INCOME TAXES
On December 22, 2017, the Tax Act was signed into law. The Tax Act made numerous changes to many aspects of U.S. corporate income taxation by, among other things, lowering the corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earning of foreign subsidiaries. As a result of the Tax Act, the Company revalued its net deferred tax liabilities to reflect the tax rate expected to apply in the years in which the temporary differences are expected to reverse. This resulted in an approximate $123.2 million tax benefit.
The Tax Act provides a full dividends received deduction for any future dividends from non-U.S. subsidiaries to their U.S. parent company. The Tax Act also imposes a one-time deemed repatriation of accumulated post-1986 foreign earnings which have not been previously taxed. The Company recorded a provisional estimate for this transition tax of approximately $7.5 million. Through the third quarter of 2017 the Company had recorded taxes of approximately $46.7 million on the amount of basis difference in foreign subsidiaries which is not indefinitely reinvested. In the fourth quarter of 2017, the Company has recorded a benefit to reflect the reduced rate at which any remaining basis difference will be taxed.
The SEC staff issued SAB 118 to address the application of 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 Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have recognized a net tax benefit of $162.4 million for the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 30, 2017. We are in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We expect to complete our analysis within the measurement period in accordance with SAB 118.
Relevant to the current consolidated financial statements is the Company's selection of an accounting policy with respect to the new Global Intangible Low-Tax Income ("GILTI"). The Company will elect to treat the GILTI as a period cost, therefore no deferred tax effects have been recorded.
Income tax (benefit)/expense from continuing operations for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 consists of the following:
|
| | | | | | | | | | | | |
(in thousands) | | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 7,014 |
| | $ | 920 |
| | $ | 22,479 |
|
State and other | | 1,726 |
| | 4,387 |
| | 3,842 |
|
Foreign | | 211 |
| | — |
| | 131 |
|
| | $ | 8,951 |
| | $ | 5,307 |
| | $ | 26,452 |
|
Deferred: | | | | | | |
Federal | | $ | (153,957 | ) | | $ | 23,413 |
| | $ | 3,109 |
|
State and other | | 1,562 |
| | (370 | ) | | (676 | ) |
Foreign | | (2,700 | ) | | (3,030 | ) | | — |
|
| | $ | (155,095 | ) | | $ | 20,013 |
| | $ | 2,433 |
|
Income tax (benefit)/expense | | $ | (146,144 | ) | | $ | 25,320 |
| | $ | 28,885 |
|
The foreign provision for income taxes is based on a foreign pre-tax loss of $61.3 million in 2017, $35.0 million in 2016 and foreign pre-tax earnings of $0.4 million in 2015. All accumulated earnings and profits of foreign subsidiaries are deemed to have been remitted as part of the one-time transition tax. Future earnings of our foreign subsidiaries will be considered to be indefinitely reinvested.
Reconciliations of the federal income tax rate to our effective income tax rate for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 are as follows:
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| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes, net of federal income tax benefit | 173.7 | % | | 3.9 | % | | 2.6 | % |
Net favorable foreign income taxes as a result of tax adjustments and tax rate differences | 162.3 | % | | (3.7 | )% | | — | % |
Effect of US rate change in year of enactment | (12,852.9 | )% | | — | % | | — | % |
Effect of U.K. rate change in year of enactment | — | % | | (1.9 | )% | | — | % |
Non-deductible goodwill on sale of route businesses | 3.2 | % | | 0.1 | % | | 0.4 | % |
Deduction for inventory contributions | (100.5 | )% | | (0.5 | )% | | (0.3 | )% |
Meals and entertainment | 20.3 | % | | 0.7 | % | | 0.5 | % |
IRC 199 deduction | — | % | | — | % | | (2.6 | )% |
Change in uncertain tax positions | (48.6 | )% | | 0.8 | % | | (1.5 | )% |
Non-deductible transaction costs | 59.8 | % | | 4.7 | % | | 2.0 | % |
Excess tax benefits for share-based payments | (548.0 | )% | | — | % | | — | % |
Goodwill impairment | 1,275.0 | % | | — | % | | — | % |
Executive compensation | 239.8 | % | | — | % | | — | % |
Miscellaneous items, net | 13.4 | % | | (1.4 | )% | | 0.2 | % |
Effective income tax rate | (11,567.5 | )% | | 37.7 | % | | 36.3 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 30, 2017 and December 31, 2016, are presented below:
|
| | | | | | | | |
(in thousands) | | 2017 | | 2016 |
Deferred tax assets: | | | | |
Reserves for employee compensation, deductible when paid for income tax purposes, accrued for financial reporting purposes | | $ | 11,762 |
| | $ | 28,560 |
|
Reserves for insurance claims, deductible when paid for income tax purposes, accrued for financial reporting purposes | | 3,421 |
| | 4,850 |
|
Other reserves, deductible when paid for income tax purposes, accrued for financial reporting purposes | | 10,858 |
| | 14,947 |
|
Basis difference in fixed rate debt | | — |
| | 187 |
|
Inventories, principally due to additional costs capitalized for income tax purposes | | 3,587 |
| | 4,790 |
|
Federal NOLs and tax credit carryforwards | | 42,443 |
| | 83,157 |
|
Net state operating loss and tax credit carryforwards | | 30,439 |
| | 24,123 |
|
Total gross deferred tax assets | | $ | 102,510 |
| | $ | 160,614 |
|
Less valuation allowance | | (14,170 | ) | | (11,283 | ) |
Net deferred tax assets | | $ | 88,340 |
| | $ | 149,331 |
|
Deferred tax liabilities: | | | | |
Fixed assets, principally due to differences in depreciation, net of impairment reserves | | $ | (38,439 | ) | | $ | (56,851 | ) |
Intangible assets, principally due to differences in amortization and acquisition basis differences | | (264,472 | ) | | (405,060 | ) |
Employee compensation, principally due to change in method of accounting | | — |
| | (1,278 | ) |
Unrealized gains, taxable when realized for income tax purposes, included in other comprehensive income | | (3,405 | ) | | (4,040 | ) |
Basis difference in noncurrent investments | | (6,371 | ) | | (8,298 | ) |
Unremitted foreign earnings | | — |
| | (42,211 | ) |
Prepaid expenses and other costs deductible for tax, amortized for financial reporting purposes | | (2,659 | ) | | (4,417 | ) |
Total gross deferred tax liabilities | | $ | (315,346 | ) | | $ | (522,155 | ) |
| | | | |
Deferred income taxes, net | | $ | (227,006 | ) | | $ | (372,824 | ) |
Included in the deferred income taxes, net above are $7.9 million and $5.4 million of deferred tax assets, which are included in Other noncurrent assets on the consolidated balance sheets as of December 30, 2017 and December 31, 2016, respectively.
As of December 30, 2017, we have approximately $20.2 million of state tax loss carryforwards available to offset future taxable income. Most of these loss carryforwards expire at various times between 2018 and 2036. Based on projected income levels and our future state tax profile, we believe it is more likely than not that several of these loss carryforwards will not be utilized prior to their expiration. Therefore, a valuation allowance of approximately $4.6 million has been established to account for the expected realizable value of the state loss carryforwards.
As of December 30, 2017, we have approximately $11.1 million of state tax credits available to offset future tax liabilities. Most of these credits expire at the end of 2023. Based on projected income levels and our future state tax profile, we believe it is more likely than not that most of these credits will not be utilized prior to their expiration. Therefore, a valuation allowance of approximately $9.6 million has been established to account for the expected realizable valuation of the state tax credits.
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. The effective income tax rate is lower than the federal statutory rate primarily due to the Tax Act which was signed into law on December 22, 2017. The effect of state and local taxes on the 2017 and 2016 effective tax rate includes the impact of a revaluation of deferred tax assets and liabilities due to enacted changes in the statutory rates in various state jurisdictions.
We have recorded gross unrecognized tax benefits, as of December 30, 2017, totaling $4.8 million and related interest and penalties of $0.7 million in other noncurrent liabilities on the Consolidated Balance Sheets. Approximately $4.7 million would affect the effective tax rate if subsequently recognized. This amount includes $0.6 million and $0.1 million of interest and penalties, respectively. We expect certain income tax audits will be settled, positions will be resolved through administrative procedures or statutes of limitations will expire for various tax authorities during the next twelve months, resulting in a potential $0.8 million reduction of the unrecognized tax benefit. We classify interest and penalties associated with income tax positions within income tax expense.
We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:
|
| | |
Jurisdiction | | Open Years |
US federal | | 2014 and forward |
California | | 2011 and forward |
North Carolina | | 2014 and forward |
New York | | 2014 and forward |
Illinois | | 2014 and forward |
United Kingdom | | 2016 and forward |
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
|
| | | | |
(in thousands) | | Amount |
Balance at January 2, 2016 | | $ | 2,735 |
|
Additions for tax positions taken during the current period | | 653 |
|
Additions for tax positions taken during a prior period | | 873 |
|
Additions for positions resulting from business combination | | 2,425 |
|
Reductions resulting from a lapse of the statute of limitations | | (852 | ) |
Balance at December 31, 2016 | | $ | 5,834 |
|
Additions for tax positions taken during the current period | | 400 |
|
Additions for tax positions taken during a prior period | | 248 |
|
Reductions resulting from a lapse of the statute of limitations | | (1,650 | ) |
Balance at December 30, 2017 | | $ | 4,832 |
|