Income Taxes

12 Months Ended

Sep. 30, 2020

Income Taxes

Income Taxes

NOTE 11—INCOME TAXES

The Tax Cuts and Jobs Act, as enacted by the U.S. federal government in December 2017, fundamentally changed the taxation of multinational corporations in the United States. Significant provisions impacting Cubic include global intangible low-taxed income, a new tax on income of foreign corporations, and base-erosion and anti-abuse tax (“BEAT”). BEAT provisions impose an alternative tax on applicable taxpayers with base-erosion payments greater than a de minimis threshold.

On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Cares Act intended to assist with the stabilization of the U.S. domestic economy during the COVID-19 crisis and includes relief provisions for the U.S. corporate income tax system, including temporary changes to the prior and future utilization of net operation losses, acceleration of depreciation for certain qualifying improvements and relaxed limitations on the deductibility of interest. At September 30, 2020, we have made reasonable estimates of the impact of the CARES Act on our condensed consolidated statements of operations and our condensed consolidated statements of cash flows.

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

	Years Ended September 30,
	2020		2019		2018
	(in thousands)
United States	$	(66,358)	$	(535)	$	(51,049)
Foreign		62,913		52,881		65,935
Total	$	(3,445)	$	52,346	$	14,886

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

	Years Ended September 30,
	2020		2019		2018
	(in thousands)
Current:
Federal	$	(3,082)	$	(710)	$	(4,775)
State		2,297		2,898		976
Foreign		9,565		10,523		19,882
Total current		8,780		12,711		16,083
Deferred:
Federal		(10,733)		(4,553)		(7,874)
State		(6,960)		(135)		482
Foreign		2,533		3,017		(1,598)
Total deferred		(15,160)		(1,671)		(8,990)
Provision (benefit) for income taxes	$	(6,380)	$	11,040	$	7,093

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

	Years Ended September 30,
	2020		2019		2018
	(in thousands)
Tax expense (benefit) at U.S. statutory rate	$	(721)	$	10,992	$	3,124
State income taxes, net of federal tax effect		(1,879)		1,416		(237)
Base Erosion and Anti-abuse Tax		3,148		540		—
Global Intangible Low-Tax Income		7,387		8,182		—
Foreign rate differential		(494)		2,149		5,684
Nondeductible expenses		652		4		1,020
Stock based compensation		1,056		438		226
Acquisition related Items		(704)		831		166
Tax credits		(3,962)		(4,767)		(2,656)
Reserve for tax contingencies		(575)		(1,468)		(1,047)
Deferred tax asset valuation allowance		(9,017)		(10,007)		8,784
Impact of U.S. Tax Reform		—		—		(7,053)
Non-controlling interest in equity arrangements		(967)		1,802		99
Other		(304)		928		(1,017)
Provision (benefit) for income taxes	$	(6,380)	$	11,040	$	7,093

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

	September 30,
	2020		2019
	(in thousands)
Deferred tax assets:
Accrued employee benefits	$	17,371	$	11,409
Allowances for loss contingencies		2,726		3,561
Debt obligation basis difference		4,630		—
Deferred compensation		2,930		3,071
Foreign currency mark-to-market		919		—
Inventory valuation		4,897		8,036
Long-term contracts		7,335		6,995
Prepaid and accrued expenses		151		1,816
Property, plant and equipment		1,632		—
Retirement benefits		3,930		4,967
Tax credit carryforwards		39,356		33,118
Loss carryforwards		46,614		36,248
Other		308		818
Total gross deferred tax assets		132,799		110,039
Valuation allowance		(59,817)		(69,098)
Total deferred tax assets		72,982		40,941
Deferred tax liabilities:
Debt obligation basis difference		—		(4,582)
Deferred revenue		(15,617)		(12,135)
Intangible assets		(36,261)		(18,592)
Lease right-of-use assets		(20,271)		—
Property, plant and equipment		—		(4,524)
Unremitted earnings		(2,159)		(977)
Other		(71)		(587)
Total deferred tax liabilities		(74,379)		(41,397)
Net deferred tax asset (liability)	$	(1,397)	$	(456)

The deferred tax assets and liabilities for fiscal 2020 and 2019 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2020 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 basis 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, 2020, we have federal and state income tax credit carryforwards (in thousands) which begin to expire as follows:

U.S. foreign tax credits	$	4,547	2024
U.S. research and development tax credits		20,475	2025
State research and development tax credits		28,136	2038 & 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	$	159,676	2033
U.S. capital loss carryforwards		10,052	2023
State loss carryforwards		118,791	2023
State capital loss carryforwards		27,639	2023
Foreign net operating loss carryforwards		18,959	Do not expire

We continue to evaluate our net U.S. deferred income taxes, which includes an assessment of the cumulative income or loss over the prior three-year periods and future periods. After consideration of our recent history of U.S. losses, we continue to maintain a valuation allowance on net U.S. federal deferred tax assets as of September 30, 2020.

As of September 30, 2020, a total valuation allowance of $59.8 million has been established against U.S. federal deferred tax assets, certain state and foreign operating losses and other state and foreign assets. For fiscal 2020, the valuation allowance decreased by $9.3 million, of which $9.0 million was recorded as a net tax benefit in our Consolidated Statement of Operations, in addition to 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.

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, 2020, we have recorded a deferred tax liability of $2.2 million related to future taxes on our unremitted foreign earnings.

Accounting for Uncertainty in Income Taxes

During fiscal 2020 and 2019, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:

	September 30,
	2020		2019
	(in thousands)
Balance at beginning of year	$	18,575	$	9,942
Additions (reductions) for tax positions taken in prior years		(8,794)		8,458
Recognition of benefits from expiration of statutes		(904)		(776)
Additions for tax positions related to the current year		890		951
Balance at end of year	$	9,767	$	18,575

At September 30, 2020 and 2019, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.5 million and $0.7 million, respectively. During fiscal year 2021, 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 2020 and 2019 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, 2020, the fiscal years open under the statute of limitations in significant jurisdictions include 2016 through 2020 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 $16.6 million, $28.7 million and $15.7 million in 2020, 2019 and 2018, respectively.