Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.2
Income Taxes
12 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
 
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code that impacted the years ended September 30, 2019 and 2018 by, among other things, reducing the federal corporate tax rate from 35% to 21%. The Internal Revenue Code stipulates that the Company’s fiscal year ended 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 the years ended September 30, 2020 and 2019.
  Year Ended September 30,
  2020 2019 2018
Domestic $ (40.3) $ 44.1  $ 33.7 
Foreign 21.8  132.6  112.8 
Total (loss) earnings before income taxes $ (18.5) $ 176.7  $ 146.5 
Income tax expense:      
Current provision:      
Federal $ (2.4) $ 11.1  $ 38.2 
State 3.0  4.5  6.7 
Foreign 53.8  28.2  16.7 
Total current provision 54.4  43.8  61.6 
Deferred (benefit) provision:      
Federal (6.6) (3.8) (7.5)
State (2.4) (0.2) 0.5 
Foreign (10.5) 10.7  10.7 
Total deferred (benefit) provision (19.5) 6.7  3.7 
Income tax expense $ 34.9  $ 50.5  $ 65.3 
 
  Year Ended September 30,
  2020 2019 2018
Federal statutory rates 21.0  % 21.0  % 24.5  %
Adjustments resulting from the tax effect of:      
State income taxes, net of federal benefit 0.3  1.6  2.4 
Foreign income tax rate differential (14.3) 4.1  (0.6)
Domestic manufacturer’s deduction —  —  (1.2)
Share-based compensation (19.1) (1.2) (1.6)
Foreign distribution taxes (54.7) 1.0  (1.7)
Valuation allowance (2.1) (0.4) (0.7)
Goodwill impairment charge (14.1) —  11.2 
Impact of inclusion of foreign income (1)
(101.1) —  — 
Transition tax —  —  17.8 
Deferred tax impact of rate change —  —  (9.4)
Impact of foreign legislated rate changes 41.5  —  — 
Transaction costs (8.7) —  — 
Unrecognized tax benefits (4.0) 1.9  2.1 
Other, net (33.3) 0.6  1.8 
Effective income tax rate (188.6) % 28.6  % 44.6  %
(1)  Represents Subpart F income, GILTI (less Section 250 deduction), net of associated foreign tax credits

The effective tax rate was (188.6)% for the year ended September 30, 2020 compared to 28.6% for the year ended September 30, 2019. The effective tax rate for fiscal 2020 was primarily related to the Company reporting a net loss for the year, while being in a taxable position, before utilization of tax attributes, for income tax purposes. The difference in the effective tax rate relative to the statutory rate of 21% was primarily attributable to an unfavorable geographic mix of pretax income, taxable gains from the sale of the Cimcool business, non-deductible transaction costs, foreign income inclusions, foreign tax rate changes and taxes on current and anticipated future distributions amongst our subsidiaries.
  September 30,
  2020 2019
Deferred tax assets:    
Employee benefit accruals $ 30.9  $ 40.1 
Loss and tax credit carryforwards 51.4  10.9 
Interest limitation carryforward 26.0  18.3 
Operating lease liabilities 31.3  — 
Rebates and other discounts 4.6  4.5 
Self-insurance reserves 2.8  2.1 
Inventory, net 4.8  2.6 
Other, net 16.8  11.7 
Total deferred tax assets before valuation allowance 168.6  90.2 
Less valuation allowance (21.0) (0.5)
Total deferred tax assets, net 147.6  89.7 
Deferred tax liabilities:    
Depreciation (27.6) (10.3)
Amortization (202.3) (89.4)
Operating right-of-use assets (32.0) — 
Long-term contracts and customer prepayments (43.8) (46.8)
Unremitted earnings of foreign operations (13.2) (1.2)
Other, net (1.4) (0.9)
Total deferred tax liabilities (320.3) (148.6)
Deferred tax liabilities, net $ (172.7) $ (58.9)
Amounts recorded in the Consolidated Balance Sheets:    
Deferred tax assets, non-current 13.1  2.7 
Deferred tax liabilities, non-current (185.8) (61.6)
Total $ (172.7) $ (58.9)
 
The Company 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, 2020 and 2019, respectively, the Company had $24.9 and $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 2021, and $51.8 and $27.5 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 2021. Deferred tax assets as of September 30, 2020 and 2019, were reduced by a valuation allowance of $21.0 and $0.5, respectively, relating to foreign net operating loss carryforwards and foreign tax credit carryforwards.  At September 30, 2020 and 2019, the Company had $36.0 and $10.2, respectively, of current income tax payable included in other current liabilities on the Consolidated Balance Sheets. As of September 30, 2020 and 2019, the Company also had a Transition Tax liability of $14.7 and $20.9 included within other long-term liabilities on the Consolidated Balance Sheets.
 
The Company establishes 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.
 
Historically, U.S. federal and state income taxes have not been recorded on accumulated undistributed retained earnings of substantially all of the Company’s foreign subsidiaries, as these earnings were considered permanently reinvested.  However, upon enactment of the Tax Act, the undistributed retained earnings of the Company’s foreign subsidiaries are subject to U.S. tax due to the Transition Tax. As a result, the Company 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, 2020, and 2019, respectively, $13.2 and $1.2 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 the Company’s foreign subsidiaries.

Deferred tax liabilities were not recorded for any additional basis differences inherent in the Company’s 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 U.S. 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, 2020 is not practicable.

A reconciliation of the unrecognized tax benefits is as follows:
  September 30,
  2020 2019 2018
Balance at September 30 $ 9.7  $ 12.1  $ 9.9 
Assumed and recognized tax positions as part of Milacron acquisition 29.2  —  — 
Additions for tax positions related to the current year 0.6  0.3  0.3 
Additions for tax positions of prior years 0.7  4.0  2.8 
Reductions for tax positions of prior years (4.4) (0.4) (0.6)
Settlements (0.1) (6.3) (0.3)
Balance at September 30 $ 35.7  $ 9.7  $ 12.1 

The gross unrecognized tax benefit included $35.7 and $9.7 at September 30, 2020 and 2019, respectively, which, if recognized, would impact the effective tax rate in future periods. The assumed and recognized tax positions as part of the Milacron acquisition, includes historical unrecognized tax benefits related to Milacron, as well as certain unrecognized tax benefits recorded as part of purchase accounting.
 
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.  During 2020 and 2019, the Company recognized $1.0 and $0.4, respectively, in additional interest and penalties.  Excluded from the reconciliation were $2.5 and $0.7 of accrued interest and penalties at September 30, 2020 and 2019, respectively.
 
The Company operates 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, the Company is currently under examination in the U.S. for 2018. The Company recently completed the tax authority examination of its German operations for the 2010 through 2014 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 the Company believes that adequate provision has been made for such issues, it is possible that their ultimate resolution could affect earnings.  Conversely, if these issues are resolved favorably in the future, the related provision would be reduced and yield a positive impact on earnings. The Company does not expect that the outcome of these audits will significantly impact the Consolidated Financial Statements.