Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.21.1
Income Taxes
 12 Months Ended
Mar. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
    
Income taxes included in the consolidated income statement consisted of the following:
Year Ended March 31, 2021 Year Ended March 31, 2020 Year Ended March 31, 2019
Current provision:
Federal provision $ (4,662) $ (759) $ 3,507 
Foreign provision 6,098  9,359  11,951 
State provision 197  279  681 
Deferred provision:
Federal deferred benefit (1,880) (796) (2,083)
Foreign deferred benefit (1,084) (2,895) (3,964)
State deferred benefit (107) (46) (119)
Total provision for income taxes $ (1,438) $ 5,142  $ 9,973 
    
    Deferred income tax assets and liabilities were as follows:
March 31,
2021 2020
Deferred tax assets:
Accrued liabilities and reserves $ 3,537  $ 2,915 
Stock option compensation 593  896 
Foreign deferred benefits 1,954  2,119 
Net operating loss carry-forward 1,224  1,545 
Inventories 383  377 
Interest limitation 204  — 
Capitalized transaction costs 119  149 
Foreign tax credit carry forward 721  458 
Valuation allowance (282) (757)
Total deferred tax assets $ 8,453  $ 7,702 
Deferred tax liabilities:
Intangible assets $ (5,959) $ (6,334)
Intangible and other - foreign (16,789) (16,189)
Property, plant and equipment (3,162) (4,004)
Prepaid expenses (227) (154)
Unrealized loss on hedge —  (42)
Undistributed foreign earnings (820) (320)
Total deferred tax liabilities $ (26,957) $ (27,043)
Net deferred tax asset (liability) $ (18,504) $ (19,341)

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, 2021 Year Ended March 31, 2020 Year Ended March 31, 2019
U.S. $ (15,447) $ (8,603) $ 44 
Non-U.S. 15,174  25,681  33,098 
Income from continuing operations $ (273) $ 17,078  $ 33,142 

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, 2021 Year Ended March 31, 2020 Year Ended March 31, 2019
Notional U.S. federal income tax expense at statutory rate $ (57) $ 3,586  $ 6,960 
Adjustments to reconcile to the income tax provision:
Impact of U.S. global intangible tax (1,859) 926  946 
U.S. net operating loss carry-back rate difference (1,470) —  — 
South Africa divestiture 526  —  — 
Rate difference-international subsidiaries 513  1,181  1,366 
Transition tax for United States tax reform —  —  (1,118)
Impact on deferred tax liability for statutory rate change 332  (1,231) — 
Undistributed foreign earnings 359  259  313 
U.S. state income tax provision, net 48  143  408 
Charges/(benefits related to uncertain tax positions 79  (408) 1,137 
Non-deductible charges 239  349  517 
Change in valuation allowance (475) 152  (280)
Other, net 327  185  (276)
Provision for income taxes $ (1,438) $ 5,142  $ 9,973 

    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, $2,478 of the Transition Tax liability is included in “Other liabilities- long-term” in the consolidated balance sheets.  
    The net benefit of $3,097 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, 2021 we have accrued $1,073 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.
During the year ended March 31, 2021, the Company recorded discrete tax benefits of $1,859 related to updated Internal Revenue Service rules regarding the United States Global intangible low-taxed income or ("GILTI tax") and related tax planning elections associated with the GILTI tax rule changes. Under the new rules, Thermon was able to reduce previously incurred GILTI tax under the high tax exception rules. Included with this benefit are certain tax elections that resulted in the reduction of previous tax expense.

During the year ended March 31, 2021, the Company incurred a taxable loss within its operations in the United States. As a result, the net operating loss was available to be carried back to the Company's 2016 tax year when the federal tax rate was 35%. The rate differential resulted in a discrete tax benefit of $1,470.

The loss on the capital stock sale of the South Africa Business, referred to in Note 14, "Restructuring and other charges/(income)," was not deductible for income tax. This resulted in approximately $526 of discrete tax expense during the fiscal 2021.

During the twelve months ended March 31, 2020, the Company recorded the impact of a prospective income tax rate reduction in the tax jurisdictions of Alberta, Canada and the Netherlands. The scheduled rate reductions of 4% and 3%, respectively, resulted in a net reduction of deferred tax liabilities of $1,231 reported as a benefit to tax expense. In fiscal 2021, the Netherlands reversed their prospective tax reduction. Accordingly, the Company adjusted its deferred tax liability resulting in additional tax expense $332.

    As of March 31, 2021, the Company had foreign tax net operating loss carry-forwards ("NOLs") of $4,421. Of this amount, $1,320 may be carried forward indefinitely. As of March 31, 2021, the tax years 2017 through 2020 remain open to examination by the major taxing jurisdictions to which we are subject.

    At March 31, 2020, reserves for uncertain tax position consisted of uncertain tax positions related to the final Transition Tax 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. No reserves are expected to be released within twelve months. 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, 2021 Year Ended March 31, 2020
Beginning balance $ 729  $ 1,137 
Release of reserve —  (463)
Interest and penalties on prior reserves 79  55 
Reserve for uncertain income taxes $ 808  $ 729