Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Prior to the Separation, the operations of Apergy were included in Dover’s U.S. combined federal and state income tax returns. Income tax expense and deferred tax balances are presented in these financial statements as if Apergy filed its own tax returns in each jurisdiction. These statements include tax losses and tax credits that may not reflect tax positions taken by Dover. In many cases, tax losses and tax credits generated by Apergy have been utilized by Dover.

Components of income before income taxes—Domestic and foreign components of income before income taxes were as follows:



	Years Ended December 31,
(in thousands)	2019		2018		2017
Domestic	$	51,073	$	104,234	$	65,923
Foreign	8,113		17,119		22,432
Income before income tax	$	59,186	$	121,353	$	88,355

Provision for (benefit from) income taxes—The provision for (benefit from) income taxes consisted of:



	Years Ended December 31,
(in thousands)	2019			2018			2017
Current:
U.S. federal	$	15,327		$	24,221		$	42,690
State and local	1,196			1,598			4,255
Foreign	4,264			4,362			6,127
Total current	20,787			30,181			53,072
Deferred:
U.S. federal	(12,815		)	(2,255		)	(73,544		)
State and local	(1,156		)	2,735			(1,595		)
Foreign	(590		)	(2,499		)	(97		)
Total deferred	(14,561		)	(2,019		)	(75,236		)
Provision for (benefit from) income taxes	$	6,226		$	28,162		$	(22,164	)

Effective income tax rate reconciliation—The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following:



	Years Ended December 31,
	2019		2018		2017
Statutory U.S. federal income tax rate	21.0	%	21.0	%	35.0	%
Net difference resulting from:
State and local taxes, net of federal income tax benefit	3.2		3.4		2.1
Foreign withholding tax	1.8		0.3		—
Foreign derived intangible income	(0.8	)	(1.9	)	—
Foreign operations tax effect	—		0.3		(2.8	)
Research and experimentation tax credits	(1.2	)	(0.6	)	(0.7	)
Foreign tax credit	(8.0	)	(1.5	)	—
Domestic manufacturing deduction	—		—		(4.4	)
Nondeductible expenses	2.5		0.7		0.7
ESOP dividends	—		(0.1	)	(0.2	)
Branch income	0.6		—		1.1
Tax return to accrual adjustments	(9.4	)	—		—
State deferred taxes	(7.9	)	—		—
Changes due to the Tax Reform Act	—		—		(54.3	)
Global intangible low-taxed income	—		2.3		—
Change in valuation allowance	9.0		—		—
Other	(0.3	)	(0.7	)	(1.6	)
Effective income tax rate	10.5	%	23.2	%	(25.1	)%

Deferred tax assets and liabilities—Significant components of deferred tax assets and liabilities were as follows:



(in thousands)	December 31, 2019			December 31, 2018
Deferred tax assets attributable to:
Accrued compensation	$	8,725		$	8,146
Accrued expenses, principally for state income taxes, interest and warranty	455			2,807
Net operating loss and other carryforwards	5,937			766
Inventories	1,380			—
Accounts receivable, principally due to allowance for doubtful accounts	1,699			973
Long-term liabilities, principally warranty and exit cost	6,178			505
Other assets	1,202			64
Deferred tax assets	25,576			13,261
Valuation allowance	(6,027		)	(722		)
Deferred tax assets, net of valuation allowance	$	19,549		$	12,539
Deferred tax liabilities attributable to:
Inventories	$	—		$	(2,061	)
Intangible assets, including goodwill	(66,736		)	(83,436		)
Property, plant and equipment	(36,873		)	(25,520		)
Deferred tax liabilities	(103,609		)	(111,017		)
Net deferred tax liabilities	$	(84,060	)	$	(98,478	)

Other non-current assets	$	—		$	1,294
Deferred income taxes	(84,060		)	(99,772		)
	$	(84,060	)	$	(98,478	)

Effective Tax Rate. Our effective tax rate was 10.5% for 2019 compared to 23.2% for 2018. The year-over-year decrease in the effective tax rate was primarily driven by deferred tax benefits associated with the 2018 pre-Separation tax return and a reduction in the combined state tax rate from 2018 to 2019 reflecting lower than estimated state income tax.

Net operating loss carryforwards. As of December 31, 2019, our deferred tax asset balance included non-U.S. net operating loss carryforwards of $1.8 million. This entire balance is available to be carried forward and will expire during the years 2024 through 2038. We have established valuation allowances by jurisdiction against the full amount of our net operating loss carryforwards as it is more likely that not these assets will not be realized.

Foreign tax credit carryforwards. As of December 31, 2019, our deferred tax asset balance included U.S. foreign tax credit carryforwards of $4.2 million. This entire balance is available to be carried forward and will expire during 2029. We maintain a valuation allowance against the full amount of our U.S. foreign tax credit carryforwards as it is more likely than not that these assets will not be realized.

Tax Reform Act. The Tax Reform Act, enacted on December 22, 2017, reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, we revalued our ending net deferred tax liabilities as of December 31, 2017, and recognized a provisional tax benefit of $53.2 million. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year ended December 31, 2017. We recorded a provisional tax expense related to the deemed repatriation of $3.9 million during the year ended December 31, 2017. We completed our accounting for the income tax effects of the Tax Reform Act in 2018 with no change to the provisional amounts recorded during the year ended December 31, 2017.

The GILTI provisions of the Tax Reform Act require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We elected to account for GILTI tax in the period in which it is incurred, and therefore did not provide any deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2019. The impact of GILTI (net of foreign tax credits) had an immaterial impact to our income tax provision for the year ended December 31, 2019.

Unrecognized tax benefits. We file federal, state, and local tax returns in the United States as well as foreign tax returns. We are routinely audited by the tax authorities in these jurisdictions, and a number of audits are currently underway. We believe all income tax uncertainties have been properly accounted. We have not recorded a liability for uncertain tax positions as of December 31, 2019 and 2018.

Undistributed earnings. As of December 31, 2019, we did not provide for deferred taxes associated with withholding taxes on our earnings of our subsidiaries that are permanently reinvested.