|12 Months Ended|
Mar. 31, 2019
|Income Tax Disclosure [Abstract]|
The components of income before income taxes and equity income (loss) from equity method investments are as follows (amounts in thousands):
(1) Fiscal years ended March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
The provision for income tax expense (benefit) is as follows (amounts in thousands):
(1) Fiscal years ended March 31, 2018 and 2017 adjusted due to the adoption of ASC 606.
The Company realized a deferred tax expense (benefit) for fiscal years ended 2019, 2018 and 2017 of ($50.1) million, $0.6 million and $1.2 million, respectively, in U.S. and certain foreign jurisdictions based on changes in judgment about the realizability of deferred tax assets in future years.
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):
(1) The statutory income tax rate for the fiscal year ended March 31, 2017 is 35%. The Tax Cuts and Jobs Act 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 after December 31, 2017. The statutory income tax rate for the fiscal year ended March 31, 2019 is 21%.
(2) The effect of prior year adjustments was offset by a full valuation allowance resulting in no impact on the provision for income taxes.
(3) Fiscal year ended March 31, 2019 difference consist of $1.5 million related to the expansion of the Sec. 162(m) limitation due to tax law changes.
(4) Fiscal year end March 31, 2018 differences due to tax law changes consists of $4.8 million related to foreign earnings and $45.6 million related to tax rate adjustment. $45.6 million related to tax rate adjustment is the gross deferred rate change, which is offset by valuation allowance adjustment, resulting in a net benefit of $0.8 million.
(5) Fiscal year ended March 31, 2018 difference 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.
(6) The change in foreign operations valuation allowance excludes other comprehensive income and currency translation adjustments of $3.8 million, $(3.4) million, and $0.9 million for fiscal years ended 2019, 2018 and 2017, respectively, which has no impact on the provision for income taxes.
The foreign jurisdictions having the greatest effect on the provision for income taxes are China and Mexico. The statutory tax rates for China and Mexico are 25% and 30%, respectively. The combined provision for income taxes for China and Mexico for fiscal years ended 2019, 2018 and 2017 is $5.7 million, $3.8 million, and $3.1 million, respectively.
The components of deferred tax assets and liabilities are as follows (amounts in thousands):
(1) March 31, 2018 adjusted due to the adoption of ASC 606.
The following table presents the annual activities included in the deferred tax valuation allowance (amounts in thousands):
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 is comprised of a $35.5 million decrease related to changes in temporary differences and net operating utilizations 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 is comprised of a $26.9 million decrease related to utilization of net operating loss carryforwards and a $44.2 million release in valuation allowance.
In fiscal year 2018, the valuation allowance increased $7.5 million, of which $74.4 million related to a valuation allowance increase for the foreign group and $66.9 million related to a valuation allowance decrease for the U.S. group. The $66.9 million decrease in valuation allowance related to the U.S. group primarily is comprised of a $49.4 million decrease from the repricing of deferred tax assets under U.S. tax reform, and a $21.1 million decrease from the additional investment in TOKIN. The $74.4 million increase in valuation allowance related to the foreign group is comprised of a $78.2 million increase due to opening balance sheet adjustments from the acquisition of TOKIN, and a decrease of $3.8 million from other foreign operations.
In fiscal year 2017, the valuation allowance decreased $7.0 million, primarily of which $4.8 million is related to the expiration of foreign tax credit carryovers that were held by the U.S. group and $1.2 million related to the investment in TOKIN.
The change in net deferred income tax asset (liability) for the current year is presented below (amounts in thousands):
(1) March 31, 2018 adjusted due to the ASC 606.
As of March 31, 2019, and 2018, the Company’s gross deferred tax assets were reduced by a valuation allowance of $58.7 million and $171.4 million, respectively. A remaining valuation allowance on a portion of U.S. deferred tax assets was determined to be necessary based on the existence of significant negative evidence. The amount of future income required for the Company to realize its net deferred tax assets is $227.1 million.
In assessing the realizability of deferred tax assets in foreign jurisdictions, 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, 2019. However, the amount of deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
As of March 31, 2019, the Company had U.S. federal net operating loss carryforwards of $114.3 million. These U.S. federal net operating losses were incurred from fiscal years 2006 through 2018 and are available to offset future federal taxable income, if any, through 2037. The Company had state net operating losses of $525.1 million, of which $3.6 million will expire in one year if unused. These state net operating losses are available to offset future state taxable income, if any, through 2039. Foreign subsidiaries, primarily in Japan, Italy, Thailand, Hong Kong, United Kingdom, and Sweden, had net operating loss carryforwards totaling $135.3 million of which none will expire within one year if unused. The net operating losses in Thailand and Japan are available to offset future taxable income through 2025 and 2029, respectively. The net operating losses in Italy, Hong Kong, United Kingdom, and Sweden are available indefinitely to offset future taxable income. 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 these deferred tax assets, and, accordingly, the Company has recorded valuation allowances of $16.9 million related to the net deferred tax assets in these jurisdictions. For the foreign jurisdictions with net operating loss carryforwards, a valuation allowance has been recorded where the Company does not expect to fully realize the deferred tax assets in the future.
Utilization of the Company’s net operating loss carryforwards may be subject to substantial 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 an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization. If such an ownership change were deemed to have occurred, the amount of our taxable income that could be offset by the Company’s net operating loss carryovers in taxable years after the ownership change would be severely limited. KBP was acquired which has substantial federal net operating losses that are limited due to the ownership change which occurred.
At March 31, 2019, the U.S. consolidated group of companies had the following tax credit carryforwards available (amounts in thousands):
The Company conducts business in Macedonia and Thailand through subsidiaries that qualify for a tax holiday. The tax holiday for Macedonia will terminate on January 1, 2023. For calendar years 2017, 2018, and 2019, the statutory rate of 10% was reduced to zero. The tax holiday for Thailand will terminate on June 15, 2020. For the 2019 fiscal year, the statutory rate of 20% was reduced to zero. For the fiscal year ended March 31, 2019 the Company realized no income tax benefit from the tax holidays.
Prior to the Tax Cuts and Jobs Act of 2017, 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 recognizes no deferred tax liability at March 31, 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, 2019, the Company had $7.7 million of unrecognized tax benefits. A reconciliation of gross unrecognized tax benefits (excluding interest and penalties) is as follows (amounts in thousands):
At March 31, 2019, $1.9 million of the $7.7 million of unrecognized income tax benefits would affect the Company’s effective income tax rate, if recognized. It is reasonably possible that the total unrecognized tax benefit could decrease by $1.0 million in fiscal year 2020 if the advanced pricing arrangement for one of the Company’s foreign subsidiaries is agreed to by the foreign tax authority and an ongoing audit in one of the Company’s foreign jurisdictions is settled.
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. The Company records potential interest and penalty expenses related to unrecognized income tax benefits within its global operations in income tax expense. The Company had $0.5 million and $0.9 million of accrued interest and penalties respectively at March 31, 2019 and 2018, which are included as a component of income tax expense. 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.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the “Act”) 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 earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign-sourced earnings.
In fiscal year 2018, the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118, because the Company had not yet completed its accounting for all of the tax effects of the Act. 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, based on legislative updates relating to the Act currently available. These tax effects related to the one-time transition tax, the reduced corporate tax rate, and an additional limitation for executive compensation under IRC Sec. 162(m). The Company recognized the below adjustments as a component of income tax expense.
One-time Transition Tax
The one-time transition tax is 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, and the amounts were offset by utilizing net operating losses that had been carried forward from prior years.
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 during the current reporting period. The final net taxable income the Company reported on its 2018 federal income tax return under IRC Section 965, after allowable deductions under IRC Section 965(c), was $34.3 million. The amount was included as a component of income tax expense and offset by federal net operating loss carryover utilizations, resulting in a net income tax expense of zero. There is no impact to foreign locations.
Deferred tax assets and liabilities
During the period ended March 31, 2018, the Company had recognized a $0.8 million tax benefit related to the US federal corporate tax rate change to its existing deferred tax balances. The amount was included as a component of income tax expense for fiscal year 2018.
Global intangible low-taxed income
The Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The Financial Accounting Standards Board (“FASB”) Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years, or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. The Company has elected to account for GILTI as a period cost in the year the tax is incurred. At March 31, 2019, the Company estimates that it will have no additional taxable income from GILTI for the 2019 fiscal year.
Foreign-Derived Intangible Income
The Act provides tax incentives to U.S. companies to earn income from the sale, lease, or license of goods and services abroad in the form of a deduction for foreign-derived intangible income. The tax law limits the amount of the FDII deductions to the U.S. shareholder’s taxable income. At March 31, 2019, the Company estimates to utilize net operating loss carryovers to absorb its taxable income for the fiscal year 2019. As a result, the Company is not estimating any taxable income deduction related to FDII.
Base Erosion Anti-Abuse Tax
Under the Act, an entity must pay a BEAT tax, if the BEAT is greater than its regular tax liability. The BEAT calculation eliminates the deduction of certain payments made to foreign affiliates, referred to as base erosion payments, but applies a lower tax rate on the resulting BEAT income. During the fiscal year ended March 31, 2019, the Company's Base Erosion Percentage was below the 3.0% threshold, and as a result, the Company estimated no additional tax expense related to the BEAT for the 2019 fiscal year.
Interest Expense Deduction Limits
The Act limits the deduction for net interest expense incurred by U.S. corporations for amounts that exceed 30% of the corporation’s adjusted taxable income for the year. The adjusted taxable income is computed initially excluding depreciation, amortization, or depletion and includes these items beginning in the year 2022. The Act permits an indefinite carryforward of any disallowed business interest expense. At March 31, 2019, the Company estimates that its net interest expense deductions for the fiscal year 2019 will not be limited.
Executive Compensation Limits
The Act made significant changes to the $1.0 million tax deduction limitation for publicly held corporations under IRC Sec. 162(m). The changes included the repeal of an exclusion for qualified performance-based compensation and broadened the group of possible covered employees subject to the deduction limit. For the fiscal year 2019, the Company estimates an additional deduction limitation of $7.0 million as a result of this law change.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef