NOTE 7 — INCOME TAXES
Significant components of the provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
Year ended January 31: | 2018 | | 2017 | | 2016 |
Current tax expense: | | | | | |
Federal | $ | 131,107 |
| | $ | 37,724 |
| | $ | 71,502 |
|
State | 6,515 |
| | 4,030 |
| | 5,989 |
|
Foreign | 49,082 |
| | 30,914 |
| | 36,804 |
|
Total current tax expense | 186,704 |
| | 72,668 |
| | 114,295 |
|
Deferred tax (benefit) expense: | | | | | |
Federal | (1,129 | ) | | (8,380 | ) | | (3,984 | ) |
State | 363 |
| | (799 | ) | | 543 |
|
Foreign | (3,495 | ) | | (1,823 | ) | | 5,828 |
|
Total deferred tax (benefit) expense | (4,261 | ) | | (11,002 | ) | | 2,387 |
|
| $ | 182,443 |
| | $ | 61,666 |
| | $ | 116,682 |
|
The reconciliation of the U.S. federal statutory tax rate to the effective tax rate is as follows:
|
| | | | | | | | |
Year ended January 31: | 2018 | | 2017 | | 2016 |
U.S. statutory rate | 33.8 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 1.1 |
| | 0.8 |
| | 1.1 |
|
Net changes in deferred tax valuation allowances | 1.2 |
| | (3.4 | ) | | 0.0 |
|
Tax on foreign earnings different than U.S. rate | (6.7 | ) | | (9.9 | ) | | (7.4 | ) |
Nondeductible interest | 1.0 |
| | 2.1 |
| | 1.6 |
|
Effect of company-owned life insurance | (1.0 | ) | | (0.7 | ) | | 0.2 |
|
U.S. Tax Reform transition tax | 33.8 |
| | 0.0 |
| | 0.0 |
|
U.S. Tax Reform impact of rate change on deferred taxes | (1.9 | ) | | 0.0 |
| | 0.0 |
|
Other, net | (0.3 | ) | | 0.1 |
| | 0.0 |
|
| 61.0 | % | | 24.0 | % | | 30.5 | % |
U.S. Tax Reform
On December 22, 2017, the U.S. federal government enacted the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) which significantly revised U.S. corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. Due to the complexities involved in accounting for U.S. Tax Reform, the SEC issued Staff Accounting Bulletin (“SAB”) 118 which requires that the Company include in its financial statements the reasonable estimate of the impact of U.S. Tax Reform on earnings to the extent such reasonable estimate has been determined. Accordingly, in fiscal 2018, the Company recorded income tax expenses of $95.4 million, which represents the Company’s reasonable estimate of the impact of enactment of U.S. Tax Reform. The amounts recorded include income tax expenses of $101.1 million for the transition tax and a net income tax benefit of $5.7 million related to the remeasurement of net deferred tax liabilities as a result of the change in the U.S. federal corporate income tax rate.
SAB 118 allows the Company to report provisional amounts within a measurement period up to one year due to the complexities inherent in adopting the changes. The Company considers both the recognition of the transition tax and the remeasurement of deferred taxes incomplete. The final impact from the enactment of U.S. Tax Reform may differ from the reasonable estimate of $95.4 million due to substantiation of foreign-based earnings and profits and foreign tax credits and the utilization of those foreign tax credits. Additionally, new guidance from regulators, interpretation of the law, and refinement of the Company’s estimates from ongoing analysis of data and tax positions may change the provisional amounts recorded. Any changes in the provisional amount recorded will be reflected in income tax expense in the period they are identified.
Additionally, U.S. Tax Reform subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The Company can make an accounting policy election to either treat taxes due on the GILTI as a current period expense, or factor such amounts into our measurement of deferred taxes. Given the complexity of the GILTI provisions, the Company is still evaluating and has not yet determined its accounting policy.
At January 31, 2018, there are $959.4 million of consolidated cumulative undistributed earnings of foreign subsidiaries. Historically, such earnings were indefinitely reinvested outside of the United States. Due to the enactment of US Tax Reform, the Company is currently in the process of evaluating this position. As a result, deferred tax liabilities with respect to state income taxes and foreign withholding taxes have not been provided on undistributed earnings of foreign subsidiaries, however, the Company does not expect that the amount would be material to its consolidated financial statements.
The components of pretax income are as follows (in thousands): |
| | | | | | | | | | | |
Year ended January 31: | 2018 | | 2017 | | 2016 |
U.S. | $ | 115,041 |
| | $ | 92,067 |
| | $ | 195,219 |
|
Foreign | 184,043 |
| | 164,694 |
| | 187,199 |
|
| $ | 299,084 |
| | $ | 256,761 |
| | $ | 382,418 |
|
The significant components of the Company’s deferred tax liabilities and assets are as follows (in thousands): |
| | | | | | | |
As of January 31: | 2018 | | 2017 |
Deferred tax liabilities: | | | |
Depreciation and amortization | $ | 106,560 |
| | $ | 48,910 |
|
Capitalized marketing program costs | 6,104 |
| | 7,525 |
|
Goodwill | 16,496 |
| | 7,581 |
|
Deferred costs currently deductible | 7,558 |
| | 4,110 |
|
Other, net | 12,540 |
| | 5,241 |
|
Total deferred tax liabilities | 149,258 |
| | 73,367 |
|
Deferred tax assets: | | | |
Accrued liabilities | 54,970 |
| | 41,509 |
|
Loss carryforwards | 127,881 |
| | 92,338 |
|
Amortizable goodwill | 1,377 |
| | 2,191 |
|
Depreciation and amortization | 13,997 |
| | 4,547 |
|
Disallowed interest expense | 11,057 |
| | 6,249 |
|
Acquisition and transaction related costs | 3,823 |
| | 5,605 |
|
Other, net | 14,527 |
| | 10,928 |
|
| 227,632 |
| | 163,367 |
|
Less: valuation allowances | (80,714 | ) | | (46,764 | ) |
Total deferred tax assets | 146,918 |
| | 116,603 |
|
Net deferred tax (liability) asset | $ | (2,340 | ) | | $ | 43,236 |
|
In fiscal 2018 and 2017, the Company recorded an income tax (expense)/benefit of $(1.2) million and $12.5 million, respectively, related to changes in deferred tax valuation allowances in certain European jurisdictions. The net change in the deferred tax valuation allowances in fiscal 2018 was an increase of $33.9 million primarily resulting from deferred tax valuation allowances recorded in various jurisdictions related to the acquisition of TS. The net change in the deferred tax valuation allowances in fiscal 2017 was a decrease of $13.4 million primarily resulting from the reversal of deferred tax valuation allowances related to certain European jurisdictions as discussed previously.
The valuation allowances at both January 31, 2018 and 2017 primarily relate to foreign net operating loss carryforwards. The Company’s net operating loss carryforwards totaled $576.8 million and $432.8 million at January 31, 2018 and 2017, respectively. The majority of the net operating losses have an indefinite carryforward period with the remaining portion expiring in fiscal years 2019 through 2034. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets. To the extent that the Company generates consistent taxable income within those operations with valuation allowances, the Company may reduce the valuation allowances, thereby reducing income tax expense and increasing net income in the period the determination is made.
The estimates and assumptions used by the Company in computing the income taxes reflected in the Company’s consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when such returns are finalized or the related adjustments are identified.
A reconciliation of the beginning and ending balances of the total amount of gross unrecognized tax benefits, excluding accrued interest and penalties, for the years ended January 31, 2018, 2017 and 2016 is as follows (in thousands):
|
| | | | | | | | | | | |
For the year ended January 31: | 2018 | | 2017 | | 2016 |
Gross unrecognized tax benefits at beginning of period | $ | 18,305 |
| | $ | 12,989 |
| | $ | 5,125 |
|
Increases in tax positions for prior years | 66,180 |
| | 5,443 |
| | 8,443 |
|
Decreases in tax positions for prior years | (3,727 | ) | | (118 | ) | | (348 | ) |
Increases in tax positions for current year | 164 |
| | 1,022 |
| | 106 |
|
Expiration of statutes of limitation | (6,924 | ) | | (292 | ) | | (77 | ) |
Settlements | (3,515 | ) | | (370 | ) | | (104 | ) |
Changes due to translation of foreign currencies | 1,769 |
| | (369 | ) | | (156 | ) |
Gross unrecognized tax benefits at end of period | $ | 72,252 |
| | $ | 18,305 |
| | $ | 12,989 |
|
At January 31, 2018, 2017 and 2016, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $38.1 million, $12.5 million and $10.1 million, respectively. In connection with the acquisition of TS, pursuant to the interest purchase agreement, Avnet agreed to indemnify the Company in relation to certain tax matters. As a result, the Company has recorded certain indemnification assets for expected amounts to be received from Avnet related to liabilities recorded for unrecognized tax benefits. During the year ended January 31, 2018, due to the expiration of statutes of limitation, the Company recorded a benefit in income tax expense of $6.5 million related to the reduction of certain liabilities recorded for unrecognized tax benefits at the date of acquisition. As a result, the Company recorded an expense of $6.5 million during the year ended January 31, 2018, which is included in “selling, general and administrative expenses” in the Consolidated Statement of Income, to reduce the corresponding indemnification asset. The net reduction of these liabilities for unrecognized tax benefits and indemnification assets had no impact on the Company's net income.
Unrecognized tax benefits that have a reasonable possibility of significantly decreasing within the 12 months following January 31, 2018 totaled $35.4 million, including $6.2 million that would impact the effective tax rate if recognized, primarily related to the foreign taxation of certain transactions. Consistent with prior periods, the Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company’s accrued interest at January 31, 2018, would not have a material impact on the effective tax rate if reversed. The provision for income taxes for each of the fiscal years ended January 31, 2018, 2017 and 2016 includes interest expense on unrecognized income tax benefits for current and prior years which is not significant to the Company’s Consolidated Statement of Income. The change in the balance of accrued interest for fiscal 2018, 2017 and 2016, includes the current year end accrual, an interest benefit resulting from the expiration of statutes of limitation, and the translation adjustments on foreign currencies.
The Company conducts business primarily in the Americas, Europe and Asia-Pacific, and as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign tax jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Company is no longer subject to examinations by the Internal Revenue Service for years before fiscal 2015. Income tax returns of various foreign jurisdictions for fiscal 2006 and forward are currently under taxing authority examination or remain subject to audit.