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, 2020

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



		Year Ended March 31, 2020			Year Ended March 31, 2019			Year Ended March 31, 2018
Current provision:
	Federal provision	$	(759	)	$	3,507		$	3,937
	Foreign provision	9,359			11,951			12,768
	State provision	279			681			301
Deferred provision:
	Federal deferred benefit	(796		)	(2,083		)	(8,506		)
	Foreign deferred benefit	(2,895		)	(3,964		)	(3,178		)
	State deferred benefit	(46		)	(119		)	(152		)
Total provision for income taxes		$	5,142		$	9,973		$	5,170

Deferred income tax assets and liabilities were as follows:



		March 31,
		2020			2019
Deferred tax assets:

	Accrued liabilities and reserves	$	2,915		$	2,489
	Stock option compensation	896			1,072
	Foreign deferred benefits	2,119			2,915
	Net operating loss carry-forward	1,545			1,440
	Inventories	377			385
	Interest limitation	—			359
	Capitalized transaction costs	149			178
	Foreign tax credit carry forward	458			149
	Valuation allowance	(757		)	(605		)
Total deferred tax assets		$	7,702		$	8,382
Deferred tax liabilities:
Intangible assets		$	(6,334	)	$	(7,847	)
Intangible and other - foreign		(16,189		)	(20,980		)
Property, plant and equipment		(4,004		)	(3,245		)
Prepaid expenses		(154		)	(39		)
Unrealized loss on hedge		(42		)	—
Undistributed foreign earnings		(320		)	(581		)
Total deferred tax liabilities		$	(27,043	)	$	(32,692	)

Net deferred tax asset (liability)		$	(19,341	)	$	(24,310	)

The Company expects that it is more likely than not that the results of future operations will generate sufficient taxable income 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, 2020			Year Ended March 31, 2019		Year Ended March 31, 2018
U.S.	$	(8,603	)	$	44	$	(13,568	)
Non-U.S.	25,681			33,098		31,957
Income from continuing operations	$	17,078		$	33,142	$	18,389

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, 2020			Year Ended March 31, 2019			Year Ended March 31, 2018
Notional U.S. federal income tax expense at statutory rate		$	3,586		$	6,960		$	5,792
Adjustments to reconcile to the income tax provision:
	Rate difference-international subsidiaries	1,181			1,366			(1,769		)
Transition tax for United States tax reform		—			(1,118		)	5,125
	Impact on deferred tax liability for statutory rate change	(1,231		)	—			(5,849		)
Impact of U.S. global intangible tax		926			946			—
	Undistributed foreign earnings	259			313			1,786
U.S. state income tax provision, net		143			408			111
	Charges/(benefits) related to uncertain tax positions	(408		)	1,137			(533		)
	Non-deductible charges	349			517			758
	Change in valuation allowance	152			(280		)	219
	Other, net	185			(276		)	(470		)
Provision for income taxes		$	5,142		$	9,973		$	5,170

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.

Consistent with provisions allowed under the Tax Act, the net $4,007 calculated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019. At March 31, 2020, $2,770 of the Transition Tax liability is included in “Other liabilities- long term” in the consolidated balance sheets.

The net benefit of $3,737 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. At March 31, 2020 we have accrued $1,200 as an additional deferred tax liability associated with the future repatriation of earnings from jurisdictions that withhold taxes on foreign paid dividends.

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.

To provide relief for taxpayers impacted by the Covid-19 outbreak, the United States enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. Among other provisions, the law provides relief to U.S. federal corporate taxpayers through temporary adjustments to net operating loss rules, changes to interest expense deductibility, and enhanced qualified improvement property depreciation. Under ASC 740, the Company recognized the effect of the change in tax law on existing deferred tax assets and liabilities in income from continuing operations in the interim period that includes March 27, 2020.

The primary impact to the Company for Cares was our ability to fully deduct interest expense for the twelve months ended March 31, 2020.

As of March 31, 2020, the Company had foreign tax net operating loss carry-forwards ("NOLs") of $5,367. Of this amount, $3,873 may be carried forward indefinitely. As of March 31, 2020, 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 $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, 2020			Year Ended March 31, 2019
Beginning balance	$	1,137		$	—
Additions for tax positions of prior years	—			1,137
Release of reserve	(463		)	—
Interest and penalties on prior reserves	55			—
Reserve for uncertain income taxes	$	729		$	1,137