Income Taxes
The significant components of income before income taxes and the consolidated income tax provision were as follows:
|
| | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 | | 2015 |
Income before income taxes: | | | | | | |
Domestic | | $ | 129.0 |
| | $ | 92.2 |
| | $ | 49.2 |
|
Foreign | | 54.0 |
| | 46.1 |
| | 15.9 |
|
Total | | $ | 183.0 |
|
| $ | 138.3 |
|
| $ | 65.1 |
|
| | | | | | |
|
| | | | | | | | | | | | |
Income tax expense: | | |
| | |
| | |
|
Current provision | | |
| | |
| | |
|
Federal | | $ | 61.6 |
| | $ | 4.7 |
| | $ | 35.3 |
|
State | | 8.6 |
| | 2.2 |
| | 3.6 |
|
Foreign | | 13.3 |
| | 9.1 |
| | 1.7 |
|
Total current provision | | 83.5 |
| | 16.0 |
| | 40.6 |
|
Deferred provision: | | |
| | |
| | |
|
Federal | | (34.9 | ) | | 21.8 |
| | (18.1 | ) |
State | | 1.3 |
| | 1.2 |
| | (1.3 | ) |
Foreign | | 0.8 |
| | (23.5 | ) | | (2.9 | ) |
Total deferred provision | | (32.8 | ) | | (0.5 | ) | | (22.3 | ) |
Income tax expense | | $ | 50.7 |
| | $ | 15.5 |
| | $ | 18.3 |
|
Differences between income tax expense reported for financial reporting purposes and that computed based upon the application of the statutory U.S. Federal tax rate to the reported income before income taxes were as follows:
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| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 | | 2015 |
| | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
Federal income tax (a) | | $ | 64.1 |
| | 35.0 | % | | $ | 48.4 |
| | 35.0 | % | | $ | 22.8 |
| | 35.0 | % |
State income tax (b) | | 4.1 |
| | 2.2 | % | | 2.9 |
| | 2.1 | % | | 1.6 |
| | 2.4 | % |
Foreign income tax (c) | | (35.6 | ) | | (19.4 | )% | | (14.0 | ) | | (10.1 | )% | | (10.2 | ) | | (15.7 | )% |
Application of federal research tax credits | | (3.6 | ) | | (2.0 | )% | | (5.6 | ) | | (4.0 | )% | | (2.2 | ) | | (3.4 | )% |
Application of foreign tax credits | | (15.0 | ) | | (8.2 | )% | | (0.5 | ) | | (0.4 | )% | | (0.2 | ) | | (0.3 | )% |
Adjustment of estimated income tax accruals | | (0.8 | ) | | (0.4 | )% | | 0.3 |
| | 0.2 | % | | (1.6 | ) | | (2.4 | )% |
Valuation of tax attributes | | 36.3 |
| | 19.8 | % | | (14.4 | ) | | (10.4 | )% | | 4.0 |
| | 6.2 | % |
Foreign Inclusions | | 11.5 |
| | 6.3 | % | | 0.9 |
| | 0.6 | % | | 0.3 |
| | 0.5 | % |
Domestic manufacturer's deduction | | (4.4 | ) | | (2.4 | )% | | (1.8 | ) | | (1.3 | )% | | (1.5 | ) | | (2.3 | )% |
Excess tax benefits from share based awards | | (8.9 | ) | | (4.9 | )% | | — |
| | — | % | | — |
| | — | % |
Capitalized transaction costs | | — |
| | — | % | | — |
| | — | % | | 2.5 |
| | 3.8 | % |
Other, net | | 3.0 |
| | 1.7 | % | | (0.7 | ) | | (0.5 | )% | | 2.8 |
| | 4.3 | % |
Income tax expense | | $ | 50.7 |
|
| 27.7 | % |
| $ | 15.5 |
|
| 11.2 | % |
| $ | 18.3 |
|
| 28.1 | % |
| |
(b) | Net of Federal benefit. |
| |
(c) | Federal tax rate differential. |
The tax effect of temporary differences that gave rise to the deferred tax balance sheet accounts were as follows:
|
| | | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Employee benefit accruals | | $ | 64.5 |
| | $ | 76.5 |
|
Inventory | | 16.6 |
| | 13.9 |
|
Net operating loss carryforwards | | 70.7 |
| | 47.1 |
|
Tax credit carryforwards | | 23.3 |
| | 14.2 |
|
Other, net | | 41.4 |
| | 46.4 |
|
| | 216.5 |
|
| 198.1 |
|
Less: Valuation allowance | | (58.2 | ) | | (26.9 | ) |
Total deferred tax assets | | 158.3 |
|
| 171.2 |
|
| | | | |
Deferred tax liabilities: | | |
| | |
|
Depreciation | | (28.6 | ) | | (41.6 | ) |
Amortization | | (349.7 | ) | | (371.2 | ) |
Other, net | | (5.3 | ) | | (3.1 | ) |
Total deferred tax liabilities | | (383.6 | ) |
| (415.9 | ) |
Deferred tax asset (liability) - net | | $ | (225.3 | ) |
| $ | (244.7 | ) |
At September 30, 2017, we had $68.6 million of deferred tax assets related to operating loss carryforwards in foreign jurisdictions that are subject to various carryforward periods with the majority eligible to be carried forward for an unlimited period. Additionally, we had $1.8 million of deferred tax assets related to federal net operating loss carryforwards which will expire between 2019 and 2033 and $0.3 million of deferred tax assets related to state net operating loss carryforwards, which expire between 2018 and 2035. We had $15.0 million of deferred tax assets related to state tax credits, some of which will be carried forward for an unlimited period and some of which will expire between 2018 and 2031. Additionally, we had $8.3 million of deferred tax assets related to foreign tax credits, which will expire between 2026 and 2027.We had $3.8 million of deferred tax assets related to capital loss carryforwards, which will expire in 2021.
The gross deferred tax assets as of September 30, 2017 were reduced by valuation allowances of $58.2 million primarily related to certain foreign deferred tax attributes and state tax credit carryforwards as it is more likely than not that some portion or all of these tax attributes will not be realized. In evaluating whether it is more likely than not that we would recover our deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies were considered. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances. In connection with our integration of recent acquisitions, in 2017 the Company completed a restructuring to further align its capital and debt structure. As a result, non-US NOLs were generated for which a full valuation allowance was recorded. This was the primary driver of the increase in the valuation allowance from the prior year end.
We operate under tax holidays in both Singapore and Puerto Rico. The Singapore tax holiday is effective through 2018 while the Puerto Rico tax holiday is effective through 2025. Both incentives are conditional on meeting certain employment and/or investment thresholds. The impact of these tax holidays decreased foreign taxes by $3.6 million in fiscal 2017, $4.1 million for fiscal 2016 and $4.3 million for fiscal 2015. The benefit of the tax holidays on net income per share (diluted) was $0.05, $0.06 and $0.07 for fiscal 2017, 2016 and 2015, respectively.
With regard to our non-U.S. subsidiaries, it is our practice and intention to reinvest the earnings in those businesses, to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, no U.S. deferred income taxes or foreign withholding taxes have been provided. As of September 30, 2017, we have approximately $335.9 million of undistributed earnings in our non-U.S. subsidiaries that are considered to be permanently reinvested. If such earnings were repatriated, additional tax expense may result. It is not practicable to estimate the amount of deferred tax liability related to these undistributed earnings due to the assumptions necessary to compute the tax.
We file a consolidated federal income tax return as well as multiple state, local and foreign jurisdiction tax returns. In the normal course of business, we are subject to examination by the taxing authorities in each of the jurisdictions where we file tax returns. During fiscal 2017, the Internal Revenue Service ("IRS") concluded its audit for fiscal year 2015 and initiated its post-filing examination of the fiscal 2016 consolidated federal return. We continue to participate in the IRS Compliance Assurance Program ("CAP") for fiscal year 2017 and 2018 and have submitted the application to remain in the CAP for fiscal year 2019. The CAP provides the opportunity for the IRS to review certain tax matters prior to us filing our tax return for the year, thereby reducing the time it takes to complete the post-filing examination. We are also subject to state and local or foreign income tax examinations by taxing authorities for years back to fiscal 2013.
We also have on-going audits in various stages of completion in several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $0.5 million to $1.0 million in the next twelve months, excluding interest.
The total amount of gross unrecognized tax benefits as of September 30, 2017, 2016 and 2015 was $4.5 million, $5.1 million and $5.8 million, which includes $3.3 million, $3.6 million and $3.3 million that, if recognized, would impact the effective tax rate in future periods. The remaining amount relates to items which, if recognized, would not impact our effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | Year Ended September 30 |
| | 2017 | | 2016 | | 2015 |
Balance at October 1 | | 5.1 |
| | 5.8 |
| | 4.1 |
|
Increases in tax position of prior years | | 0.1 |
| | 0.8 |
| | 0.4 |
|
Decreases in tax position of prior years | | — |
| | (0.1 | ) | | (1.3 | ) |
Settlements with taxing authorities | | — |
| | (0.3 | ) | | (1.2 | ) |
Lapse of applicable statute of limitations | | (0.8 | ) | | (0.5 | ) | | (1.3 | ) |
Change in positions due to acquisitions | | — |
| | (0.6 | ) | | 5.5 |
|
Foreign currency adjustments | | 0.1 |
| | — |
| | (0.4 | ) |
Total change | | (0.6 | ) |
| (0.7 | ) |
| 1.7 |
|
Balance at September 30 | | $ | 4.5 |
|
| $ | 5.1 |
|
| $ | 5.8 |
|
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties, which are not presented in the reconciliation table above, were $2.6 million, $3.0 million and $3.0 million at September 30, 2017, 2016 and 2015, respectively. Related to interest and penalties, we recognized an income tax benefit of $0.4 million in 2017 and $0.2 million in 2015. There was no income tax impact of interest or penalties in 2016.