Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.3
Income Taxes
 12 Months Ended
Aug. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes
Note 12.    Income Taxes
Earnings before income taxes from continuing operations, are summarized as follows (in thousands):
   Year Ended August 31,
  2023 2022 2021
Domestic $ 26,442  $ 10,176  $ 1,292 
Foreign 42,456  13,816  42,683 
$ 68,898  $ 23,992  $ 43,975 
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 2023, domestic earnings included non-cash impairment and other divestiture benefits of $6.2 million. 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 $4.7 million and $1.5 million of non-cash impairment and other divestiture benefits, respectively. Substantially all of the non-cash impairment and other divestiture charges (benefits) did not result in a tax expense (benefit).
Income tax expense from continuing operations is summarized as follows (in thousands):
  Year ended August 31,
  2023 2022 2021
Currently payable:
Federal $ 5,181  $ 1,765  $ (18,243)
Foreign 9,240  7,824  12,441 
State 319  164  539 
14,740  9,753  (5,263)
Deferred:
Federal (2,935) 1,580  9,677 
Foreign 3,806  (7,538) 185 
State (362) 606  (836)
509  (5,352) 9,026 
Income tax expense $ 15,249  $ 4,401  $ 3,763 
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,
  2023 2022 2021
Federal statutory rate 21.0  % 21.0  % 21.0  %
State income taxes, net of Federal effect 0.7  2.3  (0.2)
Tax on foreign earnings (1)
6.0  1.3  2.8 
Foreign derived intangible income deduction (3.1) (4.5) (3.2)
Compensation adjustment 1.5  6.6  3.1 
Impairment and other divestiture charges —  1.1  1.6 
Valuation allowance additions and releases (0.8) 2.1  7.1 
Changes in liability for unrecognized tax benefits (0.1) 3.4  (18.5)
U.S. legislative changes, net impact —  —  (9.8)
Taxable liquidation of subsidiaries (2)
0.1  (11.4) — 
Foreign non-deductible expenses 1.7  8.5  1.2 
Changes in tax rates (2.0) (3.6) (3.4)
Audits and adjustments (3)
(2.9) (6.7) 8.0 
Research and development tax credit (0.7) (2.5) (1.8)
Other items 0.7  0.7  0.7 
Effective income tax rate 22.1  % 18.3  % 8.6  %
(1) The Company generated $1.6 million, $0.2 million and $1.1 million of U.S. tax on non-U.S. earnings, net of foreign tax credits for fiscal 2023, 2022 and 2021, respectively.
(2) During fiscal 2022, the Company generated a net benefit of $2.7 million as a result of taxable liquidations of subsidiaries.
(3) During fiscal 2023 and fiscal 2022, the Company generated $2.0 million and $1.6 million of tax benefit related to audits and adjustments as compared to a tax expense of $3.5 million in fiscal 2021.
Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):
  August 31,
  2023 2022
Deferred income tax assets:
Operating loss and tax credit carryforwards $ 70,933  $ 78,717 
Compensation related liabilities 7,372  6,002 
Postretirement benefits 5,224  5,995 
Inventory 1,715  2,780 
Lease liabilities 8,594  9,637 
Research and development capitalization 4,544  — 
Book reserves and other items 6,548  9,873 
Total deferred income tax assets 104,930  113,004 
Valuation allowance (61,432) (61,630)
Net deferred income tax assets 43,498  51,374 
Deferred income tax liabilities:
Depreciation and amortization (23,844) (30,149)
Lease assets (8,594) (9,637)
Other items (1,020) (1,024)
Deferred income tax liabilities (33,458) (40,810)
Net deferred income tax asset (1)
$ 10,040  $ 10,564 
(1) The net deferred income tax asset is reflected on the balance sheet in two categories: an asset of $15.7 million and $17.9 million for fiscal 2023 and 2022, respectively, is included in "Other long-term assets" and a liability of $5.7 million and $7.3 million for fiscal 2023 and 2022, respectively, is included in "Deferred income taxes".
The Company has $68.6 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 2043. The Company also has $79.4 million and $7.7 million of foreign loss and credit carryforwards, respectively, and $1.8 million of U.S. credit carryforwards which are available to reduce certain future foreign and U.S. tax liabilities. The
majority of the foreign loss carryforwards are not subject to any expiration dates, while the other balances expire at various times through 2030. The U.S. credit carryforwards expire at various times through 2033. 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 that would become payable upon remission of undistributed earnings of foreign subsidiaries. If all undistributed earnings were remitted, an additional income tax provision of $2.6 million would have been necessary as of August 31, 2023.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):
2023 2022 2021
Beginning balance $ 15,380  $ 15,658  $ 23,205 
Increases based on tax positions related to the current year 279  433  381 
Increase for tax positions taken in a prior period —  1,084  7 
Decrease for tax positions taken in a prior period (56) (57) — 
Decrease due to lapse of statute of limitations (951) (1,271) (7,931)
Decrease due to settlements —  (31) — 
Changes in foreign currency exchange rates 102  (436) (4)
Ending balance $ 14,754  $ 15,380  $ 15,658 
Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2023, 2022 and 2021, the Company recognized $5.2 million, $4.5 million and $3.9 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 2011. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $3.1 million throughout fiscal 2024.        
Cash paid for income taxes, net of refunds, totaled $2.7 million, $5.7 million and $7.8 million during the years ended August 31, 2023, 2022 and 2021, respectively.