Income Taxes

12 Months Ended

Sep. 30, 2019

Income Taxes

Income Taxes

NOTE 13—INCOME TAXES

On December 22, 2017, the U.S. government enacted the Tax Act, which includes provisions for Global Intangible Low-Tax Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of foreign subsidiaries. Consistent with accounting guidance, we have elected to account for the tax on GILTI as a period cost and thus have not adjusted any net deferred tax assets of our foreign subsidiaries in connection with the Tax Act.

Due to the complexity of the Tax Act, the Securities and Exchange Commission issued guidance in SAB 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. These amounts did not change in fiscal year 2019.

The SAB 118 measurement period ended on December 22, 2018. Although we no longer consider these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.

Income (loss) from continuing operations before income taxes includes the following components (in thousands):

	Years Ended September 30,
	2019		2018		2017
	(in thousands)
United States	$	(535)	$	(51,049)	$	(70,566)
Foreign		52,881		65,935		59,484
Total	$	52,346	$	14,886	$	(11,082)

Significant components of the provision (benefit) for income taxes from continuing operations are as follows:

	Years Ended September 30,
	2019		2018		2017
	(in thousands)
Current:
Federal	$	(710)	$	(4,775)	$	(4,070)
State		2,898		976		878
Foreign		10,523		19,882		13,869
Total current		12,711		16,083		10,677
Deferred:
Federal		(4,553)		(7,874)		2,257
State		(135)		482		569
Foreign		3,017		(1,598)		1,155
Total deferred		(1,671)		(8,990)		3,981
Provision for income taxes	$	11,040	$	7,093	$	14,658

The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:

	Years Ended September 30,
	2019		2018		2017
	(in thousands)
Tax expense at U.S. statutory rate	$	10,992	$	3,124	$	(3,877)
State income taxes, net of federal tax effect		1,416		(237)		(923)
Nondeductible expenses		1,720		1,186		(185)
Change in reserve for tax contingencies		(1,468)		(1,047)		(4,435)
Change in deferred tax asset valuation allowance		(10,007)		8,784		17,374
Foreign rate differential (1)		2,149		5,684		9,912
Tax credits		(4,767)		(2,656)		(3,459)
Impact of U.S. Tax Reform		—		(7,053)		—
Global Intangible Low-Tax Income		8,182		—		—
Stock Based Compensation		(448)		59		16
Non-controlling interest in equity arrangements		1,802		99		—
Other		1,469		(850)		235
Provision for income taxes	$	11,040	$	7,093	$	14,658

⁽¹⁾ In 2018, we recorded $3.5 million of tax expense related to foreign earnings which were not permanently reinvested prior to the enactment of the U.S. Tax Act. After enactment, certain foreign earnings are taxed at higher statutory rates than the U.S. which results in $2.1 million of incremental tax expense in 2019. In 2017, we provided for deferred taxes on all cumulative unremitted foreign earnings, as the earnings were no longer considered permanently reinvested resulting in a charge of $9.5 million.

Significant components of our deferred tax assets and liabilities are as follows:

	September 30,
	2019		2018
	(in thousands)
Deferred tax assets:
Accrued employee benefits	$	11,409	$	8,285
Allowances for loss contingencies		3,561		3,518
Deferred compensation		3,071		3,272
Intangible assets		—		1,361
Inventory valuation		8,036		1,154
Long-term contracts		6,995		7,751
Prepaid and accrued expenses		1,816		1,229
Retirement benefits		4,967		1,398
Tax credit carryforwards		33,118		35,137
Loss carryforwards		36,248		29,097
Other		818		264
Total gross deferred tax assets		110,039		92,466
Valuation allowance		(69,098)		(81,838)
Total deferred tax assets		40,941		10,628
Deferred tax liabilities:
Debt obligation basis difference		(4,582)		—
Deferred revenue		(12,135)		(2,351)
Intangible assets		(18,592)		—
Property, plant and equipment		(4,524)		(5,079)
Unremitted earnings		(977)		(823)
Other		(587)		(351)
Total deferred tax liabilities		(41,397)		(8,604)
Net deferred tax asset (liability)	$	(456)	$	2,024

The deferred tax assets and liabilities for fiscal 2019 and 2018 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2019 includes changes that are recorded to other comprehensive income (loss), retained earnings and goodwill.

We calculate deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities and measure them using the enacted tax rates and laws that we expect will be in effect when the differences reverse.

At September 30, 2019, we have federal and state income tax credit carryforwards (in thousands) which begin to expire as follows:

U.S. foreign tax credits	$	14,535	2027
U.S. research and development tax credits		14,439	2035
State research and development tax credits		25,748	Do not expire

We have federal, state and foreign capital and net operating losses (in thousands) which begin to expire as follows:

U.S. net operating loss carryforwards	$	127,013	2033
U.S. capital loss carryforwards		5,451	2023
State loss carryforwards		55,619	2021
State capital loss carryforwards		23,038	2023
Foreign net operating loss carryforwards		13,548	Do not expire

During 2015, we evaluated our net U.S. deferred income taxes, which included an assessment of the cumulative income or loss over the prior three-year period and future periods and concluded that a valuation allowance was required. After consideration of our recent history of U.S. losses, we continue to maintain a valuation allowance on net U.S. deferred tax assets as of September 30, 2019.

As of September 30, 2019, a total valuation allowance of $69.1 million has been established against U.S. deferred tax assets, certain foreign operating losses and other foreign assets. For fiscal 2019, the valuation allowance decreased by $12.7 million, of which $10.0 million was recorded as a net tax benefit in our Consolidated Statement of Operations, offset by amounts recorded through acquisition accounting and to other components of income.

The non-cash charge to increase or decrease a valuation allowance does not have any impact on our cash flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future. Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the Consolidated Statement of Operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the Consolidated Statement of Operations. If sufficient positive evidence arises in the future, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached.

Prior to the Tax Act, we provided deferred taxes on all undistributed foreign earnings, as we did not consider these amounts permanently reinvested. Under the transition to a modified territorial tax system, all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings. As of September 30, 2019, we have recorded a deferred tax liability of $1.0 million related to future taxes on our unremitted foreign earnings.

Accounting for Uncertainty in Income Taxes

During fiscal 2019 and 2018, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:

	September 30,
	2019		2018
	(in thousands)
Balance at beginning of year	$	9,942	$	13,248
Additions (reductions) for tax positions taken in prior years		8,458		(80)
Recognition of benefits from expiration of statutes		(776)		(1,770)
Additions for tax positions related to the current year		951		713
Reductions for tax positions related to acquisitions		—		(2,169)
Balance at end of year	$	18,575	$	9,942

At September 30, 2019 and 2018, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.7 million and $1.8 million, respectively. During fiscal year 2020, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to an immaterial amount of net unrecognized tax benefits depending on the timing of examinations or expiration of statutes of limitations, either because our tax positions are sustained or because we agree to the disallowance and pay the related income tax. We

recognize interest and/or penalties related to income tax matters in income tax expense. The amount of net interest and penalties recognized as a component of income tax expense during fiscal 2019 and 2018 were not material.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, 2019, the fiscal years open under the statute of limitations in significant jurisdictions include 2016 through 2019 in the U.S. We believe we have adequately provided for uncertain tax issues we have not yet resolved with federal, state and foreign tax authorities. Although not more likely than not, the most adverse resolution of these issues could result in additional charges to earnings in future periods. Based upon a consideration of all relevant facts and circumstances, we do not believe the ultimate resolution of uncertain tax issues for all open tax periods will have a material adverse effect upon our financial condition or results of operations.

Cash amounts paid for income taxes, net of refunds received, were $28.7 million, $15.7 million and $1.6 million in 2019, 2018 and 2017, respectively.