Income Taxes
The Company accounts for income taxes using the asset and liability approach as prescribed by ASC Topic 740, Income Taxes (“ASC 740”). This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax liabilities and assets are determined based on the differences between the financial reporting and the tax basis of an asset or liability.
The provision for income taxes consists of the following components (in millions):
|
| | | | | | | | | | | |
| Year Ended August 31, |
| 2017 | | 2016 | | 2015 |
Provision for current federal taxes | $ | 151.2 |
| | $ | 139.6 |
| | $ | 101.5 |
|
Provision for current state taxes | 20.4 |
| | 17.6 |
| | 13.1 |
|
Provision for current foreign taxes | 7.0 |
| | 5.1 |
| | 4.3 |
|
(Benefit) provision for deferred taxes | (7.7 | ) | | (8.5 | ) | | 2.6 |
|
Total provision for income taxes | $ | 170.9 |
| | $ | 153.8 |
| | $ | 121.5 |
|
A reconciliation of the provision at the federal statutory rate to the total provision for income taxes is as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended August 31, |
| 2017 | | 2016 | | 2015 |
Federal income tax computed at statutory rate | $ | 172.4 |
| | $ | 155.6 |
| | $ | 120.3 |
|
State income tax, net of federal income tax benefit | 12.2 |
| | 11.0 |
| | 8.6 |
|
Foreign permanent differences and rate differential | (1.6 | ) | | (2.0 | ) | | (1.4 | ) |
Other, net | (12.1 | ) | | (10.8 | ) | | (6.0 | ) |
Total provision for income taxes | $ | 170.9 |
| | $ | 153.8 |
| | $ | 121.5 |
|
Components of the net deferred income tax liabilities at August 31, 2017 and 2016 include (in millions):
|
| | | | | | | |
| August 31, |
| 2017 | | 2016 |
Deferred income tax liabilities: | |
| | |
|
Depreciation | $ | (20.0 | ) | | $ | (22.5 | ) |
Goodwill and intangibles | (194.9 | ) | | (161.6 | ) |
Other liabilities | (4.0 | ) | | (3.7 | ) |
Total deferred income tax liabilities | (218.9 | ) | | (187.8 | ) |
Deferred income tax assets: | |
| | |
|
Self-insurance | 4.1 |
| | 4.0 |
|
Pension | 33.7 |
| | 41.7 |
|
Deferred compensation | 32.9 |
| | 28.9 |
|
Net operating losses | 13.7 |
| | 14.3 |
|
Other accruals not yet deductible | 33.3 |
| | 33.5 |
|
Other assets | 10.6 |
| | 12.3 |
|
Total deferred income tax assets | 128.3 |
| | 134.7 |
|
Valuation allowance | (14.2 | ) | | (16.4 | ) |
Net deferred income tax liabilities | $ | (104.8 | ) | | $ | (69.5 | ) |
The Company currently intends to indefinitely reinvest all undistributed earnings of and original investments in foreign subsidiaries unless it is determined future repatriation would give rise to little or no net tax costs. Undistributed earnings amounted to $96.7 million at August 31, 2017; however, this amount could fluctuate due to changes in business, economic, or other conditions. Undistributed earnings is the most significant component of the basis difference, which is indefinitely reinvested. If these undistributed earnings were distributed to the U.S. in the form of dividends or otherwise or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liabilities related to these earnings or investments is not practicable.
At August 31, 2017, the Company had state tax credit carryforwards of approximately $0.9 million, which will expire beginning in 2018. At August 31, 2017, the Company had federal net operating loss carryforwards of $23.3 million that expire beginning in 2030, state net operating loss carryforwards of $9.9 million that begin expiring in 2018, and foreign net operating loss carryforwards of $21.2 million that begin expiring in 2018.
The gross amount of unrecognized tax benefits as of August 31, 2017 and 2016 totaled $6.0 million and $5.2 million, respectively, which includes $4.4 million and $3.9 million, respectively, of net unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense; such accrued interest and penalties are not material. With few exceptions, the Company is no longer subject to United States federal, state, and local income tax examinations for years ended before 2013 or for foreign income tax examinations before 2011. The Company does not anticipate unrecognized tax benefits will significantly increase or decrease within the next twelve months.
A reconciliation of the change in the unrecognized income tax benefit (reported in Other long-term liabilities on the Consolidated Balance Sheets) for the years ended August 31, 2017 and 2016 is as follows (in millions):
|
| | | | | | | |
| Year Ended August 31, |
| 2017 | | 2016 |
Unrecognized tax benefits balance at beginning of year | $ | 5.2 |
| | $ | 4.5 |
|
Additions based on tax positions related to the current year | 1.2 |
| | 1.0 |
|
Additions for tax positions of prior years | 0.4 |
| | 0.5 |
|
Reductions due to lapse of statute of limitations | (0.8 | ) | | (0.8 | ) |
Unrecognized tax benefits balance at end of year | $ | 6.0 |
| | $ | 5.2 |
|
Total accrued interest was $1.0 million and $0.9 million as of August 31, 2017 and 2016, respectively. There were no accruals related to income tax penalties during fiscal 2017. Interest, net of tax benefits, and penalties are included in income tax expense. The classification of interest and penalties did not change during the current fiscal year.