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, 2019

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



		Year Ended March 31, 2019			Year Ended March 31, 2018			Year Ended March 31, 2017
Current provision:
	Federal provision	$	3,507		$	3,937		$	1,588
	Foreign provision	11,951			12,768			6,341
	State provision	681			301			155
Deferred provision:
	Federal deferred benefit	(2,083		)	(8,506		)	(1,907		)
	Foreign deferred benefit	(3,964		)	(3,178		)	(2,025		)
	State deferred benefit	(119		)	(152		)	(54		)
Total provision for income taxes		$	9,973		$	5,170		$	4,098

Deferred income tax assets and liabilities were as follows:



		March 31,
		2019			2018
Deferred tax assets:

	Accrued liabilities and reserves	$	2,489		$	1,987
	Stock option compensation	1,072			821
	Foreign deferred benefits	2,915			3,575
	Net operating loss carry-forward	1,440			1,688
	Inventories	385			371
	Interest limitation	359			—
	Capitalized transaction costs	178			207
	Foreign tax credit carry forward	149			104
	Valuation allowance	(605		)	(878		)
Total deferred tax assets		$	8,382		$	7,875
Deferred tax liabilities:
Intangible assets		$	(7,847	)	$	(9,498	)
Intangible assets - foreign		(20,980		)	(25,674		)
Property, plant and equipment		(3,245		)	(2,522		)
Prepaid expenses		(39		)	(104		)
Unrealized loss on hedge		—			(45		)
Undistributed foreign earnings		(581		)	(859		)
Total deferred tax liabilities		$	(32,692	)	$	(38,702	)

Net deferred tax asset (liability)		$	(24,310	)	$	(30,827	)

The Company expects that it is more likely than not that the results of future operations will generate sufficient taxable income to to realize its domestic and foreign deferred tax assets net of valuation allowance reserves.

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



	Year Ended March 31, 2019		Year Ended March 31, 2018			Year Ended March 31, 2017
U.S.	$	44	$	(13,568	)	$	(83	)
Non-U.S.	33,098		31,957			19,165
Income from continuing operations	$	33,142	$	18,389		$	19,082

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, 2019			Year Ended March 31, 2018			Year Ended March 31, 2017
Notional U.S. federal income tax expense at statutory rate		$	6,960		$	5,792		$	6,679
Adjustments to reconcile to the income tax provision:
	Rate difference-international subsidiaries	1,366			(1,769		)	(2,622		)
Transition tax for United States tax reform		(1,118		)	5,125			—
	Impact on deferred tax liability for statutory rate change	—			(5,849		)	—
Impact of U.S. global intangible tax		946			—			—
	Undistributed foreign earnings	313			1,786			—
U.S. state income tax provision, net		408			111			45
	Charges/(benefits) related to uncertain tax positions	1,137			(533		)	(128		)
	Non-deductible charges	517			758			296
	Foreign purchase price adjustment	—			—			(379		)
	Change in valuation allowance	(280		)	219			490
	Other, net	(276		)	(470		)	(283		)
Provision for income taxes		$	9,973		$	5,170		$	4,098

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

Accordingly, our income tax provision as of March 31, 2019 and 2018 reflects (i) the current fiscal year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.



	Year Ended			Year Ended
	March 31, 2019			March 31, 2018
Transition Tax (provisional)	$	—		$	5,126
Net impact on U.S. deferred tax assets and liabilities (provisional)	—			(6,030		)
Benefit on final calculation of Transition Tax	(1,118		)	—
Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)	—			1,704
Net discrete impacts of the enactment of the Tax Act	$	(1,118	)	$	800

Consistent with provisions allowed under the Tax Act, the net $4,008 calculated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019. The non-current portion of the estimated Transition Tax liability has been included in “Other liabilities- long term” in the Condensed Consolidated Balance Sheets.

The net benefit of $6,030 related to deferred tax assets and liabilities is primarily associated with a reduction in deferred liabilities for unamortized intangible assets. Since these intangible assets are not tax deductible, the reduction of the liability is non-cash and will not reduce future tax payments.

Given the Tax Act’s significant changes and the opportunities to repatriate cash tax free, we have reevaluated our current permanent reinvestment position. Accordingly, we no longer assert a permanent reinvestment position in most of our foreign subsidiaries. We expect to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions.

While the Tax Act provides for a modified territorial tax system, beginning in January 1, 2018, global intangible low-taxed income, or ("GILTI"), provisions will be applied by the United States providing an incremental tax on certain foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on the future U.S. inclusions in taxable income related to GILTI provisions as a current-period expense when incurred, or the period cost method, or (2) factoring such amounts into the Company's measurement of its deferred taxes, or the deferred method. The Company has selected the period cost method as its accounting policy with respect to the new GILTI tax rules.

As of March 31, 2019, the Company had foreign tax net operating loss carry-forwards ("NOLs") of $5,046. Of this amount, $3,579 may be carried forward indefinitely. As of March 31, 2019, the tax years 2015 through 2018 remain open to examination by the major taxing jurisdictions to which we are subject.

During the fiscal year ended March 31, 2019, the Company reserved $674 related to uncertain tax positions related to the final Transition Tax and and $463 related to current tax elections that we determined could be overturned if the calculations were examined by tax authorities. The reserves for the Transition Tax will remain subject to examination until January 2025. The reserves for other tax elections are expected to be released within twelve months. During the fiscal year ended March 31, 2018, the Company released its remaining reserve for uncertain tax positions as the tax periods to which they relate had closed. 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, 2019		Year Ended March 31, 2018
Beginning balance	$	—	$	533
Additions for tax positions of prior years	1,137		—
Reductions for tax positions of prior years	—		(533		)
Reserve for uncertain income taxes	$	1,137	$	—