Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3
Income Taxes
 12 Months Ended
Aug. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Note 12.    Income Taxes
Income tax expense (benefit) from continuing operations is summarized as follows (in thousands):
 
Year ended August 31,
 
2019
 
2018
 
2017
Currently payable:
 
 
 
 
 
Federal
$
(2,040
)
 
$
291

 
$
(22,002
)
Foreign
9,370

 
9,223

 
11,239

State
1,347

 
358

 
(675
)
 
8,677

 
9,872

 
(11,438
)
Deferred:
 
 
 
 
 
Federal
(400
)
 
(1,143
)
 
3,278

Foreign
2,172

 
5,807

 
(14,406
)
State
208

 
(86
)
 
(48
)
 
1,980

 
4,578

 
(11,176
)
Income tax expense (benefit)
$
10,657

 
$
14,450

 
$
(22,614
)

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 earnings (loss) 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,
 
2019
 
2018
 
2017
Federal statutory rate
21.0
 %
 
25.7
 %
 
35.0
 %
State income taxes, net of Federal effect
(4.0
)
 
(0.5
)
 
0.6

Net effects of foreign tax rate differential and credits (1)
11.3

 
(12.2
)
 
(5.4
)
Domestic manufacturing deduction
—

 
(1.3
)
 
0.2

Foreign branch currency losses
—

 
(2.1
)
 
(0.2
)
Compensation adjustment
4.4

 
7.0

 
—

Impairment and divestiture charges (2)
19.3

 
39.1

 
(7.9
)
Valuation allowance additions and releases (3)
3.9

 
20.3

 
(12.3
)
Changes in liability for unrecognized tax benefits
4.1

 
(34.1
)
 
(2.6
)
U.S. tax reform, net impact (4)
(31.1
)
 
2.4

 
—

Taxable liquidation of foreign subsidiaries (5)
—

 
7.7

 
15.5

Foreign non-deductible expenses
16.2

 
12.0

 
(2.1
)
Changes in tax rates
1.7

 
(1.4
)
 
(1.5
)
R&D credit, audits and adjustments
4.8

 
15.3

 
1.0

Other items
5.3

 
(2.6
)
 
(1.1
)
Effective income tax rate
56.9
 %
 
75.3
 %
 
19.2
 %

(1) The Company generated $0.7 million, $10.2 million and $4.2 million of foreign tax credits, excluding the impact of tax reform for fiscal 2019, 2018 and 2017, respectively.  
(2) Fiscal 2019, 2018 and 2017 pretax earnings (loss) include $22.8 million, $3.0 million and $117.0 million, respectively, in impairment & divestiture charges related to goodwill, intangible assets, tangible assets and the cumulative effect of foreign currency rate changes of which $14.0 million, $0.7 million and $69.0 million, respectively, are not deductible for income tax purposes.
(3) Incremental valuation allowances of $1.7 million and $20.4 million were recorded in fiscal 2019 and 2018, respectively, due to uncertainty regarding utilization of foreign operating loss carryforwards, which were partially offset by a reduction of $2.9 million and $11.8 million of valuation allowances for fiscal 2019 and 2018, respectively. These amounts exclude valuation allowances related to foreign tax credits that are categorized with tax reform.
(4) During fiscal 2019, legislative changes and additional guidance related to the Act resulted in tax benefit of $5.8 million related to the fiscal 2018 tax year.
(5) 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.
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
 
August 31,
 
2019
 
2018
Deferred income tax assets:
 
 
 
Operating loss and tax credit carryforwards
$
88,198

 
$
38,414

Compensation related liabilities
7,752

 
8,821

Postretirement benefits
9,289

 
8,659

Inventory
629

 
520

Book reserves and other items
11,465

 
17,499

Total deferred income tax assets
117,333

 
73,913

Valuation allowance
(73,255
)
 
(32,426
)
Net deferred income tax assets
44,078

 
41,487

Deferred income tax liabilities:
 
 
 
Depreciation and amortization
(26,248
)
 
(23,517
)
Other items
(862
)
 
(611
)
Deferred income tax liabilities
(27,110
)
 
(24,128
)
Net deferred income tax asset (1)
$
16,968

 
$
17,359


(1) The net deferred income tax asset is reflected on the balance sheet in two categories: an asset of $18.4 million and $21.3 million for fiscal 2019 and 2018, respectively, is included in "Other long-term assets" and a liability of $1.6 million and $3.9 million for fiscal 2019 and 2018, respectively, is included in "Deferred income taxes".
The Company has $68.8 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 2039. The Company also has $85.3 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 2029. 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):
 
2019
 
2018
 
2017
Beginning balance
$
24,359

 
$
31,446

 
$
29,174

Increases based on tax positions related to the current year
2,169

 
2,599

 
6,057

Increase for tax positions taken in a prior period
1,422

 
359

 
297

Decrease for tax positions taken in a prior period
—

 
(349
)
 
(627
)
Decrease due to lapse of statute of limitations
(3,212
)
 
(9,163
)
 
(4,008
)
Decrease due to settlements
(324
)
 
—

 
—

Changes in foreign currency exchange rates
(247
)
 
(533
)
 
553

Ending balance
$
24,167

 
$
24,359

 
$
31,446


Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2019, 2018 and 2017, the Company recognized $3.7 million, $3.0 million and $2.9 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 2009. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $2.4 million throughout fiscal 2020.    
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 $5.4 million would have been necessary as of August 31, 2019.    
Earnings (loss) before income taxes from continuing operations, are summarized as follows (in thousands):
  
Year Ended August 31,
 
2019
 
2018
 
2017
Domestic
$
(715
)
 
$
5,337

 
$
(10,023
)
Foreign
19,439

 
13,859

 
(107,866
)
 
$
18,724

 
$
19,196

 
$
(117,889
)

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 2019, domestic and foreign earnings included non-cash impairment and other divestiture costs of $9.0 million and $13.8 million, respectively. In fiscal 2018, foreign earnings included $3.0 million of non-cash impairment & divestiture charges. In fiscal 2017, domestic earnings included $7.8 million of director and officer transition charges and foreign earnings included $117.0 million of non-cash impairment & divestiture charges. Approximately 70% - 80% of pre-tax earnings from continuing operations (excluding impairment & divestiture charges) were generated in foreign jurisdictions with tax rates different than the U.S. federal income tax rate.
Cash paid for income taxes, net of refunds, totaled $15.4 million, $1.5 million (refund) and $11.8 million during the years ended August 31, 2019, 2018 and 2017, respectively.