INCOME TAXES
The operations of the Company are included in a consolidated U.S. federal income tax return filed by iHeartMedia. However, for financial reporting purposes, the Company’s provision for income taxes has been computed on the basis that the Company files separate consolidated U.S. federal income tax returns with its subsidiaries.
Significant components of the provision for income tax benefit (expense) are as follows:
|
| | | | | | | | | | | |
(In thousands) | Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Current - federal | $ | — |
| | $ | (270 | ) | | $ | 2,001 |
|
Current - foreign | (43,611 | ) | | (45,322 | ) | | (26,281 | ) |
Current - state | (1,731 | ) | | (1,046 | ) | | (502 | ) |
Total current expense | (45,342 | ) | | (46,638 | ) | | (24,782 | ) |
| | | | | |
Deferred - federal | (89,068 | ) | | (8,259 | ) | | 26,744 |
|
Deferred - foreign | 56,759 |
| | 5,282 |
| | 4,307 |
|
Deferred - state | 976 |
| | (562 | ) | | 2,518 |
|
Total deferred benefit (expense) | (31,333 | ) | | (3,539 | ) | | 33,569 |
|
Income tax benefit (expense) | $ | (76,675 | ) | | $ | (50,177 | ) | | $ | 8,787 |
|
For the year ended December 31, 2016 the Company recorded current tax expense of $45.3 million as compared to $46.6 million for the 2015 year. The current tax expense for 2016 was primarily related to foreign income taxes on operating profits generated in certain jurisdictions during the period.
For the year ended December 31, 2015 the Company recorded current tax expense of $46.6 million compared to $24.8 million for the 2014 year. The change in current tax was due primarily to a reduction in unrecognized tax benefits during 2015, which resulted from the expiration of statutes of limitations to assess taxes in the United Kingdom and several state jurisdictions. This decrease in unrecognized tax benefits resulted in a reduction to current tax expense of $21.8 million during 2014.
Deferred tax expense of $31.3 million was recorded for 2016 compared with a deferred tax expense of $3.5 million for 2015. The change in deferred tax expense is primarily due to the current year utilization of net operating loss carryforwards in the U.S. which offset taxable income from the gains on the sales of nine non-strategic U.S. outdoor markets during the first quarter of 2016 and the sale of the Company's Australia business during the fourth quarter of 2016. The current year federal deferred tax expenses was partially offset by foreign deferred tax benefit attributable to the release of $43.3 million of valuation allowance against certain net operating losses in France. Due to positive evidence that now exists, the Company expects to realize the benefit of these net operating loss carryforwards in the future.
Deferred tax expense of $3.5 million was recorded for 2015 compared with a deferred tax benefit of $33.6 million for 2014. The change in deferred tax is primarily due to the valuation allowance of $32.9 million recorded against the Company's federal and state net operating losses during 2015
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2016 and 2015 are as follows:
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| | | | | | | |
(In thousands) | December 31, | | December 31, |
| 2016 | | 2015 |
Deferred tax liabilities: | | | |
Intangibles and fixed assets | $ | 800,144 |
| | $ | 927,779 |
|
Equity in earnings | 2,816 |
| | 2,374 |
|
Other | 16,971 |
| | 16,036 |
|
Total deferred tax liabilities | 819,931 |
| | 946,189 |
|
Deferred tax assets: | | | |
Accrued expenses | 19,458 |
| | 17,121 |
|
Net operating loss carryforwards | 257,613 |
| | 472,975 |
|
Bad debt reserves | 3,364 |
| | 3,256 |
|
Other | 36,266 |
| | 29,006 |
|
Total deferred tax assets | 316,701 |
| | 522,358 |
|
Less: Valuation allowance | 137,337 |
| | 185,079 |
|
Net deferred tax assets | 179,364 |
| | 337,279 |
|
Net deferred tax liabilities | $ | 640,567 |
| | $ | 608,910 |
|
During the fourth quarter of 2015, the Company elected early adoption of ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. This update requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts.
The deferred tax liabilities associated with intangibles and fixed assets primarily relates to the difference in book and tax basis of acquired billboard permits and tax deductible goodwill created from the Company’s various stock acquisitions. In accordance with ASC 350-10, Intangibles—Goodwill and Other, the Company does not amortize its book basis in permits. As a result, this deferred tax liability will not reverse over time unless the Company recognizes future impairment charges related to its permits and tax deductible goodwill or sells its permits. As the Company continues to amortize its tax basis in its permits and tax deductible goodwill, the deferred tax liability will increase over time. The Company’s net foreign deferred tax assets for the period ending December 31, 2016 were $50.0 million and its foreign deferred tax liabilities for the period ended December 31, 2015 were $6.4 million.
At December 31, 2016, the Company had recorded deferred tax assets for net operating loss carryforwards (tax effected) for federal and state income tax purposes of $105.2 million, which expire in various amounts through 2035. The Company expects to realize the benefits of its deferred tax assets attributable to federal and state net operating losses based upon expected future taxable income from deferred tax liabilities that reverse in the relevant federal and state jurisdictions and carryforward periods. During 2016, the Company released the valuation allowance of $32.9 million that was previously recorded against these deferred tax assets attributable to federal and state net operating losses. The release of valuation allowance was due to the taxable gains that were recognized from the sale of various outdoor markets during the period. In addition, the Company recorded a net decrease of $14.8 million in valuation allowances against its foreign deferred tax assets during the year ended December 31, 2016. At December 31, 2016, the Company had recorded $152.5 million (tax-effected) of deferred tax assets for foreign net operating losses, which are offset in part by an associated valuation allowance of $103.3 million. The remaining deferred tax valuation allowance of $34.0 million offsets other foreign deferred tax assets that are not expected to be realized. Realization of these foreign deferred tax assets is dependent upon the Company’s ability to generate future taxable income in appropriate tax jurisdictions to obtain benefits. Due to the Company’s evaluation of all available evidence, including significant negative evidence of cumulative losses in these jurisdictions, the Company continues to record valuation allowances on the foreign deferred tax assets that are not expected to be realized. The Company expects to realize its remaining gross deferred tax assets based upon its assessment of deferred tax liabilities that will reverse in the same carryforward period and jurisdiction and are of the same character as the net operating loss carryforwards and temporary differences that give rise to the deferred tax assets. Any deferred tax liabilities associated with billboard permits and tax deductible goodwill intangible assets are not relied upon as a source of future taxable income, as these intangible assets have an indefinite life.
At December 31, 2016 and 2015, net deferred tax assets include a deferred tax asset of $14.9 million and $16.4 million, respectively, relating to stock-based compensation expense under ASC 718-10, Compensation—Stock Compensation. Full realization of this deferred tax asset requires stock options to be exercised at a price equaling or exceeding the sum of the grant price plus the fair value of the option at the grant date and restricted stock to vest at a price equaling or exceeding the fair market value at the grant date. Accordingly, there can be no assurance that the stock price of the Company’s Common Stock will rise to levels sufficient to realize the entire deferred tax benefit currently reflected in our balance sheet. See Note 8 for additional discussion of ASC 718-10.
Income (loss) before income taxes:
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| | | | | | | | | | | |
(In thousands) | Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
US | $ | 182,311 |
| | $ | (69,676 | ) | | $ | (87,120 | ) |
Foreign | 58,797 |
| | 48,545 |
| | 95,452 |
|
Total income (loss) before income taxes | $ | 241,108 |
| | $ | (21,131 | ) | | $ | 8,332 |
|
The reconciliation of income tax computed at the U.S. federal statutory rates to income tax benefit is:
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| | | | | | | | | | | | | | | | | |
(In thousands) | Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Income tax benefit (expense) at statutory rates | $ | (84,388 | ) | | 35.0% | | $ | 7,396 |
| | 35.0% | | $ | (2,916 | ) | | 35.0% |
State income taxes, net of federal tax effect | (4,602 | ) | | 1.9% | | 2,238 |
| | 10.6% | | 2,016 |
| | (24.2)% |
Foreign income taxes | (20,725 | ) | | 8.6% | | (23,062 | ) | | (109.1)% | | 11,434 |
| | (137.3)% |
Nondeductible items | (687 | ) | | 0.3% | | (754 | ) | | (3.6)% | | (722 | ) | | 8.7% |
Changes in valuation allowance and other estimates | 34,597 |
| | (14.4)% | | (33,684 | ) | | (159.4)% | | 2,941 |
| | (35.3)% |
Other, net | (870 | ) | | 0.4% | | (2,311 | ) | | (11.0)% | | (3,966 | ) | | 47.6% |
Income tax benefit (expense) | $ | (76,675 | ) | | 31.8% | | $ | (50,177 | ) | | (237.5)% | | $ | 8,787 |
| | (105.5)% |
During 2016, the Company recorded tax expense of approximately $76.7 million. The 2016 income tax expense and 31.8% effective tax rate were impacted primarily by the $32.9 million and $43.3 million deferred tax benefits recorded in connection with the release of valuation allowances in the U.S. and France, respectively. These deferred tax benefits were partially offset by $54.7 million in tax expense attributable to the sale of our Australia outdoor business.
During 2015, the Company recorded tax expense of approximately $50.2 million. The 2015 income tax expense and (237.5)% effective tax rate were impacted primarily by a $32.9 million valuation allowance recorded against the Company’s federal and state net operating losses during 2015. Additionally, the Company recorded additional taxes due to the inability to benefit from losses in certain foreign jurisdictions.
During 2014, the Company recorded tax benefit of approximately $8.8 million. The 2014 income tax benefit and (105.5)% effective tax rate were impacted primarily by the Company's benefits and charges from tax amounts associated with its foreign earnings that are taxed at rates different from the federal statutory rate and an inability to benefit from losses in certain foreign jurisdictions. Additionally, the Company recorded $20.0 million in net tax benefits associated with a decrease in unrecognized tax benefits resulting from the expiration of statutes of limitations to assess taxes in the United Kingdom and several state jurisdictions.
The Company provides for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the United States or would otherwise become taxable upon remittance within our foreign structure. Substantially all of the Company’s undistributed international earnings are intended to be indefinitely reinvested in home country operations outside the United States. If any excess cash held by our foreign subsidiaries were needed to fund operations in the U.S., we could presently repatriate available funds without a requirement to accrue or pay U.S. taxes. This is a result of significant deficits, as calculated for tax law purposes, in our foreign earnings and profits, which give us flexibility to make future cash distributions as non-taxable returns of capital. All tax liabilities owed by the Company are paid either by the Company or on behalf of the Company by iHeartCommunications through an operating account that represents net amounts due to or from iHeartCommunications.
The Company continues to record interest and penalties related to unrecognized tax benefits in current income tax expense. The total amount of interest accrued at December 31, 2016 and 2015, was $3.4 million and $3.6 million, respectively. The total amount of unrecognized tax benefits including accrued interest and penalties at December 31, 2016 and 2015, was $39.7 million and $43.5 million, respectively, of which $23.8 million and $23.8 million is included in “Other long-term liabilities.” In addition, $15.9 million and $19.7 million of unrecognized tax benefits are recorded net with the Company’s deferred tax assets for its net operating losses as opposed to being recorded in “Other long-term liabilities” at December 31, 2016 and 2015, respectively. The total amount of unrecognized tax benefits at December 31, 2016 and 2015 that, if recognized, would impact the effective income tax rate is $18.6 million and $18.2 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
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| | | | | | | | |
(In thousands) | | Years Ended December 31, |
Unrecognized Tax Benefits | | 2016 | | 2015 |
Balance at beginning of period | | $ | 39,908 |
| | $ | 39,143 |
|
Increases for tax position taken in the current year | | 6,996 |
| | 6,311 |
|
Increases for tax positions taken in previous years | | 2,199 |
| | 1,025 |
|
Decreases for tax position taken in previous years | | (6,148 | ) | | (2,009 | ) |
Decreases due to settlements with tax authorities | | (717 | ) | | (689 | ) |
Decreases due to lapse of statute of limitations | | (5,906 | ) | | (3,873 | ) |
Balance at end of period | | $ | 36,332 |
| | $ | 39,908 |
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Pursuant to the Tax Matters Agreement between iHeartCommunications and the Company, the operations of the Company are included in a consolidated U.S. federal income tax return filed by iHeartMedia. In addition, the Company and its subsidiaries file income tax returns in various state and foreign jurisdictions. During 2016 and 2015, the Company reversed $6.2 and $3.9 million in unrecognized tax benefits, inclusive of interest, as a result of the expiration of statutes of limitations to assess taxes in certain state and foreign jurisdictions. During 2016, the Company settled certain tax examinations that resulted in the reduction of uncertain tax positions of $6.8 million, inclusive of interest. All federal income tax matters through 2010 are closed. The Company is currently in appeals with the IRS for its tax returns for the 2011 and 2012 periods. Substantially all material state, local, and foreign income tax matters have been concluded for years through 2008.