Income Taxes
U.S. and foreign components of income before income taxes are presented below:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | (In thousands) | | |
U.S. income | $ | 120,281 |
| | $ | 176,448 |
| | $ | 75,431 |
|
Foreign income (loss) | (709 | ) | | 1,717 |
| | (2,316 | ) |
Total income before income taxes | $ | 119,572 |
| | $ | 178,165 |
| | $ | 73,115 |
|
The components of the Company’s income tax provision were as follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | (In thousands) | | |
Current taxes: | |
| | |
| | |
|
Federal tax expense | $ | 13 |
| | $ | 1,206 |
| | $ | 1,700 |
|
State tax expense | 422 |
| | 978 |
| | 266 |
|
Foreign tax expense | 863 |
| | 1,141 |
| | 650 |
|
Total current tax expense | 1,298 |
| | 3,325 |
| | 2,616 |
|
Deferred taxes: | |
| | |
| | |
|
Federal tax expense (benefit) | (110,811 | ) | | 60,295 |
| | 54,906 |
|
State tax expense (benefit) | (4,851 | ) | | 3,454 |
| | 8,803 |
|
Foreign tax expense (benefit) | 80 |
| | 59 |
| | (333 | ) |
Total deferred tax expense (benefit) | (115,582 | ) | | 63,808 |
| | 63,376 |
|
Total income tax expense (benefit) | $ | (114,284 | ) | | $ | 67,133 |
| | $ | 65,992 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 is effective for reporting periods that include December 22, 2017. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. As the Company collects and prepares the necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company's provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
The Company has recorded a net tax benefit of $154.5 million in the fourth quarter of 2017, which includes its provisional estimate of the impact of the Tax Act on its financial statements. Further detail on specific provisions are included below.
Remeasurement of deferred tax assets/liabilities: In the fourth quarter of 2017, the Company recorded a provisional net deferred tax benefit of $150.9 million related to the remeasurement of certain deferred tax assets and liabilities as of December 31, 2017. The Company remeasured those deferred tax assets and liabilities at 21%, because this is the rate at which it expects these items to reverse. Although the tax rate reduction is known, the Company has not collected the necessary data to complete its analysis of the effect of the Tax Act on the underlying deferred taxes, and, as such, the amounts recorded as of December 31, 2017 are provisional.
Deemed Repatriation of Certain Foreign Subsidiary Earnings: The Tax Act requires the Company to increase its U.S. taxable income for the mandatory deemed repatriation on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining untaxed earnings. The Company recorded a provisional amount for this one-time taxable income amount of $2.3 million, with a provisional estimated deferred tax asset associated with foreign taxes paid on those earnings of $0.8 million. The Company has recorded provisional amounts based on estimates of the effects of the Tax Act, since a more detailed analysis of historical foreign earnings as well as potential correlative adjustments is required.
In 2011 and 2012, Arizona enacted tax law changes resulting in a benefit to the Company’s net deferred tax expense. Due to the size and nature of the Company’s operations in Arizona, such changes have a significant impact on the tax provision in a given period. As a result of these law changes, the Company’s deferred tax expense was reduced by approximately $10.2 million and $3.0 million for the years ended December 31, 2017 and 2016, respectively, and increased by approximately $0.1 million for the year ended December 31, 2015.
A reconciliation of the U.S. federal statutory income tax expense to the Company’s effective income tax provision is as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | (In thousands) | | |
Expected tax expense at U.S. federal statutory tax rate | $ | 41,850 |
| | $ | 62,309 |
| | $ | 25,590 |
|
State taxes, net of federal benefit | 5,133 |
| | 9,757 |
| | 11,663 |
|
State tax valuation allowance | 582 |
| | (2,710 | ) | | (2,763 | ) |
Deferred impact of Arizona tax law changes and elections | (10,217 | ) | | (2,962 | ) | | 99 |
|
Tax Act - deferred tax effects | (150,903 | ) | | — |
| | — |
|
Impairment of goodwill | — |
| | — |
| | 30,464 |
|
Other nondeductible expenses | (841 | ) | | 596 |
| | 557 |
|
Tax credits | (528 | ) | | (442 | ) | | (97 | ) |
Foreign taxes and other items | 640 |
| | 585 |
| | 479 |
|
Total income tax expense (benefit) | $ | (114,284 | ) | | $ | 67,133 |
| | $ | 65,992 |
|
The components of deferred tax assets and liabilities are as follows:
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| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets | |
| | |
|
Long-term contracts | $ | 61,358 |
| | $ | 74,720 |
|
Federal, state and foreign net operating loss carryforwards and tax credits | 107,566 |
| | 60,667 |
|
Other | 22,680 |
| | 34,330 |
|
Total deferred tax assets | 191,604 |
| | 169,717 |
|
Valuation allowance | (3,815 | ) | | (2,825 | ) |
Net deferred tax assets | 187,789 |
| | 166,892 |
|
Deferred tax liabilities | |
| | |
|
Fixed assets, intangibles and research and development expenditures | (403,545 | ) | | (513,905 | ) |
Investment in joint venture | (27,796 | ) | | (14,643 | ) |
Other | (2,276 | ) | | — |
|
Total deferred tax liabilities | (433,617 | ) | | (528,548 | ) |
Net deferred income tax liabilities | $ | (245,828 | ) | | $ | (361,656 | ) |
Pursuant to ASC 740, the Company nets deferred tax assets and liabilities within the same jurisdiction. As of December 31, 2017, the Company had a net deferred tax asset of $0.3 million that is included in other assets on the balance sheet and a net deferred tax liability of $246.2 million.
The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers: (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; (iii) taxable income in prior carryback year(s) if carryback is permitted under applicable tax law; and (iv) tax planning strategies.
The Company had deferred tax assets related to cumulative U.S. federal net operating loss carryforwards of approximately $80.5 million, and $42.9 million as of December 31, 2017 and 2016, respectively. These net operating loss carryforwards, if unutilized, will expire in various amounts from 2031 through 2037. The Company believes that the U.S. federal net operating losses will be utilized before the expiration dates and, as such, no valuation allowance has been established for these deferred tax assets. The Company had deferred tax assets related to the state net operating loss carryforwards of approximately $10.9 million and $4.1 million as of December 31, 2017 and 2016, respectively, that expire from 2025 through 2037. The Company does not expect to fully utilize all of its state net operating losses within the respective carryforward periods and as such reflects a partial valuation allowance of $0.7 million as of December 31, 2017 against these deferred tax assets on its consolidated balance sheet. The Company had deferred tax assets related to the foreign net operating loss carryforwards of approximately $1.3 million and $1.2 million as of December 31, 2017 and 2016, respectively, that begin to expire in 2022. The Company does not expect to fully utilize all of its foreign net operating losses within the respective carryforward periods and as such reflects a partial valuation allowance against these deferred tax assets on its consolidated balance sheet. The timing and manner in which the Company will utilize the net operating loss carryforwards in any year, or in total, may be limited in the future as a result of alternative minimum taxes, changes in the Company’s ownership and any limitations imposed by the jurisdictions in which the Company operates.
The Company has approximately $6.1 million and $5.0 million of deferred tax assets related to research and development tax credits as of December 31, 2017 and 2016, respectively, that expire in various amounts from 2027 through 2037. The Company has approximately $4.7 million and $3.5 million of deferred tax assets related to foreign tax credits as of December 31, 2017 and 2016, respectively, that expire in various amounts from 2020 through 2027. The Company has $3.8 million and $3.4 million of deferred tax assets related to Alternative Minimum Tax credits as of December 31, 2017 and 2016, respectively which do not expire. Under the Tax Act, the Alternative Minimum Tax credits will convert to refunds if not used as a credit. The Company believes that the research and development credits will be fully utilized within the carryforward period. However, the Company does not expect to utilize all of its foreign tax credits within the respective carryforward periods. As such, the Company has a partial valuation allowance of $1.1 million as of December 31, 2017, which is unchanged from December 31, 2016.
The Company has provided for U.S. income taxes on all undistributed earnings of its significant foreign subsidiaries since the Company does not indefinitely reinvest these undistributed earnings. The Company measures deferred tax assets and liabilities using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.
Uncertain Income Tax Positions
The Company is subject to income taxes in the U.S. and various state and foreign jurisdictions. Significant judgment is required in evaluating tax positions and determining the provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to these liabilities.
The amount of unrecognized tax benefits was $1.0 million and $0.9 million at December 31, 2017 and 2016, respectively. Any changes in the next twelve months are not anticipated to have significant impact on the results of operations, financial position or cash flows of the Company. All of the Company’s uncertain tax positions, if recognized, would affect its income tax expense.
The Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2017 and 2016, potential interest and penalties on unrecognized tax benefits were not significant.
The Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. Currently, there are no U.S. federal, state or foreign jurisdiction tax audits pending. The Company’s corporate U.S. federal and state tax returns from 2010 to 2016 remain subject to examination by tax authorities and the Company’s foreign tax returns from 2009 to 2016 remain subject to examination by tax authorities.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits which includes related interest and penalties:
|
| | | | | | | |
| 2017 | | 2016 |
| (In thousands) |
Balance at January 1, | $ | 920 |
| | $ | 916 |
|
Change attributable to tax positions taken in a prior period | 146 |
| | 25 |
|
Change attributable to final assessment | (27 | ) | | — |
|
Change attributable to tax positions taken in the current period | 10 |
| | 8 |
|
Decrease attributable to lapse of statute of limitations | (3 | ) | | (29 | ) |
Balance at December 31, | $ | 1,046 |
| | $ | 920 |
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