Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.1
Income Taxes
12 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of income before income taxes and equity income (loss) from equity method investments are as follows (amounts in thousands):
 
 
Fiscal Years Ended March 31,
 
 
2020
 
2019
 
2018
Domestic (U.S.) 
 
$
31,937

 
$
95,639

 
$
141,582

Foreign (Outside U.S.)
 
47,894

 
74,792

 
45,485

Total 
 
$
79,831

 
$
170,431

 
$
187,067


The provision for income tax expense (benefit) is as follows (amounts in thousands):
 
 
Fiscal Years Ended March 31,
 
 
2020
 
2019
 
2018
Current:
 
 
 
 
 
 
Federal
 
$
3,387

 
$
170

 
$
223

State and local
 
522

 
161

 
50

Foreign
 
10,288

 
9,966

 
8,295

Total current income tax expense
 
14,197

 
10,297

 
8,568

Deferred:
 
 
 
 
 
 
Federal
 
16,486

 
(43,804
)
 
(807
)
State and local
 
871

 
(773
)
 
(96
)
Foreign
 
6,972

 
(5,180
)
 
1,467

Deferred tax expense (benefit)
 
24,329

 
(49,757
)
 
564

Provision for income tax expense (benefit)
 
$
38,526

 
$
(39,460
)
 
$
9,132



Differences between the provision for income taxes on earnings from continuing operations and the amount computed using the U.S. Federal statutory income tax rate are as follows (amounts in thousands):
 
 
Fiscal Years Ended March 31,
 
 
2020
 
2019
 
2018
Amount computed using the statutory rate (1)
 
21.0
 %
 
21.0
 %
 
31.6
 %
Change in U.S. valuation allowance
 
0.2

 
(39.8
)
 
(35.7
)
Effect of prior year adjustments
 
6.1

 
1.4

 
(0.7
)
IRC section 162(m) limitation (2)
 
1.1

 
2.7

 

Taxable foreign source income
 
6.0

 
2.1

 
11.8

Other current year adjustments
 
2.1

 

 
0.3

Non-taxable gain from bargain purchase
 

 

 
(22.0
)
Deduction related to APA settlement
 

 
(1.4
)
 

Tax-deductible equity compensation
 
(1.3
)
 
(2.5
)
 
(3.0
)
Differences due to U.S. tax law changes (3)
 
0.2

 

 
26.9

State income taxes, net of federal taxes (4)
 
1.2

 
(0.4
)
 
(1.8
)
Change in U.S. tax exposure reserves
 
3.0

 

 

Change in foreign operations tax exposure reserves
 
1.0

 
0.1

 
0.5

Foreign tax rate differential
 
5.4

 
3.8

 
(0.2
)
Change in foreign tax law
 
0.1

 
(1.2
)
 
0.1

Change in foreign operations valuation allowance
 
(0.4
)
 
(24.1
)
 
(3.6
)
Nondeductible expenses related to antitrust litigation
 

 
8.4

 
0.3

Other effect of foreign operations
 
2.6

 
6.7

 
0.4

Provision for income tax expense (benefit)
 
48.3
 %
 
(23.2
)%
 
4.9
 %
______________________________________________________________________________
(1) The statutory income tax rate for the fiscal year ended March 31, 2017 was 35%. The Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017 reduced the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018. Based on the fiscal year of the Company ending on March 31, the statutory income tax rate for the fiscal year ended March 31, 2018 is a blended rate of 31.6% based on the number of days in the fiscal year before January 1, 2018 and the number of days in the fiscal year after December 31, 2017. The statutory income tax rate for the fiscal years ended March 31, 2020 and 2019 is 21%.
(2) Fiscal year ended March 31, 2019 includes $1.5 million related to the expansion of the Sec. 162(m) limitation due to TCJA tax law changes.
(3) Fiscal year ended March 31, 2018 is due to tax law changes consisting of $4.8 million related to foreign earnings and $45.6 million related to TCJA tax rate adjustment.
(4) Fiscal year ended March 31, 2018 consists mainly of $3.7 million related to the revaluation of state net operating loss carryforwards as a result of the change in the federal tax rate due to the TCJA.

The components of deferred tax assets and liabilities are as follows (amounts in thousands):
 
 
March 31,
 
 
2020
 
2019
Deferred tax assets:
 
 
 
 
Net operating loss carry forwards
 
$
60,170

 
$
78,903

Sales allowances and inventory reserves
 
10,370

 
11,076

Medical and employee benefits
 
29,890

 
35,283

Depreciation and differences in basis
 
3,193

 
5,337

Leased assets
 
573

 
201

Accrued restructuring
 
310

 
469

Anti-trust fines and settlements
 
11,883

 
910

Tax credits
 
4,934

 
3,644

Stock-based compensation
 
4,607

 
5,589

Other
 
2,641

 
970

Total deferred tax assets before valuation allowance
 
128,571

 
142,382

Less valuation allowance
 
(64,477
)
 
(58,658
)
Total deferred tax assets
 
64,094

 
83,724

Deferred tax liabilities:
 
 
 
 
Unremitted earnings of subsidiaries
 
(23,972
)
 
(21,959
)
Amortization of intangibles and debt discounts
 
(11,369
)
 
(11,996
)
Non-amortized intangibles
 
(1,587
)
 
(1,551
)
Total deferred tax liabilities
 
(36,928
)
 
(35,506
)
Net deferred tax assets (liabilities)
 
$
27,166

 
$
48,218



The change in net deferred income tax asset (liability) for fiscal year 2020 is presented below (amounts in thousands):
Balance at March 31, 2019
$
48,218

Deferred income tax resulting from business combination
399

Deferred income taxes related to continuing operations
(24,329
)
Deferred income taxes related to other comprehensive income
4,030

Foreign currency translation
(1,152
)
Balance at March 31, 2020
$
27,166



    













The following table presents the annual activities included in the deferred tax valuation allowance (amounts in thousands):
 
Valuation Allowance for Deferred Tax Assets
Balance at March 31, 2017
$
163,898

Charge (benefit) to costs and expenses
8,647

Deductions
(1,144
)
Balance at March 31, 2018
171,401

Charge (benefit) to costs and expenses
(112,080
)
Deductions
(663
)
Balance at March 31, 2019
58,658

Additions, Business Combination
6,547

Charge (benefit) to costs and expenses
(658
)
Deductions
(70
)
Balance at March 31, 2020
$
64,477



In fiscal year 2020, the valuation allowance increased $5.8 million, primarily related to the acquisition of Novasentis. In fiscal year 2019, the valuation allowance decreased $112.7 million, of which $44.9 million related to a valuation allowance decrease for the foreign group and $67.8 million related to a valuation allowance decrease for the U.S. group. The $44.9 million decrease in valuation allowance related to the foreign group primarily was comprised of a $35.5 million decrease related to changes in temporary differences and utilization of net operating loss carryforwards and a $5.5 million release in valuation allowance. The $67.8 million decrease in the valuation allowance related to the U.S. group primarily was comprised of a $26.9 million utilization of net operating loss carryforwards and a $44.2 million release in valuation allowance based on changes in judgment about the realizability of deferred tax assets in future years.

As of March 31, 2020, and 2019, the Company’s deferred tax assets were reduced by a valuation allowance of $64.5 million and $58.7 million, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of March 31, 2020. For a portion of the U.S. federal and some state jurisdictions there is a greater likelihood of not realizing the future tax benefits of deferred tax assets, and, accordingly, the Company has recorded valuation allowances of $23.5 million related to the net deferred tax assets in these jurisdictions. For the foreign jurisdictions, a valuation allowance of $41.0 million has been recorded where the Company does not expect to fully realize the deferred tax assets in the future. The amount of deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period change.
As of March 31, 2020, the Company has gross U.S. federal net operating loss carryforwards of $82.4 million, of which $75.3 million will expire between fiscal years 2026 and 2037, and the remaining $7.1 million can be carried forward indefinitely. Certain of the Company's U.S. federal net operating loss carryforwards are subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “Code”) and similar state provisions. Such annual limitation could result in the expiration of the net operating loss carryforwards before utilization. The Company has state net operating losses of $545.0 million, of which $1.6 million will expire in one year if unused. The remaining state net operating losses are available to offset future state taxable income, if any, through 2040. Foreign subsidiaries, primarily in Japan, Italy, Thailand, Hong Kong, United Kingdom, and Sweden, had net operating loss carryforwards totaling $114.4 million of which none will expire within one year if unused.
At March 31, 2020, the U.S. consolidated group of companies had the following tax credit carryforwards available (amounts in thousands):
 
 
Tax
Credits ($)
 
Fiscal Year
of Expiration
U.S. research credits
 
$
2,877

 
2022-2025
Texas franchise tax credits
 
1,902

 
2026
Federal business tax credits
 
33

 
2028
Foreign local tax credits
 
122

 
various

The Company conducts business in Macedonia and Thailand through subsidiaries that qualify for a tax holiday. The tax holiday for Macedonia will terminate on July 27, 2021. For calendar years 2018, 2019, and 2020, the statutory rate of 10% for Macedonia was reduced to zero. The tax holiday for Thailand's SC BOI income will terminate on June 15, 2020, and the tax holiday for Thailand's TA BOI income terminated on June 28, 2019. For the 2020 fiscal year, the statutory rate of 20% was applied to income that was earned outside the tax holiday and for the remaining income, the statutory rate was reduced to zero.
Prior to the TCJA, earnings of a foreign subsidiary were taxed when remitted to the U.S. With the Tax Cuts and Jobs Act of 2017, the Company is permitted a 100% exemption from U.S. tax on foreign earnings remitted to the U.S. and the U.S group recognized no deferred tax liability at March 31, 2020 and 2019 relating to unremitted foreign earnings. The Company asserts that no foreign earnings subject to a withholding tax will be remitted to the U.S.
At March 31, 2020, the Company had $19.4 million of unrecognized tax benefits. A reconciliation of gross unrecognized tax benefits (excluding interest and penalties) is as follows (amounts in thousands):
 
 
Fiscal Years Ended March 31,
 
 
2020
 
2019
 
2018
Beginning of fiscal year
 
$
18,877

 
$
8,680

 
$
7,390

Additions from business combinations
 

 

 
1,270

Additions for tax positions of the current year
 
490

 
2,027

 
1,078

Additions for tax positions of prior years
 
2,286

 
11,735

 

Reductions for tax positions of prior years
 
(1,831
)
 
(633
)
 
(1,058
)
Lapse in statute of limitations
 
(16
)
 
(9
)
 

Settlements
 
(439
)
 
(2,923
)
 

End of fiscal year
 
$
19,367

 
$
18,877

 
$
8,680


At March 31, 2020, $17.4 million of the $19.4 million of unrecognized income tax benefits would affect the Company’s effective income tax rate, if recognized. The remainder of $2.0 million primarily results from positions which if sustained would be fully offset by a change in valuation allowance. It is reasonably possible that the total unrecognized tax benefit could decrease by $5.8 million in fiscal year 2021 if the advanced pricing arrangement for one of the Company’s foreign subsidiaries is agreed to by the foreign tax authority and certain U.S. taxable foreign source income is recognized.
The Company records potential interest and penalty expenses related to unrecognized income tax benefits in income tax expense. The Company had $0.5 million of aggregate accrued interest and penalties at both March 31, 2020 and 2019. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

The Company files income tax returns in the U.S. and multiple foreign jurisdictions, including various state and local jurisdictions. The U.S. Internal Revenue Service concluded its examinations of the Company’s U.S. federal tax returns for all tax years through 2003. Because of net operating losses, the Company’s U.S. federal returns for 2003 and later years will remain subject to examination until the losses are utilized. The Company is subject to income tax examinations in various foreign and U.S. state jurisdictions for the years 2014 and forward.
Tax Cuts and Jobs Act
The TCJA was enacted on December 22, 2017. The Act reduced the US federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on prior earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign-sourced earnings. Certain provisions of the Act did not impact the Company until fiscal year 2019. These provisions include, but are not limited to, the base erosion anti-abuse tax (“BEAT”), the provision designed to tax global intangible low-taxed income (“GILTI”), the foreign-derived intangible income (“FDII”) provision, the expansion of the IRC Sec. 162(m) limitation, and the provision designed to limit interest expense deductions. In fiscal year 2019, the Company completed its accounting for the enactment-date income tax effects of the Act.
The one-time transition tax was based on the Company’s total post-1986 earnings and profits which were previously deferred from U.S. income taxes under U.S. law. In previous periods, the Company recorded provisional amounts for its one-time transition tax liability for each of its foreign subsidiaries. Upon further analysis of the Act and notices and regulations issued and proposed under Internal Revenue Code (“IRC”) Section 965 by the U.S. Department of Treasury and the Internal Revenue Service, the Company finalized its calculations of the transition tax liability. The final net taxable income the Company reported on its 2018 federal income tax return, after allowable deductions under IRC Section 965(c), was $40.1 million. The transition tax component of income tax expense was offset by the utilization of available U.S. federal net operating loss carryforwards, resulting in no net cash tax liability.
The Company's policy is to account for GILTI as a period cost in the year the tax is incurred and, therefore, does not record any deferred taxes related to GILTI. For fiscal year 2020, the Company had no taxable income from GILTI. In addition, other provisions such as BEAT, FDII, and 163(j) are relevant to the Company but had no income tax impact for fiscal year 2020.
CARES Act
On March 27, 2020, Congress enacted The Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) in response to the COVID-19 pandemic. The CARES Act provides $2 trillion of economic support and stimulus through a variety of provisions for individuals and businesses. Corporate and employer-focused provisions include, but are not limited to, the following: (i) payroll tax deferral; (ii) employee retention credit; (iii) modifications to net operating losses; (iv) modification to the limitation on business interest under Section 163(j); (v) Qualified Improvement Property technical correction; (vi) acceleration of previously generated corporate AMT credits; and (vii) modifications to the charitable contribution limitation. The Company analyzed the provisions of the CARES Act and concluded that there are no significant income tax impacts to KEMET as of March 31, 2020.