Enerpac Tool Group Corp. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Aug. 31, 2015

Income tax expense from continuing operations is summarized as follows (in thousands):



	Year ended August 31,
	2015			2014			2013
Currently payable:
Federal	$	(126	)	$	23,211		$	24,809
Foreign	21,200			9,059			13,335
State	(1,616		)	(657		)	902
	19,458			31,613			39,046
Deferred:
Federal	(4,416		)	4,224			(13,514		)
Foreign	(9,199		)	(4,130		)	(9,942		)
State	(324		)	866			(218		)
	(13,939		)	960			(23,674		)
	$	5,519		$	32,573		$	15,372

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,
	2015		2014		2013
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal effect	(0.2	)	0.8		0.9
Net effects of foreign tax rate differential and credits ⁽¹⁾	(58.4	)	(10.5	)	(8.8	)
Domestic manufacturing deduction	(5.1	)	(1.0	)	(1.0	)
Goodwill impairment ⁽²⁾	78.6		—		—
Valuation allowance additions and releases ⁽³⁾	15.5		(8.0	)	(3.1	)
Changes in liability for unrecognized tax benefits ⁽⁴⁾	(42.1	)	3.2		(5.6	)
Change in income tax accounting method, net	—		(5.6	)	—
Business (RV) divestiture	—		3.0		—
Prior period correction⁽⁵⁾	—		—		(6.5	)
Other items	(1.6	)	1.8		(1.5	)
Effective income tax rate	21.7	%	18.7	%	9.4	%

⁽¹⁾During fiscal 2015, the Company generated significant foreign tax credits and approximately 68% of pre-tax earnings (excluding the impairment charge) were generated in foreign jurisdictions with tax rates lower than the U.S. federal income tax rate.

⁽²⁾ Fiscal 2015 net earnings includes an $84.4 million impairment of goodwill and intangible assets, of which $6.3 million is deductible for income tax purposes.

⁽³⁾ Additional valuation allowances of $5.7 million, were established in fiscal 2015 due to uncertainty regarding utilization of foreign operating loss carryforwards, which were partially offset by the reversal of $2.3 million of previously established reserves.

⁽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 2013, the Company recorded a $10.6 million adjustment to properly state deferred income tax balances associated with its equity compensation programs. The correction was not material to current or previously issued financial statements.

Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities include the following items (in thousands):



	August 31,
	2015			2014
Deferred income tax assets:
Operating loss and tax credit carryforwards	$	19,419		$	18,062
Compensation related liabilities	27,047			23,496
Postretirement benefits	5,462			5,082
Inventory	3,253			2,775
Book reserves and other items	11,976			12,214
Total deferred income tax assets	67,157			61,629
Valuation allowance	(8,053		)	(5,608		)
Net deferred income tax assets	59,104			56,021
Deferred income tax liabilities:
Depreciation and amortization	(109,447		)	(124,688		)
Other items	(4,539		)	(5,728		)
Deferred income tax liabilities	(113,986		)	(130,416		)
Net deferred income tax liability	$	(54,882	)	$	(74,395	)

The Company has $50.5 million of state net operating loss carryforwards, which are available to reduce future state tax liabilities. These state net operating carryforwards expire at various times through 2035. The Company also has $66.1 million of foreign loss carryforwards which are available to reduce certain future foreign tax liabilities. Approximately half of the foreign loss carryforwards are not subject to any expiration dates, while the balance expire at various times through 2025. The valuation allowance represents a reserve for deferred tax assets, including net operating loss and tax credit 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):



	2015			2014			2013
Beginning balance	$	39,509		$	18,006		$	24,608
Increases based on tax positions related to the current year	2,183			28,053			3,601
Increase for tax positions taken in a prior period	8,935			—			—
Decrease for tax positions taken in a prior period	(633		)	—			(100		)
Decrease due to lapse of statute of limitations	(4,464		)	(7,030		)	(7,522		)
Decrease due to settlements	(14,180		)	—			(2,581		)
Changes in foreign currency exchange rates	(1,426		)	480			—
Ending balance	$	29,924		$	39,509		$	18,006

Substantially all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. As of August 31, 2015, 2014 and 2013, the Company recognized $1.8 million, $2.0 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. The previously reported August 31, 2014 reserve for unrecognized tax benefits increased by $7.2 million the result of an adjustment to reclassify amounts previously reported as a valuation allowance reserve. With few exceptions, the Company is no longer subject to U.S. federal, state and foreign income tax examinations by tax authorities in our major tax jurisdictions for years before fiscal 2006. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by $1.6 million within the next twelve months.

The Company’s policy is to remit earnings from foreign subsidiaries only to the extent any resultant foreign income taxes are creditable in the U.S.. 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 $384.5 million at August 31, 2015. If all such undistributed earnings were remitted, an additional income tax provision of $70.9 million would have been necessary as of August 31, 2015. The percentage of incremental U.S. taxes on unremitted earnings as of August 31, 2015 was 18.4%.

Earnings before income taxes, for continuing operations, are summarized as follows (in thousands):



	Year Ended August 31,
	2015		2014		2013
Domestic	$	14,593	$	84,854	$	67,392
Foreign	10,798		89,172		95,557
	$	25,391	$	174,026	$	162,949

Both domestic and foreign pre-tax earnings are impacted by changes in sales levels, acquisition and divestiture activities, restructuring costs and the related benefits, growth investments, debt levels and the impact of changes in foreign currency exchange rates. In fiscal 2015, domestic and foreign earnings included goodwill impairment charges of $20.3 million and $64.1 million, respectively, while, fiscal 2014 domestic earnings included a $13.5 million gain on the RV divestiture.

Cash paid for income taxes (including tax due on divestitures), net of refunds was $26.4 million, $57.2 million and $42.1 million during the years ended August 31, 2015, 2014 and 2013, respectively.