Income Taxes

9 Months Ended

Jun. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent projected annual effective tax rate (“PAETR”), adjusted for the tax effect of discrete items. Management estimates the PAETR each quarter based on the forecasted annual pretax income or (loss). The Company is required to reduce deferred tax assets by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the benefit of the deferred tax assets will not be realized in future periods. The Company also records the income tax impact of certain discrete, unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.

When a company maintains a valuation allowance in a particular jurisdiction, no net deferred income tax expense or (benefit) will typically be provided. Jurisdictions with projected income that maintain a valuation allowance typically will form part of the PAETR calculation discussed above. However, jurisdictions with a projected loss for the year that maintain a valuation allowance are excluded from the PAETR calculation. Instead, the income tax for these jurisdictions is computed separately.

The actual year-to-date income tax expense (benefit) is the product of the most current PAETR and the actual year-to-date pretax income (loss) adjusted for any discrete tax items. The income tax expense (benefit) for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense (benefit) and the year-to-date calculation for the prior quarter. Items unrelated to current period ordinary income or (loss) are recognized entirely in the period identified as a discrete item of tax. Discrete items generally relate to changes in tax laws, adjustments to prior period’s actual liability determined upon filing tax returns, and adjustments to previously recorded reserves for uncertain tax positions, initially recording or fully reversing valuation allowances. The inclusion of discrete items in a particular quarter can cause the actual effective rate for that quarter to vary significantly from the PAETR.

Therefore, the actual effective income tax rate for a particular quarter can vary significantly based upon the jurisdictional mix and timing of actual earnings compared to projected annual earnings, permanent items, earnings for those jurisdictions that maintain a valuation allowance, tax associated with jurisdictions excluded from the PAETR calculation and discrete items.

Annual Effective Tax Rate

The updated PAETR, which excludes the impact of discrete items, was 19.7% and 3.9% as of the nine months ended June 30, 2021 and 2020, respectively. For the nine months ended June 30, 2021, the PAETR was lower than the U.S. federal statutory rate of 21.0% primarily due to the impact of maintaining a U.S. valuation allowance that is provided on U.S. deferred tax assets offset by changes in the mix of earnings between countries, some of which have higher statutory rates, and it is higher than the prior year’s rate which included the impact of the sale of the Memcor product line and the impact on deferred tax liabilities related to indefinite lived intangibles, a portion of which was reversed in relation to the sale of the Memcor product line.

The Company continues to maintain a full valuation allowance on U.S. federal and state net deferred tax assets (excluding the tax effects of deferred tax liabilities associated with indefinite lived intangibles) for the period ending June 30, 2021 as a result of pretax losses incurred since the Company’s inception in early 2014. The Company reported positive U.S. pre-tax earnings for the first time in 2017 and again in 2020 and is projecting positive pre-tax earnings in 2021, however, the Company generated pre-tax losses in all other years. The Company was in a three-year cumulative loss position at September 30, 2019, but was no longer in a three-year cumulative loss position at September 30, 2020. The Company believes it is prudent to retain a valuation allowance until a more consistent pattern of earnings is established and net operating loss carryforwards begin to be utilized.

Current and Prior Period Tax Expense

For the three months ended June 30, 2021, the Company recognized income tax expense of $3,887 on pretax income of $17,086. The rate of 22.7% differed from the U.S. statutory rate of 21.0% principally due to the impact of higher earnings in non-U.S. tax jurisdictions, some with higher statutory rates, which increases overall tax expense, and lower earnings in the U.S., which does not impact tax expense due to the U.S. valuation allowance.

For the three months ended June 30, 2020, the Company recognized income tax expense of $740 on pretax income of $22,581. The rate of 3.3% differed from the U.S. statutory rate of 21.0% principally due to the favorable impact to the PAETR of the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of the U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles.

For the nine months ended June 30, 2021, the Company recognized income tax expense of $7,672 on pretax income of $32,430. The rate of 23.7% differed from the statutory rate of 21.0% principally due to the unfavorable impact of discrete items related to an adjustment for prior periods and recording an uncertain tax position related to a tax audit in a foreign jurisdiction, as well as the impact of higher earnings in non-U.S. tax jurisdictions, which increases overall tax expense, and lower earnings in the U.S., which does not impact tax expense due to the U.S. valuation allowance.

For the nine months ended June 30, 2020, the Company recognized income tax expense of $3,336 on pretax income of $86,593. The rate of 3.9% differed from the statutory rate of 21.0% principally due to the gain on the sale of the Memcor product line, which did not generate significant tax expense due to the combination of the U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles.

At June 30, 2021 and 2020, the Company had gross unrecognized tax benefits of $1,805 and $1,313 respectively.