Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3
Income Taxes
12 Months Ended
Sep. 30, 2019
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 impacted our fiscal years 2019 and 2018 by, among other things, (a) reducing the U.S. federal corporate tax rate, (b) implementing the 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% applied to our fiscal year ended September 30, 2019 and future years.

 
Year Ended September 30,
 
2019
 
2018
 
2017
Domestic
$
44.1

 
$
33.7

 
$
108.2

Foreign
132.6

 
112.8

 
80.1

Total earnings before income taxes
$
176.7

 
$
146.5

 
$
188.3

 
 
 
 
 
 
Income tax expense:
 

 
 

 
 

Current provision:
 

 
 

 
 

Federal
$
11.1

 
$
38.2

 
$
0.5

State
4.5

 
6.7

 
(0.4
)
Foreign
28.2

 
16.7

 
22.7

Total current provision
43.8

 
61.6

 
22.8

 
 
 
 
 
 
Deferred provision (benefit):
 

 
 

 
 

Federal
(3.8
)
 
(7.5
)
 
32.0

State
(0.2
)
 
0.5

 
5.0

Foreign
10.7

 
10.7

 
0.1

Total deferred provision (benefit)
6.7

 
3.7

 
37.1

Income tax expense
$
50.5

 
$
65.3

 
$
59.9


 
 
Year Ended September 30,
 
2019
 
2018
 
2017
Federal statutory rates
21.0
 %
 
24.5
 %
 
35.0
 %
Adjustments resulting from the tax effect of:
 

 
 

 
 

State income taxes, net of federal benefit
1.6

 
2.4

 
1.6

Foreign income tax rate differential
4.1

 
(0.6
)
 
(5.8
)
Domestic manufacturer’s deduction

 
(1.2
)
 
(0.3
)
Share-based compensation
(1.2
)
 
(1.6
)
 
(1.1
)
Foreign distribution taxes
1.0

 
(1.7
)
 
2.7

Valuation allowance
(0.4
)
 
(0.7
)
 
(1.3
)
Goodwill impairment charge

 
11.2

 

Transition tax

 
17.8

 

Deferred tax impact of rate change

 
(9.4
)
 

Unrecognized tax benefits
1.9

 
2.1

 

Other, net
0.6

 
1.8

 
1.0

Effective income tax rate
28.6
 %
 
44.6
 %
 
31.8
 %

 
September 30,
 
2019
 
2018
Deferred tax assets:
 

 
 

Employee benefit accruals
$
40.6

 
$
29.0

Loss and tax credit carryforwards
11.3

 
23.1

Interest limitation carryforward
18.3

 
14.2

Rebates and other discounts
4.5

 
4.4

Self-insurance reserves
2.1

 
2.5

Inventory, net
2.8

 
2.0

Other, net
15.1

 
8.5

Total deferred tax assets before valuation allowance
94.7

 
83.7

Less valuation allowance
(0.9
)
 
(1.8
)
Total deferred tax assets, net
93.8

 
81.9

Deferred tax liabilities:
 

 
 

Depreciation
(10.8
)
 
(8.3
)
Amortization
(105.0
)
 
(105.3
)
Long-term contracts and customer prepayments
(46.8
)
 
(38.9
)
Unremitted earnings of foreign operations
(1.2
)
 
(0.5
)
Other, net
(0.9
)
 
(1.8
)
Total deferred tax liabilities
(164.7
)
 
(154.8
)
Deferred tax liabilities, net
$
(70.9
)
 
$
(72.9
)
 
 
 
 
Amounts recorded in the balance sheets:
 

 
 

Deferred tax assets, non-current
2.7

 
3.5

Deferred tax liabilities, non-current
(73.6
)
 
(76.4
)
Total
$
(70.9
)
 
$
(72.9
)

 
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, 2019, we had $1.7 of deferred tax assets related to U.S. federal and state net operating losses and tax credit carryforwards, which will begin to expire in 2020, and $27.9 of deferred tax assets related to foreign net operating loss and interest carryforwards. The majority of the foreign net operating loss and interest carryforwards have unlimited carryforward periods. Portions of the net operating loss carryforwards with expiration periods will begin to expire in 2020. Deferred tax assets as of September 30, 2019 and 2018, were reduced by a valuation allowance of $0.9 and $1.8 relating to foreign net operating loss carryforwards and foreign tax credit carryforwards.  At September 30, 2019 and 2018, we had $10.2 and $19.5 of current income tax payable included in other current liabilities on our Consolidated Balance Sheets. At both September 30, 2019 and 2018, the current liability was $2.0, representing the second and first installment payments of the Transition Tax liability, which is payable over eight years. As of September 30, 2019 and 2018, we also had a Transition Tax liability of $20.9 and $22.6 included within Other long-term liabilities on our Consolidated 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, 2019, and 2018, we had approximately $310.2 and $321.7 of undistributed retained earnings from our foreign subsidiaries. Historically, U.S. federal and state income taxes have not been recorded on accumulated undistributed retained earnings of substantially all our foreign subsidiaries, as these earnings were considered permanently reinvested.  However, upon enactment of the Tax Act, the undistributed retained earnings of our foreign subsidiaries are subject to U.S. tax due to the Transition Tax. As a result, we recognized a provisional transition tax liability of $24.6 during the quarter ended December 31, 2017. This amount was adjusted during the year ended September 30, 2019, to a tax liability of $24.9.

As of September 30, 2019, and 2018, $1.2 and $0.5 of deferred tax liability on unremitted earnings of foreign subsidiaries was recognized, representing the assumed tax on the future distribution and tax withholdings on the distribution of such earnings among certain of our foreign subsidiaries. As of September 30, 2019, a current tax liability of $0.8 was recognized for taxes on distributions expected to be made in the next fiscal year.

Deferred tax liabilities were not recorded for any additional 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 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 basis differences at September 30, 2019 is not practicable.

A reconciliation of the unrecognized tax benefits is as follows:
 
September 30,
 
2019
 
2018
 
2017
Balance at September 30
$
12.1

 
$
9.9

 
$
7.7

Additions for tax positions related to the current year
0.3

 
0.3

 
0.7

Additions for tax positions of prior years
4.0

 
2.8

 
3.4

Reductions for tax positions of prior years
(0.4
)
 
(0.6
)
 
(1.5
)
Settlements
(6.3
)
 
(0.3
)
 
(0.4
)
Balance at September 30
$
9.7

 
$
12.1

 
$
9.9



The gross unrecognized tax benefit included $9.7 and $12.1 at September 30, 2019 and 2018, 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 2019 and 2018, we recognized $0.4 and $0.9 in additional interest and penalties.  Excluded from the reconciliation were $0.7 and $2.0 of accrued interest and penalties at September 30, 2019 and 2018.
 
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 2018. We recently completed the tax authority examination of our German operations for the 2009 through 2013 tax years. The German examination resulted in the reduction of tax attribute carryforwards and cash taxes offset by the reduction of valuation allowances and utilizations of reserves for uncertain tax position. 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 $2.5 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 Consolidated Financial Statements.