
$
8,976

 
$
(16,478
)
 
$
(25,170
)

Income tax expense (benefit) from continuing operations recognized in the accompanying consolidated statements of operations differs from the amounts computed by applying the federal income tax rate to (loss) 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,
 
2018
 
2017
 
2016
Federal statutory rate (1)
25.7
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of Federal effect
5.1

 
1.1

 
1.2

Net effects of foreign tax rate differential and credits (2) (8)
26.9

 
(3.5
)
 
2.4

Domestic manufacturing deduction
3.9

 
0.6

 
0.3

Foreign branch currency losses
3.2

 
(0.3
)
 
4.9

Compensation adjustment (3)
(11.1
)
 
—

 
—

Impairment and other divestiture charges (4)
(125.9
)
 
(11.2
)
 
(27.0
)
Valuation allowance additions and releases (5)
(31.7
)
 
(16.2
)
 
(0.7
)
Changes in liability for unrecognized tax benefits (6)
51.7

 
(3.7
)
 
(0.9
)
U.S. tax reform, net impact
(3.9
)
 
—

 
—

Taxable liquidation of foreign subsidiaries (7)
(11.7
)
 
22.1

 
—

Foreign non-deductible expenses (8)
(18.2
)
 
(4.6
)
 
(1.7
)
Changes in tax rates (8)
2.2

 
(2.1
)
 
0.9

Business divestitures
—

 
—

 
3.9

U.S. credits and adjustments (8)
11.4

 
2.5

 
1.3

Other items (8)
1.6

 
0.2

 
(0.3
)
Effective income tax rate
(70.8
)%
 
19.9
 %
 
19.3
 %

(1) The Federal statutory rate is a blended rate which reflects 35% through December 31, 2017 and the lowered rate of 21% beginning on January 1, 2018 due to tax reform.
(2) During fiscal 2018, the Company generated $10.3 million of foreign tax credits, excluding the impact of tax reform and had a higher proportion of non-U.S. earnings.
(3) The adoption of ASU 2016-09, Compensation-Stock Compensation resulted in the recognition of excess tax expense in the Company’s provision for income taxes within the Consolidated Statement of Earnings rather than paid-in capital of $1.5 million for the fiscal year 2018.
(4) Fiscal 2018, 2017 and 2016 pretax (loss) earnings include $73.1 million, $117.0 million and $186.5 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 $45.1 million, $69.0 million and $118.5 million, respectively, are not deductible for income tax purposes.
(5) Incremental valuation allowances of $18.1 million, which excludes $7.1 million of valuation allowances related to foreign tax credits that are categorized with tax reform and $15.1 million were recorded in fiscal 2018 and 2017, respectively, due to uncertainty regarding utilization of foreign operating loss carryforwards, which were partially offset by a reduction of $12.8 million and $0.6 million of valuation allowances for fiscal 2018 and 2017, respectively.
(6) The liability for unrecognized tax benefits decreased $6.6 million in fiscal 2018 primarily due to settlements and lapsing of tax audit statutes.
(7) During fiscal 2018 and 2017, the Company generated a net expense of $1.5 million and a net benefit of $14.9 million, the result of taxable liquidations of foreign subsidiaries.
(8) Certain prior year amounts have been reclassified to conform to current year presentation.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law. The Act includes significant changes to the U.S. corporate income tax system which reduces the U.S. federal corporate income tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously deferred from U.S. income tax; and creates new taxes on certain foreign-sourced earnings. The decrease in the U.S. federal corporate income tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 25.7% for the fiscal year ending August 31, 2018. The new taxes for certain foreign-sourced earnings under the Act are effective for the Company in fiscal 2019.
Income tax effects resulting from changes in tax laws are accounted for by the Company in the period in which the law is enacted and the effects are recorded as a component of income tax expense or benefit. As a result, the Company recorded provisional income tax expense resulting from the Act totaling $0.5 million during the year ended August 31, 2018, which includes (i) a transition tax of $5.3 million on the Company’s total post-1986 earnings and profits (“E&P”) which, prior to the Act, were previously deferred from U.S. income tax, (ii) a $11.9 million decrease in income tax expense as a result of the re-measurement of the Company’s deferred tax assets and liabilities to the new corporate tax rate of 21.0% and (iii) $7.1 million in valuation allowances recorded against foreign tax credits as future utilization is now uncertain.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance on accounting for various effects of the Act that may be at different stages of completion. To the extent that a company’s accounting for a certain income tax effect of the Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions the Company has made, and actions the Company may take as a result of the Act. In accordance with SAB 118, the financial reporting impact of the Act will be completed no later than the second quarter of fiscal 2019. As of August 31, 2018, the tax effects related to the Act are provisional and represent the Company’s best estimate. Amounts recorded are based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances which are subject to change and modification. Provisional amounts recorded may change as a result of the following:
•
The amount recorded for the transition tax liability is a provisional amount and based on current estimates of total post-1986 foreign E&P and the income tax pools for all foreign subsidiaries which will continue to be refined over the coming periods. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets as of August 31, 2018. Further interpretations from U.S. federal and state governments and regulatory organizations may change the provisional tax liability or the accounting treatment of the provisional tax liability. It is anticipated that the amounts resulting from the transition tax will be fully offset by available foreign tax credits and will not result in future cash tax payments. In addition, there is a foreign tax credit carryforward on the balance sheet after the calculation of the transition tax liability. The Company is continuing to analyze the new provisions in order to determine future utilization of the credits and is anticipating further interpretive guidance in connection with the utilization of foreign tax credits going forward. As such, we are not yet able to reasonably estimate the future utilization of the foreign tax credits and have recorded a corresponding valuation allowance.
•
The Company is still analyzing certain aspects of the Act and refining the estimate of the expected revaluation of its deferred tax balances. This can potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In addition, the Act provides for accelerated first year expensing of certain capital expenditures for which an estimate has been included in the estimated deferred balances for the year but will continue to be refined through the filing of the tax return. The Act also provides changes related to the limits of deduction for employee compensation. The Company is treating any future non-deductible compensation as impacting compensation expenses in the period incurred and will review further guidance and the related impact as provided through the second quarter of fiscal 2019.
•
The Act also includes a provision designed to tax global intangible low taxed income (GILTI) and benefit foreign-derived intangible income (FDII) which will be effective in fiscal 2019. Under the provision, a U.S. shareholder is required to include in gross income the amount of its GILTI, which is generally the net income of its controlled foreign corporations in excess of a 10% return on depreciable tangible assets after identification of other income subject to non-deferral rules. Due to the complexity of the new GILTI tax rules and uncertainty of the application of the foreign tax credit rules in relation to GILTI and FDII, we are continuing to evaluate this provision of the Act, the application of ASC 740, and are considering available accounting policy alternatives to either record the U.S. income tax effect of future GILTI inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions. Our accounting policies depend, in part, on analyzing our global income to determine whether we expect a tax liability resulting from the application of this provision, and, if so, whether and when to record related current and deferred income taxes. Whether we intend to recognize deferred tax liabilities related to the GILTI provisions is dependent, in part, on our assessment of the Company's future operating structure. In addition, we are awaiting further interpretive guidance in connection with the computation of the GILTI tax. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Act. Therefore, we have not made any adjustments relating to potential GILTI tax in our consolidated financial statements and have not made a policy decision regarding our accounting for GILTI.
•
Prior to the Act, our practice and intention was to reinvest the earnings in our non-U.S. subsidiaries outside of the U.S., and no U.S. deferred income taxes or foreign withholding taxes were recorded. The transition tax noted above will result in the previously untaxed foreign earnings being included in the federal and state fiscal 2018 taxable income. We are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which may include withholding taxes, local country taxes and potential U.S. state taxation. Furthermore, the transition tax will close a majority of the outside basis differences in our foreign corporations and any remaining temporary difference will potentially have some interaction with the GILTI tax noted above. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Act and have not recorded any withholding or state tax liabilities, any deferred taxes attributable to GILTI (as noted above) or any deferred taxes attributable to our investment in our foreign subsidiaries.
•
We are also currently analyzing certain additional provisions of the Act that come into effect in fiscal 2019 and will determine if and how these items would impact the effective tax rate in the year the income or expense occurs. These provisions include the Base Erosion Anti-Abuse Tax (BEAT), eliminating U.S. federal income taxes on dividends from foreign subsidiaries, the new provision that could limit the amount of deductible interest expense, and the limitations on the deductibility of certain executive compensation.
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
 
August 31,
 
2018
 
2017
Deferred income tax assets:
 
 
 
Operating loss and tax credit carryforwards
$
45,947

 
$
41,985

Compensation related liabilities
10,450

 
17,319

Postretirement benefits
8,813

 
14,359

Inventory
2,081

 
2,958

Book reserves and other items
18,986

 
14,224

Total deferred income tax assets
86,277

 
90,845

Valuation allowance
(35,076
)
 
(22,671
)
Net deferred income tax assets
51,201

 
68,174

Deferred income tax liabilities:
 
 
 
Depreciation and amortization
(48,148
)
 
(77,548
)
Other items
(633
)
 
(1,910
)
Deferred income tax liabilities
(48,781
)
 
(79,458
)
Net deferred income tax asset (liability) (1)
$
2,420

 
$
(11,284
)

(1) The net deferred income tax liability is reflected on the balance sheet in two categories: an asset of $24.3 million and $18.6 million for fiscal 2018 and 2017, respectively, is included in other long-term assets and a liability of $21.9 million and $29.9 million for fiscal 2018 and 2017, respectively, is included in deferred income taxes.
The Company has $60.8 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 2038. The Company also has $125.9 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 2028. 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):
 
2018
 
2017
 
2016
Beginning balance
$
31,446

 
$
29,174

 
$
29,924

Increases based on tax positions related to the current year
2,599

 
6,057

 
1,050

Increase for tax positions taken in a prior period
359

 
297

 
475

Decrease for tax positions taken in a prior period
(349
)
 
(627
)
 
—

Decrease due to lapse of statute of limitations
(9,163
)
 
(4,008
)
 
(1,027
)
Decrease due to settlements
—

 
—

 
—

Changes in foreign currency exchange rates
(533
)
 
553

 
(1,248
)
Ending balance
$
24,359

 
$
31,446

 
$
29,174


Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2018, 2017 and 2016, the Company recognized $3.0 million, $2.9 million and $2.3 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 2008. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $3.4 million throughout fiscal 2019.    
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 is reviewing the impact of tax reform on this policy and 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 $2.2 million would have been necessary as of August 31, 2018.    
(Loss) earnings before income taxes, are summarized as follows (in thousands):
  
Year Ended August 31,
 
2018
 
2017
 
2016
Domestic
$
(11,325
)
 
$
12,635

 
$
(19,182
)
Foreign
(1,347
)
 
(95,326
)
 
(111,162
)
 
$
(12,672
)
 
$
(82,691
)
 
$
(130,344
)

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 2018, domestic and foreign earnings included non-cash impairment and other divestiture costs of $23.7 million and $49.3 million, respectively. In fiscal 2017, domestic earnings included $7.8 million of transition costs while foreign earnings included $117.0 million of non-cash 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. Approximately 79%, 63% and 53% of pre-tax earnings (excluding impairment and other divestiture charges) were generated in foreign jurisdictions with tax rates different than the U.S. federal income tax rate during fiscal 2018, 2017 and 2016, respectively.
Cash paid for income taxes, net of refunds, was a net refund of $1.5 million during the year ended August 31, 2018 and a net payment of $11.8 million and $21.4 million during the years ended August 31, 2017 and 2016, respectively.