Note 15: Income Taxes
The Company's geographic sources of income before income taxes and non-controlling interest are as follows (in millions):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (270.1 | ) | | $ | (287.0 | ) | | $ | (102.7 | ) |
Foreign | 817.6 |
| | 467.6 |
| | 322.5 |
|
| $ | 547.5 |
| | $ | 180.6 |
| | $ | 219.8 |
|
The Company's provision (benefit) for income taxes is as follows (in millions):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 26.3 |
| | $ | (0.1 | ) | | $ | — |
|
State and local | 0.2 |
| | 0.1 |
| | 2.0 |
|
Foreign | 53.1 |
| | 34.4 |
| | 21.3 |
|
| 79.6 |
| | 34.4 |
| | 23.3 |
|
Deferred: | | | | | |
Federal | (356.3 | ) | | 60.8 |
| | 0.4 |
|
State and local | 0.4 |
| | — |
| | (1.4 | ) |
Foreign | 10.8 |
| | (99.1 | ) | | (11.5 | ) |
| (345.1 | ) | | (38.3 | ) | | (12.5 | ) |
Total provision (benefit) | $ | (265.5 | ) | | $ | (3.9 | ) | | $ | 10.8 |
|
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
|
| | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) resulting from: | | | | | | |
State and local taxes, net of federal tax benefit | | 2.2 |
| | (3.6 | ) | | (1.0 | ) |
Impact of U.S. Tax Reform and related effects (1) | | (82.2 | ) | | — |
| | — |
|
Impact of foreign operations | | (1.5 | ) | | (8.1 | ) | | (39.8 | ) |
Reversal of prior years’ indefinite reinvestment assertion | | — |
| | 172.1 |
| | — |
|
Dividend income from foreign subsidiaries | | — |
| | 0.2 |
| | 85.5 |
|
Change in valuation allowance and related effects (2) | | 0.4 |
| | (190.7 | ) | | (75.3 | ) |
Nondeductible acquisition costs | | — |
| | 1.9 |
| | 0.1 |
|
Nondeductible share-based compensation costs | | (1.6 | ) | | 0.7 |
| | 0.9 |
|
U.S. federal R&D credit
| | (1.5 | ) | | (10.1 | ) | | — |
|
Other | | 0.7 |
| | 0.4 |
| | (0.5 | ) |
Total | | (48.5 | )% | | (2.2 | )% | | 4.9 | % |
(1) Includes the benefit of $744.1 million, or 135.9% for the reduction in the Company's deferred tax liability for undistributed current and prior years' earnings of the Company's foreign subsidiaries and the benefit of $33.0 million, or 6.0% for the release of valuation allowance on federal foreign tax credit carryforwards which were utilized against the mandatory repatriation tax. These benefits are offset by the expense for the mandatory repatriation tax, net of uncertain tax positions, of $207.1 million, or 37.8% and expense related to the change in the federal rate from 35% to 21% of $120.1 million, or 21.9% on the Company's remaining net federal deferred tax asset balances.
(2) The Company has included the benefit related to the change in valuation allowance on federal foreign tax credits which were previously set to expire unutilized but were utilized against the expense related to the mandatory repatriation tax $33.0 million 6.0%, in the line “Impact of U.S. Tax Reform and related effects”
The Company's effective tax rate for 2017 was a benefit of 48.5%, which differs from the U.S. federal statutory income tax rate of 35% primarily due to U.S. tax reform codified under the Tax Act. The Company's effective tax rate for 2016 was a benefit of 2.2%, which differs from the U.S. federal statutory income tax rate of 35% primarily due to the release of its U.S. and Japan valuation allowances, partially offset by the reversal of the prior years' indefinite reinvestment assertion. The Company's effective tax rate for 2015 was a provision of 4.9%, which differs from the U.S. federal statutory income tax rate of 35% primarily due to its change in valuation allowance, deemed dividend income from foreign subsidiaries and tax rate differential in its foreign subsidiaries.
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the net deferred tax asset (liability) as of December 31, 2017 and December 31, 2016 are as follows (in millions):
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 |
Net operating loss and tax credit carryforwards | | $ | 738.4 |
| | $ | 978.1 |
|
Tax-deductible goodwill and amortizable intangibles | | (29.1 | ) | | (57.1 | ) |
Reserves and accruals | | 49.8 |
| | 51.7 |
|
Property, plant and equipment | | (42.8 | ) | | (60.9 | ) |
Inventories | | 24.5 |
| | 42.1 |
|
Undistributed earnings of foreign subsidiaries | | (32.5 | ) | | (639.1 | ) |
Share-based compensation | | 9.2 |
| | 14.3 |
|
Pension | | 21.1 |
| | 21.5 |
|
Debt financing costs | | (9.9 | ) | | (40.8 | ) |
Other | | 17.6 |
| | 14.3 |
|
Deferred tax assets and liabilities before valuation allowance | | 746.3 |
| | 324.1 |
|
Valuation allowance | | (462.3 | ) | | (474.1 | ) |
Net deferred tax asset (liability) | | $ | 284.0 |
| | $ | (150.0 | ) |
On December 22, 2017, the U.S. enacted comprehensive tax legislation, the Tax Act. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, and requires companies to pay a one-time mandatory repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain future foreign earnings. In December 2017 the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Tax Act; however, in certain cases, specifically as follows, the Company has made a reasonable estimate of (i) the effects on its existing deferred tax balances and (ii) the effects of the one-time mandatory repatriation tax. The Company has recognized a provisional tax benefit of $449.9 million in the year ended December 31, 2017 associated with the items it could reasonably estimate as described in the reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate table. The Company is still analyzing the Tax Act and refining its calculations, which could potentially impact the measurement of its tax balances. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
As of December 31, 2017, all benefits related to excess tax deductions from employee equity exercises are included in the Company’s NOL deferred tax asset due to the adoption of ASU 2016-09 as of the first quarter of 2017. As of December 31, 2016, the Company’s deferred tax assets do not include $194.5 million of excess tax deductions from employee equity exercises.
As of December 31, 2017 and 2016, the Company had approximately $1,198.6 million and $1,203.6 million, respectively, of federal NOL carryforwards, before reduction for uncertain tax positions, which are subject to annual limitations prescribed in Section 382 of the Code. If not utilized, a portion of the NOLs will expire in varying amounts from 2021 to 2036.
As of December 31, 2017 and 2016, the Company had approximately $46.0 million and $211.9 million, respectively, of federal credit carryforwards, before consideration of valuation allowance or reduction for uncertain tax positions, which are subject to annual limitations prescribed in Section 383 of the Code. The decrease is primarily due to utilization of $191.1 million of credits to offset the mandatory repatriation tax liability. If not utilized, a portion of the credits will expire in varying amounts from 2033 to 2037.
As of December 31, 2017 and 2016, the Company had approximately $790.3 million and $1,191.2 million, respectively, of state NOL carryforwards, before consideration of valuation allowance or reduction for uncertain tax positions. The decrease is primarily due to expiration. If not utilized, a portion of the NOLs will expire in varying amounts from 2018 to 2037. As of December 31, 2017 and 2016, the Company had $107.2 million and $129.0 million, respectively, of state credit carryforwards before consideration of valuation allowance or reduction for uncertain tax positions. If not utilized, a portion of the credits will begin to expire in varying amounts starting in 2018.
As of December 31, 2017 and 2016, the Company had approximately $1,103.0 million and $1,078.8 million, respectively, of foreign NOL carryforwards, before consideration of valuation allowance or reduction for uncertain tax positions. If not utilized, a portion of the NOLs will begin to expire in varying amounts starting in 2018. As of December 31, 2017 and 2016, the Company had $65.3 million and $50.5 million, respectively, of foreign credit carryforwards before consideration of valuation allowance. The majority of these credits have an indefinite life and do not expire.
In 2016, the Company reassessed its need for a valuation allowance for the Japan consolidated group. Due to the Company’s recent trend of positive operating results, which resulted in the Japan group being in a cumulative twelve-quarter income position as of the period ended December 31, 2016, as well as the realignment of the former System Solutions Group segment, the Company realized an $89.4 million net tax benefit related to the release of a portion of its valuation allowance, to reflect the amount of its deferred tax assets which are expected to be realized in future years. The Company continues to maintain a valuation allowance on a portion of its Japan NOLs, or $302.0 million, which expire in varying amounts from 2018 to 2024.
In addition to the valuation allowance mentioned above on Japan NOLs, as of December 31, 2017 and 2016, the Company continues to maintain a full valuation allowance on its U.S. state deferred tax assets, and a valuation allowance on foreign NOLs and tax credits in certain other foreign jurisdictions.
The consummation of the Fairchild acquisition during 2016 caused the Company to reassess its prior years’ indefinite reinvestment assertion because of the U.S. debt incurred to fund the acquisition. See Note 8: ''Long-Term Debt'' for additional information. This resulted in a change in judgment regarding the Company’s future cash flows by jurisdiction and its prior years’ indefinite reinvestment assertion. The change in assertion, which resulted in recording a deferred tax liability for future U.S. taxes, had a direct impact on the Company’s judgment about the realizability of its U.S. federal deferred tax assets which resulted in a release of valuation allowance. The change in the Company’s prior years’ indefinite reinvestment assertion resulted in an increase to income tax expense of $310.8 million, which was partially offset by a benefit of $267.9 million relating to the release of valuation allowance. The reversal of the prior years' indefinite reinvestment assertion and release of the U.S. federal valuation allowance did not have an effect on the Company’s cash taxes. At December 31, 2016, the Company was not indefinitely reinvested with respect to any of its foreign earnings.
In 2017, the Company reevaluated its indefinite reinvestment assertion because of the fundamental change in the U.S. approach to taxing international operations under the Tax Act. As a result, the Company has indefinitely reinvested certain foreign earnings. Therefore, tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in its foreign subsidiaries that are considered indefinitely reinvested. The excess of the amount for financial reporting over the tax basis for which the Company is indefinitely reinvested is $226.3 million as of December 31, 2017, and the related unrecognized deferred income tax liability is $9.9 million. However, substantially all of the Company’s foreign earnings continue to not be indefinitely reinvested at December 31, 2017.
The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. The Company is currently under examination by various taxing authorities. Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its consolidated financial statements for any additional taxes that the Company may be required to pay as a result of such examinations. If the payment ultimately proves not to be necessary, the reversal of these tax liabilities would result in tax benefits being recognized in the period the Company determines such liabilities are no longer necessary. However, if an ultimate tax assessment exceeds the Company's estimate of tax liabilities, additional tax expense will be recorded. The impact of such adjustments could have a material impact on the Company's results of operations in future periods.
The activity for unrecognized gross tax benefits for 2017, 2016, and 2015 is as follows (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 136.7 |
| | $ | 33.5 |
| | $ | 31.2 |
|
Acquired balances
| — |
| | 86.9 |
| | — |
|
Additions for tax positions related to the current year | 23.6 |
| | 4.6 |
| | 9.2 |
|
Additions for tax positions of prior years | 4.7 |
| | 13.7 |
| | 3.4 |
|
Reductions for tax positions of prior years | (1.6 | ) | | (0.4 | ) | | (6.9 | ) |
Lapse of statute | (16.3 | ) | | (1.6 | ) | | (3.3 | ) |
Settlements | (4.9 | ) | | — |
| | (0.1 | ) |
Change in rate due to U.S. Tax Reform | (27.4 | ) | | — |
| | — |
|
Balance at end of year | $ | 114.8 |
| | $ | 136.7 |
| | $ | 33.5 |
|
For the period ended December 31, 2016, the Company performed a U.S. R&D tax credit study which covered the years from 2012 to 2015. The results of the study were recorded during the period ended December 31, 2016. As a result the uncertain tax position related to the outcome of the prior year study was also recorded.
Included in the December 31, 2017 balance of $114.8 million is $114.0 million related to unrecognized tax positions that, if recognized, would impact the annual effective tax rate. Although the Company cannot predict the timing of resolution with taxing authorities, if any, the Company believes it is reasonably possible that its unrecognized tax positions will be reduced by $8.3 million in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company recognizes interest and penalties accrued in relation to unrecognized tax benefits in tax expense. The Company recognized approximately $1.5 million of tax expenses for interest and penalties during the year ended December 31, 2017, and recognized approximately $0.5 million and $0.9 million of tax expenses for interest and penalties during the years ended December 31, 2016 and 2015, respectively. The Company had approximately $5.9 million, $4.4 million, and $3.9 million of accrued interest and penalties at December 31, 2017, 2016, and 2015, respectively.
Tax years prior to 2013 are generally not subject to examination by the IRS except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. The Company is not currently under IRS examination. For state returns, the Company is generally not subject to income tax examinations for years prior to 2012. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to major jurisdictions outside the United States, the Company's subsidiaries are no longer subject to income tax audits for years prior to 2007. The Company is currently under audit in the following significant jurisdictions: China, Malaysia, Philippines, Singapore and Vietnam.