INCOME TAXES
Earnings before income taxes shown below are based on the geographic location to which such earnings are attributable.
|
| | | | | | | | | | | | |
| | Years Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| | (in millions) |
Earnings before income taxes: | | | | | | |
U.S. | | $ | 398.6 |
| | $ | 389.2 |
| | $ | 365.4 |
|
Foreign | | 89.5 |
| | 79.7 |
| | 73.5 |
|
Total | | $ | 488.1 |
| | $ | 468.9 |
| | $ | 438.9 |
|
The Provision for income taxes consists of the following components: |
| | | | | | | | | | | | |
| | Years Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| | (in millions) |
Current: | | | | | | |
U.S. Domestic | | $ | 138.2 |
| | $ | 134.9 |
| | $ | 120.8 |
|
Foreign | | 24.8 |
| | 23.9 |
| | 19.8 |
|
State | | 13.0 |
| | 8.5 |
| | 10.6 |
|
Total current | | 176.0 |
| | 167.3 |
| | 151.2 |
|
Deferred: | | | | | | |
U.S. Domestic | | (7.9 | ) | | (7.4 | ) | | 4.5 |
|
Foreign | | (4.2 | ) | | (0.4 | ) | | (0.9 | ) |
State | | (2.5 | ) | | 1.9 |
| | (3.0 | ) |
Total deferred | | (14.7 | ) | | (5.9 | ) | | 0.6 |
|
Total Provision for income taxes | | $ | 161.4 |
| | $ | 161.4 |
| | $ | 151.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended June 30, |
| | 2017 | | % | | 2016 | | % | | 2015 | | % |
| | (in millions) |
Provision for income taxes at U.S. statutory rate | | $ | 170.8 |
| | 35.0 |
| | $ | 164.1 |
| | 35.0 |
| | $ | 153.6 |
| | 35.0 |
|
Increase (decrease) in Provision for income taxes from: | | | | | | | | | | | | |
State taxes, net of federal tax | | 6.7 |
| | 1.4 |
| | 7.0 |
| | 1.5 |
| | 5.8 |
| | 1.3 |
|
Foreign taxes | | (6.9 | ) | | (1.4 | ) | | (5.6 | ) | | (1.2 | ) | | (5.1 | ) | | (1.2 | ) |
Valuation allowances | | (0.6 | ) | | (0.1 | ) | | (0.3 | ) | | (0.1 | ) | | (0.9 | ) | | (0.2 | ) |
Non taxable investment gain | | (3.3 | ) | | (0.7 | ) | | — |
| | — |
| | — |
| | — |
|
Other | | (5.3 | ) | | (1.1 | ) | | (3.8 | ) | | (0.7 | ) | | (1.6 | ) | | (0.3 | ) |
Total Provision for income taxes | | $ | 161.4 |
| | 33.1 |
| | $ | 161.4 |
| | 34.4 |
| | $ | 151.8 |
| | 34.6 |
|
The Provision for income taxes and effective tax rates for the fiscal year ended June 30, 2017 were $161.4 million and 33.1%, compared to $161.4 million and 34.4%, for the fiscal year ended June 30, 2016, respectively. The effective tax for the fiscal year ended June 30, 2017 was impacted by the recognition of the non-cash, nontaxable $9.3 million MAL investment gain. Excluding that investment gain, the effective tax rate for the fiscal year ended June 30, 2017 was 33.7%. In addition to the tax benefit from the MAL investment gain, the effective tax rate also declined as a result of a $2.2 million increase in the current year accrual for the Section 199 domestic production activities deduction relating to prior tax years. The effective tax rate was also positively impacted by approximately 20 basis points due to a more favorable mix of geographical income.
The Provision for income taxes and the effective tax rates for the fiscal year ended June 30, 2016 were $161.4 million and 34.4%, respectively, compared to $151.8 million and 34.6%, for the fiscal year ended June 30, 2015, respectively. The decrease in the effective tax rate was primarily attributable to a greater recognition of tax benefits in the fiscal year 2016 annualized effective tax rate for the current year federal research and development (R&D) tax credit and the Section 199 domestic production activities deduction (the Section 199 deduction) compared to the recognition of such tax benefits in the annualized rate for fiscal year 2015. The additional benefits in the fiscal year 2016 annualized tax rate for the R&D tax credit and the Section 199 deduction compared to fiscal year 2015 resulted in a decrease in the rate of approximately 34 basis points. In addition, the Company recognized more cumulative discrete tax benefits in fiscal year 2016 compared to fiscal year 2015, yielding an additional benefit of approximately 2 basis points to the rate. The cumulative discrete tax benefits in fiscal year 2016 related primarily to larger discrete tax benefits for prior years US federal R&D tax credits and the prior year Section 199 deduction. The gross tax benefit of approximately 36 basis points from the greater recognition in fiscal year 2016 for tax benefits in the annualized rate and excess cumulative discrete items compared to fiscal year 2015 was partially offset by the recognition in fiscal year 2015 of additional US federal tax expense (a decrease of approximately 16 basis points to the rate) attributable to a one-time dividend from a foreign affiliate that was a party to a legal entity reorganization. In fiscal year 2016, the Company’s foreign earnings were approximately 17% of total company earnings before income taxes as compared to fiscal year 2015 when the Company’s foreign earnings were also approximately 17% of total company earnings before income taxes. The geographical mix of income may impact the effective tax rate in future periods as the geographical mix of the Company’s business changes.
As of June 30, 2017, the Company had approximately $430.4 million of accumulated earnings attributable to foreign subsidiaries. The Company considers such earnings as permanently reinvested outside the U.S. and, therefore, provides no additional taxes that could occur upon repatriation. It is not practicable to determine the amount of income taxes payable in the event all such foreign earnings are repatriated.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company’s deferred tax assets and liabilities at June 30, 2017 and 2016 were as follows:
|
| | | | | | | | |
| | June 30, |
| | 2017 | | 2016 |
| | (in millions) |
Classification: | | | | |
Current deferred tax assets (included in Other current assets) | | $ | 26.1 |
| | $ | 19.3 |
|
Long-term deferred tax assets (included in Other non-current assets) | | 2.7 |
| | 1.5 |
|
Current deferred tax liabilities (included in Accrued expenses and other current liabilities) | | (0.8 | ) | | (0.8 | ) |
Long-term deferred tax liabilities | | (82.0 | ) | | (61.6 | ) |
Net deferred tax liabilities | | $ | (54.0 | ) | | $ | (41.6 | ) |
Components: | | | | |
Deferred tax assets: | | | | |
Accrued expenses not currently deductible | | $ | 5.6 |
| | $ | 4.0 |
|
Depreciation | | 18.8 |
| | 21.1 |
|
Compensation and benefits not currently deductible | | 70.3 |
| | 56.0 |
|
Net operating and capital losses | | 20.4 |
| | 21.6 |
|
Tax credits | | 4.4 |
| | 4.8 |
|
Other | | 6.8 |
| | 5.1 |
|
Total deferred tax assets | | 126.3 |
| | 112.6 |
|
Less: Valuation allowances | | (9.3 | ) | | (9.8 | ) |
Deferred tax assets, net | | 117.0 |
| | 102.8 |
|
Deferred tax liabilities: | | | | |
Goodwill and identifiable intangibles | | 141.4 |
| | 120.3 |
|
Net deferred expenses | | 20.2 |
| | 16.5 |
|
Other | | 9.4 |
| | 7.6 |
|
Deferred tax liabilities | | 171.0 |
| | 144.4 |
|
Net deferred tax liabilities | | $ | (54.0 | ) | | $ | (41.6 | ) |
The Company has estimated foreign net operating loss carryforwards of approximately $14.8 million as of June 30, 2017 of which $1.3 million expires in 2018 through 2027 and of which $13.5 million has an indefinite utilization period. In addition, the Company has estimated U.S. federal net operating loss carryforwards of approximately $26.4 million, which expire in 2018 through 2030.
Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that the Company will not be able to utilize the deferred tax assets attributable to net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings. The Company has recorded valuation allowances of $9.3 million and $9.8 million at June 30, 2017 and 2016, respectively. The determination as to whether a deferred tax asset will be recognized is made on a jurisdictional basis and is based on the evaluation of historical taxable income or loss, projected future taxable income, carryforward periods, scheduled reversals of deferred tax liabilities and tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The assumptions used to project future taxable income require significant judgment and are consistent with the plans and estimates used to manage the underlying businesses.
In the next twelve months, the Company does not expect a material change to its net reserve balance for unrecognized tax benefits.
The following table summarizes the activity related to the Company’s gross unrecognized tax positions:
|
| | | | | | | | | | | | |
| | Fiscal Year Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| | (in millions) |
Beginning balance | | $ | 18.2 |
| | $ | 24.4 |
| | $ | 26.6 |
|
Gross increase related to prior period tax positions | | 0.6 |
| | 0.6 |
| | 0.5 |
|
Gross increase related to current period tax positions | | 2.7 |
| | 2.6 |
| | 2.4 |
|
Gross decrease related to prior period tax positions | | (2.8 | ) | | (9.4 | ) | | (5.1 | ) |
Ending balance | | $ | 18.7 |
| | $ | 18.2 |
| | $ | 24.4 |
|
As of June 30, 2017, 2016 and 2015 the net reserve for unrecognized tax positions recorded by the Company that is included in the preceding table of gross unrecognized tax positions, was $13.4 million, $12.9 million, and $12.7 million respectively, and if reversed in full, would favorably affect the effective tax rate by these amounts, respectively.
The $2.8 million, $9.4 million and $5.1 million gross decreases in fiscal years 2017, 2016 and 2015, respectively, for prior period tax positions related to certain tax audit settlements and certain state, federal and foreign statute of limitation expirations.
During the fiscal year ended June 30, 2017, the Company adjusted accrued interest by approximately $(0.2) million as a result of a favorable audit settlement and recognized a total liability of $3.2 million; in the fiscal year ended June 30, 2016, the Company adjusted accrued interest by approximately $(0.3) million as a result of a favorable audit settlement and recognized a total liability of $3.4 million; in the fiscal year ended June 30, 2015 the Company accrued approximately $0.1 million and recognized a total liability of $5.0 million for penalties and interest.
The Company is regularly subject to examination of its income tax returns by U.S. Federal, state and foreign income tax authorities. The tax years that are currently open and could be subject to income tax audits for U.S. federal and most state and local jurisdictions are fiscal years ending June 30, 2014 through June 30, 2017, and for Canadian operations that could be subject to audit in Canada, fiscal years ending June 30, 2013 through June 30, 2017. A change in the assessment of the outcomes of such matters could materially impact our Consolidated Financial Statements.