Thermon Group Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Mar. 31, 2017

Income taxes included in the consolidated income statement consisted of the following:



		Year Ended March 31, 2017			Year Ended March 31, 2016			Year Ended March 31, 2015
Current provision:
	Federal provision	$	1,588		$	4,185		$	8,402
	Foreign provision	6,341			8,503			13,160
	State provision	155			311			324
Deferred provision:
	Federal deferred benefit	(1,907		)	(1,964		)	(5,063		)
	Foreign deferred benefit	(2,025		)	(2,263		)	(3,498		)
	State deferred benefit	(54		)	(56		)	(149		)
Total provision for income taxes		$	4,098		$	8,716		$	13,176

Deferred income tax assets and liabilities were as follows:



		March 31,
		2017			2016
Deferred tax assets:

	Accrued liabilities and reserves	$	1,617		$	1,607
	Stock option compensation	932			1,166
	Foreign deferred benefits	2,340			788
	Net operating loss carry-forward	1,250			614
	Inventories	440			529
	Capitalized transaction costs	390			531
	Interest rate swap included in Other Comprehensive Loss	18			444
	Foreign tax credit carry forward	65			52
	Unrealized gain on hedge	—			7
	Valuation allowance	(659		)	(169		)
	Other	—			24
Total deferred tax assets		6,393			5,593
Deferred tax liabilities:
Intangible assets		(17,952		)	(22,189		)
Intangible assets - foreign		(7,452		)	(7,787		)
Property, plant and equipment		(3,637		)	(3,208		)
Prepaid expenses		(161		)	(47		)
Unrealized loss on hedge		(19		)	—
Undistributed foreign earnings		(10		)	—
Total deferred tax liabilities		(29,231		)	(33,231		)

Net deferred tax asset (liability)		$	(22,838	)	$	(27,638	)

The U.S. and non-U.S. components of income (loss) from continuing operations before income taxes were as follows:



	Year Ended March 31, 2017			Year Ended March 31, 2016		Year Ended March 31, 2015
U.S.	$	(83	)	$	13,043	$	22,493
Non-U.S.	19,165			19,323		40,069
Income from continuing operations	$	19,082		$	32,366	$	62,562

The difference between the provision for income taxes and the amount that would result from applying the U.S. statutory tax rate to income before provision for income taxes is as follows:



		Year Ended March 31, 2017			Year Ended March 31, 2016			Year Ended March 31, 2015
Notional U.S. federal income tax expense at statutory rate		$	6,679		$	11,328		$	21,980
Adjustments to reconcile to the income tax provision:
U.S. state income tax provision, net		45			150			66
	Undistributed foreign earnings	—			—			(3,105		)
	Rate difference-international subsidiaries	(2,622		)	(1,727		)	(4,113		)
	Charges/(benefits) related to uncertain tax positions	(128		)	(1,227		)	61
	Release of valuation allowance for foreign net operating loss carry forward	—			—			(634		)
	Impact on deferred tax liability for statutory rate change	—			455			—
	Non-deductible charges	296			51			(846		)
	Foreign purchase price adjustment	(379		)	—			—
	Change in valuation allowance	490			—			—
	Other, net	(283		)	(314		)	(233		)
Provision for income taxes		$	4,098		$	8,716		$	13,176

As of March 31, 2017, the Company had foreign tax net operating loss carry-forwards ("NOLs") of $4,097. Of this amount, $3,960 may be carried forward indefinitely. During the year ended March 31, 2015, the Company made an operational change in a jurisdiction that had a NOL and determined that it could be utilized in future periods. The valuation reserve previously recorded on the associated deferred tax asset was released and the Company recorded a tax benefit of $634. Our NOLs in other foreign jurisdictions currently carry a full valuation allowance.

We have adopted a permanent reinvestment position whereby we expect to reinvest our foreign earnings for most of our foreign subsidiaries and do not expect to repatriate future earnings. As a result of this policy, we will not accrue a tax liability in anticipation of future dividends from our significant foreign subsidiaries. The estimated annual effective tax rate for the fiscal year ended March 31, 2017 reflects the estimated taxable earnings of our various foreign subsidiaries and the applicable local tax rates and after accounting for certain permanent differences, such as nondeductible compensation expenses. During the year ended March 31, 2015, the Company released a net deferred tax liability of $3,105 for taxes accrued on previously undistributed foreign earnings that are no longer expected to be repatriated.

Since we have established a permanent reinvestment policy on foreign earnings, we have not established a deferred tax liability for the U.S. tax associated with potential repatriation of foreign earnings. At March 31, 2017, we had not provided for U.S. federal income taxes and foreign withholding taxes on approximately $138,974 of available earnings in our significant foreign subsidiaries that are expected to be indefinitely invested. Future tax law changes or changes in the needs of our foreign subsidiaries could cause us to reconsider our policy and repatriate such earnings to the U.S. in the form of dividends. Any such dividends would be limited to the actual cash or assets available at our foreign subsidiaries, which are also subject to foreign currency fluctuations. Upon repatriation, the U.S. tax liability would be reduced by any foreign taxes already paid. We estimate that the ultimate tax liability for the repatriation of our foreign earnings would be in the range of $13,000 to $15,000.

For the year ended March 31, 2014, the United States entities generated a net operating loss as result of the premiums paid and other costs related to the refinancing of the senior secured notes. The benefit of the net operating loss carry forward was fully utilized by our United States operations during the year ended March 31, 2016. During the year ended March 31, 2015, we received a refund from the United States Internal Revenue Service of $3,220 which relates to net operating losses that were previously carried back to our fiscal 2012 tax year.

As of March 31, 2017, the tax years 2013 through 2016 remain open to examination by the major taxing jurisdictions to which we are subject.

As of March 31, 2017, we have established a reserve for uncertain income taxes in the amount of $533, all of which is related to our IPI acquisition. During the fiscal year ended March 31, 2017, we reduced our liabilities for uncertain tax positions in the amount of $176 as a portion of our uncertain tax positions related to periods which are no longer subject to audit. Activity within our reserve for uncertain tax positions as well as the penalties and interest are recorded as a component of the Company's income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year Ended March 31, 2017			Year Ended March 31, 2016
Beginning balance	$	661		$	748
Additions from acquisitions based on tax positions related to prior years	—			1,119
Reductions for tax positions of prior years	(176		)	(1,281		)
Settlements	—			—
Interest and penalties on prior reserves	48			75
Reserve for uncertain income taxes	$	533		$	661

We expect that $533 of our liability for uncertain tax positions will be released during fiscal 2018 as the periods to which they relate will close.