INCOME TAXES
Income taxes have been based on the following components of Income before taxes from continuing operations:
|
| | | | | | | | | | | |
| For the Years Ended September 30, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (1,339 | ) | | $ | 23,163 |
| | $ | 6,184 |
|
Non-U.S. | 18,037 |
| | 9,050 |
| | 12,882 |
|
| $ | 16,698 |
| | $ | 32,213 |
| | $ | 19,066 |
|
Provision (benefit) for income taxes on income was comprised of the following from continuing operations:
|
| | | | | | | | | | | |
| For the Years Ended September 30, |
| 2017 | | 2016 | | 2015 |
Current | $ | (3,426 | ) | | $ | 6,388 |
| | $ | 3,098 |
|
Deferred | 2,341 |
| | 6,044 |
| | 3,674 |
|
Total | $ | (1,085 | ) | | $ | 12,432 |
| | $ | 6,772 |
|
U.S. Federal | $ | (6,689 | ) | | $ | 4,358 |
| | $ | 1,643 |
|
State and local | 3,307 |
| | 3,287 |
| | 2,237 |
|
Non-U.S. | 2,297 |
| | 4,787 |
| | 2,892 |
|
Total provision | $ | (1,085 | ) | | $ | 12,432 |
| | $ | 6,772 |
|
Griffon's Income tax provision for the years ended September 30, 2017 and 2016 included a $4,440 and $2,193 benefit, respectively, from the early adoption of the new FASB accounting guidance which now requires excess tax benefits from vesting of equity awards to be recognized within income tax expense. Under this guidance all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation are recognized within income tax expense. Under prior guidance windfalls were recognized to Additional Paid In Capital and shortfalls were only recognized to the extent they exceed the pool of windfall tax benefits.
Griffon’s Income tax provision included benefits of ($122) in 2017, ($2,172) in 2016, and ($517) in 2015 reflecting the reversal of previously recorded tax liabilities primarily due to the resolution of various tax audits and the closing of certain statutes for prior years’ tax returns.
Differences between the effective income tax rate applied to Income and U.S. Federal income statutory rate from continuing operations were as follows:
|
| | | | | | | | |
| For the Years Ended September 30, |
| 2017 | | 2016 | | 2015 |
U.S. Federal income tax provision (benefit) rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local taxes, net of Federal benefit | 12.4 | % | | 6.6 | % | | 13.0 | % |
Non-U.S. taxes - foreign permanent items and taxes | (12.4 | )% | | (1.6 | )% | | (8.0 | )% |
Non-U.S. tax true-up | (11.4 | )% | | — | % | | — | % |
Change in domestic manufacturing deduction | (5.8 | )% | | — | % | | — | % |
Change in tax contingency reserves | 0.7 | % | | (6.3 | )% | | (1.7 | )% |
Repatriation of foreign earnings | — | % | | — | % | | 2.5 | % |
Change in valuation allowance | (0.6 | )% | | (0.6 | )% | | (12.5 | )% |
Non-deductible/non-taxable items, net | 8.3 | % | | 2.6 | % | | (2.3 | )% |
Research and U.S. foreign tax credits | (3.6 | )% | | 8.8 | % | | (0.9 | )% |
Share based compensation | (26.6 | )% | | (5.7 | )% | | — | % |
Other | (2.5 | )% | | (0.2 | )% | | 10.4 | % |
Effective tax provision (benefit) rate | (6.5 | )% | | 38.6 | % | | 35.5 | % |
The tax effect of temporary differences that give rise to future deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| At September 30, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Bad debt reserves | $ | 2,509 |
| | $ | 2,156 |
|
Inventory reserves | 7,615 |
| | 9,158 |
|
Deferred compensation (equity compensation and defined benefit plans) | 27,430 |
| | 39,866 |
|
Compensation benefits | 6,111 |
| | 5,770 |
|
Insurance reserve | 2,985 |
| | 3,285 |
|
Restructuring reserve | 29 |
| | 431 |
|
Warranty reserve | 2,893 |
| | 2,352 |
|
Net operating loss | 37,383 |
| | 31,732 |
|
Tax credits | 1,866 |
| | 3,573 |
|
Other reserves and accruals | 7,658 |
| | 4,238 |
|
| 96,479 |
| | 102,561 |
|
Valuation allowance | (17,466 | ) | | (12,832 | ) |
Total deferred tax assets | 79,013 |
| | 89,729 |
|
Deferred tax liabilities: | |
| | |
|
Deferred income | (1,862 | ) | | (3,389 | ) |
Goodwill and intangibles | (70,560 | ) | | (72,907 | ) |
Property, plant and equipment | (51,488 | ) | | (46,391 | ) |
Interest | — |
| | (496 | ) |
Deferred gain on assets held for sale | (16,300 | ) | | — |
|
Other | (1,016 | ) | | (551 | ) |
Total deferred tax liabilities | (141,226 | ) | | (123,734 | ) |
Net deferred tax liabilities | $ | (62,213 | ) | | $ | (34,005 | ) |
The increase in the valuation allowance of $4,634 is primarily the result of a valuation allowance on accumulated Germany net operating losses resulting from management's assessment of current and future operational performance and related restructuring efforts partially offset by a release related to expired tax credits. The deferred tax gain on assets held for sale results from the book versus tax outside basis difference. The Company has allocated this deferred tax liability and related tax expense to discontinued operations.
The components of the net deferred tax liability, by balance sheet account, were as follows:
|
| | | | | | | |
| At September 30, |
| 2017 | | 2016 |
Other assets | $ | 6 |
| | $ | 3 |
|
Assets of discontinued operations held for sale | 6,745 |
| | 7,271 |
|
Other liabilities | (58,505 | ) | | (30,476 | ) |
Liabilities of discontinued operations held for sale | (12,584 | ) | | (11,449 | ) |
Liabilities of discontinued operations not held for sale | 2,125 |
| | 646 |
|
Net deferred liability | $ | (62,213 | ) | | $ | (34,005 | ) |
At both September 30, 2017 and 2016, Griffon has a policy election to indefinitely reinvest the undistributed earnings of foreign subsidiaries with operations outside the U.S. Griffon considers the earnings of these foreign subsidiaries to be indefinitely invested outside the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. The majority of the amounts held outside the U.S. are generally utilized to support non U.S. liquidity needs in order to fund operations and growth of the foreign subsidiaries, and for funding of acquisitions. Griffon has not recorded deferred income taxes on the undistributed earnings of its non-U.S. subsidiaries because of management’s ability and intent to indefinitely reinvest such earnings outside the U.S. At September 30, 2017, Griffon’s share of the undistributed earnings of the non-U.S. subsidiaries amounted to approximately $49,659. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries. If a determination is made to repatriate some or all of these foreign earnings, the income tax provision would be adjusted in the period of that determination to accrue for the taxes payable on such earnings.
At September 30, 2017 and 2016, Griffon had loss carryforwards for U.S. tax purposes of $1,264 and $0, respectively, and non-U.S. tax purposes of $7,941 and $6,900, respectively. The U.S. losses expire beginning in 2029. The non-U.S. loss carryforwards are available for carryforward indefinitely.
At September 30, 2017 and 2016, Griffon had state and local loss carryforwards of $114,837 and $104,254, respectively, which expire in varying amounts through 2036.
At September 30, 2017 and 2016, Griffon had federal tax credit carryforwards of $1,762 and $3,199, respectively, which expire beginning in 2020.
We believe it is more likely than not that the benefit from certain state net operating losses and federal tax credits will not be realized. In recognition of this risk, we have provided a valuation allowance as of September 30, 2017 and 2016 of $1,343 and $1,752, respectively, on the deferred tax assets relating to these state net operating loss carryforwards and federal credits. If our assumptions change and we determine we will be able to realize these state net operating loss carryforwards or federal credits, the benefits relating to the reversal of the valuation allowance will be recognized as a reduction of income tax expense.
If certain substantial changes in Griffon's ownership occur, there would be an annual limitation on the amount of carryforward(s) that can be utilized.
Griffon files U.S. Federal, state and local tax returns, as well as applicable returns in Canada, Australia, Ireland and other non-U.S. jurisdictions. Griffon’s U.S. Federal income tax returns are no longer subject to income tax examination for years before 2012. Griffon's major U.S. state and other non-U.S. jurisdictions are no longer subject to income tax examinations for years before 2011. Various U.S. state and non-U.S. statutory tax audits are currently underway.
The following is a roll forward of unrecognized tax benefits:
|
| | | |
Balance at September 30, 2015 | $ | 6,613 |
|
Additions based on tax positions related to the current year | 263 |
|
Reductions based on tax positions related to prior years | (1,082 | ) |
Lapse of Statutes | (1,085 | ) |
Balance at September 30, 2016 | 4,709 |
|
Additions based on tax positions related to the current year | 177 |
|
Additions based on tax positions related to prior years | 69 |
|
Reductions based on tax positions related to prior years | (8 | ) |
Lapse of Statutes | (122 | ) |
Balance at Balance at September 30, 2017 | $ | 4,825 |
|
If recognized, the amount of potential tax benefits that would impact Griffon’s effective tax rate is $1,553. Griffon recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2017 and 2016, the combined amount of accrued interest and penalties related to tax positions taken or to be taken on Griffon’s tax returns and recorded as part of the reserves for uncertain tax positions was $174 and $166, respectively. Griffon cannot reasonably estimate the extent to which existing liabilities for uncertain tax positions may increase or decrease within the next twelve months as a result of the progression of ongoing tax audits or other events. Griffon believes that it has adequately provided for all open tax years by tax jurisdiction.