Income Taxes

12 Months Ended

Sep. 30, 2019

NOTE 16 - INCOME TAXES

Income tax expense was calculated based upon the following components of income (loss) from operations before income taxes for the years ended September 30, 2019, 2018 and 2017:


	SBH						SB/RH
(in millions)	2019		2018		2017		2019		2018		2017
United States	$	(267.3)	$	(140.4)	$	(150.7)	$	(202.7)	$	25.4	$	50.7
Outside the United States		73.5		104.7		122.8		73.5		104.7		122.9
Income from operations before income taxes	$	(193.8)	$	(35.7)	$	(27.9)	$	(129.2)	$	130.1	$	173.6

The components of income tax expense for the years ended September 30, 2019, 2018 and 2017 are as follows:


	SBH						SB/RH
(in millions)	2019		2018		2017		2019		2018		2017
Current tax expense:
U.S. Federal	$	(47.6)	$	58.1	$	6.9	$	(47.6)	$	58.4	$	4.2
Foreign		44.3		34.7		13.2		44.3		34.7		13.2
State and local		2.7		1.0		0.6		2.7		1.0		0.6
Total current tax expense		(0.6)		93.8		20.7		(0.6)		94.1		18.0
Deferred tax (benefit) expense:
U.S. Federal		9.9		(539.7)		(18.0)		24.3		(170.0)		(12.2)
Foreign		(4.9)		3.1		(10.1)		(4.9)		3.0		(10.1)
State and local		(11.5)		(19.9)		(4.4)		(8.1)		(3.9)		(4.3)
Total deferred tax expense		(6.5)		(556.5)		(32.5)		11.3		(170.9)		(26.6)
Income tax expense	$	(7.1)	$	(462.7)	$	(11.8)	$	10.7	$	(76.8)	$	(8.6)

The following reconciles the total income tax expense, based on the U.S. Federal statutory income tax rate of 21% for the year ended September 30, 2019, 24.5% for the year ended September 30, 2018, and 35% for the year ended September 30, 2017, with the Company’s recognized income tax expense:


	SBH						SB/RH
(in millions)	2019		2018		2017		2019		2018		2017
U.S. Statutory federal income tax expense	$	(40.7)	$	(8.8)	$	(9.7)	$	(27.1)	$	31.9	$	60.8
Permanent items		3.7		7.6		4.8		3.8		(3.5)		0.8
Goodwill impairment		12.2		—		—		12.2		—		—
Foreign statutory rate vs. U.S. statutory rate		(10.3)		3.0		(32.8)		(10.3)		3.0		(32.8)
State income taxes, net of federal effect		(14.2)		(2.9)		1.2		(11.1)		(1.9)		1.3
Illinois state rate change		—		—		(3.4)		—		—		(3.4)
Tax reform act - U.S. rate change		—		(166.7)		—		—		(181.7)		—
Global intangible low tax income inclusion		8.6		—		—		8.6		—		—
Foreign dividend received deduction tax law change		95.9		—		—		95.9		—		—
Tax reform act - mandatory repatriation		(48.0)		73.1		—		(48.0)		73.1		—
Residual tax on foreign earnings		1.5		5.9		(36.1)		1.5		5.9		(36.1)
Change in valuation allowance		(29.9)		(365.6)		77.1		(29.9)		(0.3)		18.1
Unrecognized tax expense (benefit)		6.2		(0.1)		3.9		6.2		(0.1)		3.9
Share based compensation adjustments		4.6		(5.5)		(4.9)		4.6		(0.5)		(0.4)
Research and development tax credits		(4.4)		(1.9)		(9.3)		(4.4)		(1.9)		(9.3)
UK Tax refund		—		—		(1.5)		—		—		(1.5)
Outside basis difference		—		—		(0.8)		—		—		(5.4)
Return to provision adjustments and other, net		7.7		(0.8)		(0.3)		8.7		(0.8)		(4.6)
Income tax expense	$	(7.1)	$	(462.7)	$	(11.8)	$	10.7	$	(76.8)	$	(8.6)

NOTE 16 - INCOME TAXES (continued)

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of September 30, 2019 and 2018 are as follows:


	SBH				SB/RH
(in millions)	2019		2018		2019		2018
Deferred tax assets
Employee benefits	$	37.6	$	24.8	$	36.0	$	23.1
Restructuring		0.9		0.5		0.9		0.5
Inventories and receivables		16.8		25.0		16.8		25.0
Marketing and promotional accruals		10.6		9.9		10.6		9.9
Property, plant and equipment		5.9		32.1		5.9		31.2
Unrealized losses		12.8		7.1		12.8		7.1
Intangibles		19.0		14.3		19.0		14.3
Investment in subsidiaries		0.3		16.9		0.3		0.3
Net operating loss and credit carry forwards		530.6		790.8		229.8		281.8
Other		32.7		30.2		31.9		44.5
Total deferred tax assets		667.2		951.6		364.0		437.7
Deferred tax liabilities
Property, plant and equipment		11.1		51.4		11.1		51.4
Unrealized gains		9.0		7.3		9.0		7.3
Intangibles		311.8		416.4		311.8		416.4
Investment in partnership		37.6		52.0		55.0		52.0
Taxes on unremitted foreign earnings		5.0		6.2		5.0		6.2
Other		10.9		7.6		10.8		7.6
Total deferred tax liabilities		385.4		540.9		402.7		540.9
Net deferred tax liabilities		281.8		410.7		(38.7)		(103.2)
Valuation allowance		(307.0)		(282.6)		(202.8)		(178.4)
Net deferred tax liabilities, net valuation allowance	$	(25.2)	$	128.1	$	(241.5)	$	(281.6)
Reported as:
Deferred charges and other	$	30.7	$	163.1	$	30.7	$	5.4
Deferred taxes (noncurrent liability)		55.9		35.0		272.2		287.0

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Reform Act") was signed into law. The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a dividends received deduction for dividends from foreign subsidiaries and imposing a tax on deemed repatriated accumulated earnings of foreign subsidiaries. The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

On June 14, 2019, the U.S. Department of the Treasury and the Internal Revenue Service issued Regulations (“Regulations”) related to the foreign dividends received deduction and global intangible low taxed income (“GILTI”). The Regulations contained language that modified certain provisions of the Tax Reform Act and previously issued guidance. The Regulations are retroactive to January 1, 2018 and caused certain distributions made by the Company’s non-U.S. subsidiaries during Fiscal 2018 to be taxable as Subpart F income on its Fiscal 2018 federal income tax return. The impacts of the Regulations were recorded in the year ended September 30, 2019. The Company used an additional $454.6 million in net operating losses and recognized $95.9 million in federal and state tax expense due to the impact on prior distributions among subsidiaries. The Company also recognized a $48.0 million tax benefit from recalculating its liability for one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits after application of the Regulations and the final calculations for its Fiscal 2018 federal income tax returns, including the ability for the Company to offset the liability in part by foreign tax credits. The Company also recorded $70.7 million of foreign tax credits, but concluded it is more likely than not these credits will expire unused and therefore recorded a $70.7 million valuation allowance against the deferred tax assets.

The Company’s $25.1 million mandatory repatriation tax is payable over 8 years. The first payment was due January 2019. As of September 30, 2019, $22.9 million of the mandatory repatriation liability is still outstanding and $2.0 million is due and payable in the next 12 months but will be offset by previous payments and credits.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized $166.7 million of tax benefit in the Company’s net income from continuing operations for the year ended September 30, 2018.

In response to the enactment of the Tax Reform Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 allows registrants to record provisional amounts during a one year measurement period in a manner similar to accounting for business combinations. The measurement period ended December 30, 2018 and the Company did not recognize changes in the current year to the provisional tax impacts prior to the closing of the measurement period. Portions of the Tax Reform Act are unclear or have not yet been clarified and interpretations and regulations continue to be issued, some of which are also subject to legal challenges. The issuance of new regulations or the invalidation of existing regulations could have a material impact on what the Company has recorded to date.

During the year ended September 30, 2019, the Company recorded an increase of $12.2 million to tax expense from impairment of $116 million of book goodwill. A portion of the impairment resulted in a tax benefit since the goodwill had previously been amortized for income tax purposes and the Company therefore reversed a deferred tax liability.

To the extent necessary, the Company intends to utilize free cash flow from foreign subsidiaries in order to support management's plans to voluntarily accelerate pay down of U.S. debt, fund distributions to shareholders, fund U.S. acquisitions and satisfy ongoing U.S. operational cash flow requirements. The Company annually estimates the available earnings, permanent reinvestment classification and the availability of and management’s intent to use alternative mechanisms for repatriation for each jurisdiction in which the Company does business. Accordingly, the Company is providing residual U.S. and foreign deferred taxes on these earnings to the extent they cannot be repatriated in a tax-free manner.

NOTE 16 - INCOME TAXES (continued)

As of September 30, 2019, and 2018, the Company provided $5.0 and $6.1 million, respectively, of residual foreign taxes on undistributed foreign earnings.

During the year ended September 30, 2017, the Company concluded that sufficient evidence existed that substantially all of its non-U.S. subsidiaries had invested or would invest their respective undistributed earnings indefinitely or that the earnings would be remitted in a tax-free manner. As a result, the Company recognized approximately $30.3 million in tax benefit for reducing the deferred tax liability on those earnings that had been established in prior years. The Company provided residual tax expense of $2.3 million on earnings deemed to be repatriated under U.S. tax law for the year ended September 30, 2017. The tax benefit was recognized as an addition to net operating loss and credit carryforwards deferred tax assets.

As a result of the Regulations issued in June 2019 and the deemed mandatory repatriation, the Company does not have significant prior year untaxed, undistributed earnings from its foreign operations at September 30, 2019. $500.6 million of the Company’s undistributed earnings were taxed in the U.S. as a result of the mandatory deemed repatriation that was part of the Tax Reform Act, and the remaining earnings were taxed as a result of the Regulations. The Company does not expect to generate untaxed, undistributed foreign earnings for the year ended September 30, 2019 due to GILTI inclusions under the Tax Reform Act. The Company recorded GILTI inclusions for the tax year ended September 30, 2019 of $40.8 million.

As of September 30, 2019, the Company has U.S. federal net operating loss carryforwards (“NOLs”) of $1,491.1 million with a federal tax benefit of $313.1 million and tax benefits related to state NOLs of $85.8 million. These NOLs expire through years ending in 2038. As of September 30, 2019, the Company has foreign NOLs of $119.4 million and tax benefits of $29.1 million, which will expire beginning in the Company's fiscal year ending September 30, 2020. Certain of the foreign NOLs have indefinite carryforward periods.

A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.

The Company has had multiple changes of ownership, as defined under Section 382 of the Internal Revenue Code of 1986, as amended, that subject the Company’s U.S. federal and state NOLs and other tax attributes to certain limitations. The annual limitation is based on a number of factors including the value of the Company’s stock (as defined for tax purposes) on the date of the ownership change, its net unrealized gain position on that date, the occurrence of realized gains in years subsequent to the ownership change and the effects of subsequent ownership changes (as defined for tax purposes), if any. Due to these limitations, the Company estimates, as of September 30, 2019, that $660.5 million of the total U.S. federal NOLs with a federal tax benefit of $138.7 million and $16.7 million of the tax benefit related to state NOLs will expire unused even if the Company generates sufficient income to otherwise use all of its NOLs. The Company also projects, as of September 30, 2019, that $31.1 million of tax benefits related to foreign NOLs will not be used. The Company has provided a full valuation allowance against these deferred tax assets.

The income recognized as a result of the Regulations, the U.S. gain on the sale of the battery business, and the U.S. operating results for the year ended September 30, 2019 have increased the likelihood that the Company can use federal net operating losses subject to certain limits; therefore, the Company released the $36.7 million of valuation allowance on these losses in Fiscal 2019.

As a result of the Spectrum Merger in fiscal year 2018, the Company and Spectrum Legacy joined in the filing of a U.S. consolidated tax return starting July 13, 2018. The form of the Spectrum Merger allows for the Company’s capital and net operating loss carryforwards to be able to be used to offset future income and the U.S. tax gain on the sale of the GBL business to Energizer. As a result, during the year ended September 30, 2018, the Company released $365.3 million of valuation allowance on its U.S. federal net deferred tax assets since it is now more likely than not that the assets will be realized. The Company also recorded $12.3 million of state tax benefit related to net operating loss and credit carryforwards as a result of the Spectrum Merger since it is more likely than not that those carryforwards will generate tax benefits after the Spectrum Merger.

The Company also released $4.9 million of valuation allowance against its U.S. federal and state capital losses as a result of the announced sale of the GBL business to Energizer during the year ended September 30, 2018.

The Company recorded tax expense of $14.7 million related to additional valuation allowance on state NOLs during the year ended September 30, 2017.

As of September 30, 2019, the valuation allowance is $307.0 million, of which $273.5 million is related to U.S. net deferred tax assets and $33.5 million is related to foreign net deferred tax assets. As of September 30, 2018, the valuation allowance was $282.6 million, of which $247.3 million was related to U.S. net deferred tax assets and $35.3 million is related to foreign net deferred tax assets. As of September 30, 2017, the valuation allowance was $888.3 million, of which $862.2 million is related to U.S. net deferred tax assets and $26.1 million is related to foreign net deferred tax assets. During the year ended September 30, 2019, the Company increased its valuation allowance for deferred tax assets by $24.4 million of which $26.2 million is related to an increase in valuation allowance against U.S. net deferred tax assets and $1.8 million related to a decrease in the valuation allowance against foreign net deferred tax assets. During the year ended September 30, 2018, the Company decreased its valuation allowance for deferred tax assets by $605.7 million, of which $614.9 million is related to a decrease in valuation allowance against U.S. net deferred tax assets and $9.2 million related to an increase in the valuation allowance against foreign net deferred tax assets.

As of September 30, 2019, the Company has recorded $59.5 million of valuation allowance against its U.S. state net operating losses.

‎

NOTE 16 - INCOME TAXES (continued)

The total amount of unrecognized tax benefits at September 30, 2019 and 2018 are $20.9 million and $15.0 million, respectively. If recognized in the future, $20.9 million of the unrecognized tax benefits as of September 30, 2019 will impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2019, and 2018 the Company had $2.7 million and $2.8 million, respectively, of accrued interest and penalties related to uncertain tax positions. The impact on income tax expense related to interest and penalties for the years ended September 30, 2019, 2018 and 2017 was a net decrease of $0.1 million, a net increase of $0.3 million and a net increase of $0.5 million, respectively. The following table summarizes the changes to the amount of unrecognized tax benefits for the years ended September 30, 2019, 2018 and 2017:


(in millions)	2019		2018		2017
Unrecognized tax benefits, beginning of year	$	15.0	$	15.6	$	11.8
Gross increase – tax positions in prior period		5.3		0.9		3.3
Gross decrease – tax positions in prior period		(0.4)		(3.5)		(0.1)
Gross increase – tax positions in current period		3.5		2.5		0.9
Settlements		(1.1)		(0.3)		—
Lapse of statutes of limitations		(1.4)		(0.2)		(0.3)
Unrecognized tax benefits, end of year	$	20.9	$	15.0	$	15.6

During the tax year ended September 30, 2018, the Company reduced unrecognized tax benefits recorded against its deferred tax assets by $1.9 million for the change in the U.S. tax rate from 35% to 21%.

The September 30, 2019 Consolidated Statement of Financial Position for SB/RH Holdings, LLC contains $211.1 million of income taxes payable to its parent company, calculated as if SB/RH Holdings, LLC were a separate taxpayer.

The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Company’s major taxing jurisdictions are the U.S., United Kingdom and Germany. In the U.S., federal tax filings for years prior to and including the Company’s fiscal year ended September 30, 2015 are closed. However, the federal NOLs from the Company’s fiscal years ended September 30, 2007 through September 30, 2013 are subject to Internal Revenue Service (“IRS”) examination until the year that such net operating loss carryforwards are utilized and those years are closed for audit. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen. As of September 30, 2019, certain of the Company’s legal entities are undergoing income tax audits. The Company cannot predict the ultimate outcome of the examinations; however, it is reasonably possible that during the next twelve months some portion of previously unrecognized tax benefits could be recognized.