Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.10.0.1
Income Taxes
12 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
 
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that impact our fiscal year ended September 30, 2018 including, but not limited to (a) reducing the U.S. federal corporate tax rate, (b) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and (c) accelerating expensing of certain capital expenditures. The Tax Act reduced the federal corporate tax rate from 35% to 21%. The Internal Revenue Code stipulates that our fiscal year ending September 30, 2018 had a blended corporate tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after the effective date of the Tax Act. The statutory tax rate of 21% will apply to future years.

 
Year Ended September 30,
 
2018
 
2017
 
2016
Domestic
$
33.7

 
$
108.2

 
$
99.3

Foreign
112.8

 
80.1

 
64.8

Total earnings before income taxes
$
146.5

 
$
188.3

 
$
164.1

 
 
 
 
 
 
Income tax expense:
 

 
 

 
 

Current provision:
 

 
 

 
 

Federal
$
38.2

 
$
0.5

 
$
28.9

State
6.7

 
(0.4
)
 
5.1

Foreign
16.7

 
22.7

 
18.0

Total current provision
61.6

 
22.8

 
52.0

 
 
 
 
 
 
Deferred provision (benefit):
 

 
 

 
 

Federal
(7.5
)
 
32.0

 
3.2

State
0.5

 
5.0

 
(0.7
)
Foreign
10.7

 
0.1

 
(7.2
)
Total deferred provision (benefit)
3.7

 
37.1

 
(4.7
)
Income tax expense
$
65.3

 
$
59.9

 
$
47.3


 
 
Year Ended September 30,
 
2018
 
2017
 
2016
Federal statutory rates
24.5
 %
 
35.0
 %
 
35.0
 %
Adjustments resulting from the tax effect of:
 

 
 

 
 

State income taxes, net of federal benefit
2.4

 
1.6

 
2.0

Foreign income tax rate differential
(0.6
)
 
(5.8
)
 
(6.7
)
Domestic manufacturer’s deduction
(1.2
)
 
(0.3
)
 
(1.9
)
Share-based compensation
(1.6
)
 
(1.1
)
 
(1.5
)
Foreign distribution taxes
(1.7
)
 
2.7

 

Valuation allowance
(0.7
)
 
(1.3
)
 
1.7

Goodwill impairment charge
11.2

 

 

Transition tax
17.8

 

 

Deferred tax impact of rate change
(9.4
)
 

 

Unrecognized tax benefits
2.1

 

 

Other, net
1.8

 
1.0

 
0.2

Effective income tax rate
44.6
 %
 
31.8
 %
 
28.8
 %

 
September 30,
 
2018
 
2017
Deferred tax assets:
 

 
 

Employee benefit accruals
$
29.0

 
$
46.0

Loss and tax credit carryforwards
37.3

 
43.7

Rebates and other discounts
4.4

 
5.8

Self-insurance reserves
2.5

 
4.6

Inventory, net
2.0

 
3.1

Other, net
8.5

 
12.6

Total deferred tax assets before valuation allowance
83.7

 
115.8

Less valuation allowance
(1.8
)
 
(3.1
)
Total deferred tax assets, net
81.9

 
112.7

Deferred tax liabilities:
 

 
 

Depreciation
(8.3
)
 
(11.6
)
Amortization
(105.3
)
 
(134.9
)
Long-term contracts and customer prepayments
(38.9
)
 
(28.9
)
Unremitted earnings of foreign operations
(0.5
)
 
(4.2
)
Other, net
(1.8
)
 
(5.1
)
Total deferred tax liabilities
(154.8
)
 
(184.7
)
Deferred tax liabilities, net
$
(72.9
)
 
$
(72.0
)
 
 
 
 
Amounts recorded in the balance sheets:
 

 
 

Deferred tax assets, non-current
3.5

 
3.7

Deferred tax liabilities, non-current
(76.4
)
 
(75.7
)
Total
$
(72.9
)
 
$
(72.0
)

 
We recorded a tax benefit of $13.7 at September 30, 2018, for the remeasurement of the deferred tax items to reflect the impact of the U.S. corporate tax rate reduction to 21%. At September 30, 2018, we had $2.3 of deferred tax assets related to U.S. federal and state net operating losses and tax credit carryforwards, which will begin to expire in 2019, and $35.0 of deferred tax assets related to foreign net operating loss carryforwards, which will begin to expire in 2019. Deferred tax assets as of September 30, 2018 and 2017, were reduced by a valuation allowance of $1.8 and $3.1 relating to foreign net operating loss carryforwards and foreign tax credit carryforwards.  At September 30, 2018 and 2017, we had $19.5 and $18.3 of current income tax payable classified as other current liabilities on our balance sheets. The September 30, 2018 current liability included $2.0 of the first annual installment of the Transition Tax. As of September 30, 2018, we also had $22.6 of Transition Tax that we expect to be payable over the next 7 years classified as other noncurrent liabilities on our balance sheets.
 
We establish a valuation allowance for deferred tax assets when it is determined that the amount of expected future taxable income is not likely to support the use of the deduction or credit.
 
As of September 30, 2018 and 2017, we had approximately $321.7 and $241.2 of undistributed earnings from our foreign subsidiaries. Historically, U.S. federal and state income taxes have not been provided on accumulated undistributed earnings of substantially all our foreign subsidiaries, as these earnings were considered permanently reinvested.  However, upon enactment of the Tax Act, the undistributed earnings of our foreign subsidiaries are subject to U.S. tax due to the Transition Tax. As a result we have provisionally recognized a one-time tax expense of $29.2 to be partially offset by current year foreign tax credits and foreign tax credit carryforwards of approximately $4.6.

As of September 30, 2018 and 2017, $0.5 and $4.2 of deferred tax liability on unremitted earnings of foreign subsidiaries was recognized, representing the assumed tax on the distribution and tax withholdings on the distribution of such earnings among certain of our foreign subsidiaries.

Deferred tax liabilities were not provided for any additional outside basis differences inherent in our foreign subsidiaries (i.e. basis differences in excess of those subject to the transition tax) as these amounts continue to be provisionally permanently reinvested outside of the US. If these amounts were not considered permanently reinvested, deferred tax liabilities would be recorded for any additional income taxes, distribution taxes, and withholding taxes payable in various countries. A determination of the unrecognized deferred tax liabilities on the permanently reinvested earnings at September 30, 2018 is not practicable.

A reconciliation of the unrecognized tax benefits is as follows:
 
September 30,
 
2018
 
2017
 
2016
Balance at September 30
$
9.9

 
$
7.7

 
$
7.8

Additions for tax positions related to the current year
0.3

 
0.7

 
0.2

Additions for tax positions of prior years
2.8

 
3.4

 
1.7

Reductions for tax positions of prior years
(0.6
)
 
(1.5
)
 
(2.0
)
Settlements
(0.3
)
 
(0.4
)
 

Balance at September 30
$
12.1

 
$
9.9

 
$
7.7



The gross unrecognized tax benefit included $12.1 and $9.9 at September 30, 2018 and 2017, which, if recognized, would impact the effective tax rate in future periods.
 
We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense.  During 2018 and 2017, we recognized $0.9 and $0.7 in additional interest and penalties.  Excluded from the reconciliation were $2.0 and $1.3 of accrued interest and penalties at September 30, 2018 and 2017.
 
We operate in multiple income tax jurisdictions both inside and outside the U.S. and are currently under examination in various federal, state, and foreign jurisdictions. Specifically, we are currently under examination in the U.S. for 2016 and under examination in Germany for 2009 through 2013. In addition, there are other ongoing audits in various stages of completion in several state and foreign jurisdictions.
 
It is possible that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months.  These changes may be the result of ongoing audits or the expiration of statutes of limitations and could range up to $3.0 based on current estimates.  Audit outcomes and the timing of audit settlements are subject to significant uncertainty.  Although we believe that adequate provision has been made for such issues, it is possible that their ultimate resolution could affect our earnings.  Conversely, if these issues are resolved favorably in the future, the related provision would be reduced and yield a positive impact on earnings.  We do not expect that the outcome of these audits will significantly impact the financial statements.