Income Taxes
The provision for income taxes consists of amounts for taxes currently payable, amounts for tax items deferred to future periods; as well as, adjustments relating to the Company’s determination of uncertain tax positions, including interest and penalties. The Company recognizes deferred tax assets and liabilities based on the future tax consequences attributable to tax net operating loss (“NOL”) carryforwards, tax credit carryforwards and differences between the financial statement carrying amounts and the tax bases of applicable assets and liabilities. Deferred tax assets are regularly reviewed for recoverability and valuation allowances are established based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, the Company continues to maintain a partial valuation allowance against certain foreign NOL carryforwards and other related foreign deferred tax assets, as well as certain state NOL carryforwards.
Income Tax Provision
The components of the provision for income taxes are as follows (in millions):
|
| | | | | | | | | | | |
| Year ended March 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
United States | $ | 12.1 |
| | $ | 24.0 |
| | $ | 17.2 |
|
Non-United States | 20.3 |
| | 15.3 |
| | 15.6 |
|
State and local | 2.2 |
| | 3.9 |
| | 4.7 |
|
Total current | 34.6 |
| | 43.2 |
| | 37.5 |
|
Deferred: | | | | | |
United States | (18.0 | ) | | (10.2 | ) | | (8.2 | ) |
Non-United States | (6.8 | ) | | 1.1 |
| | (10.5 | ) |
State and local | (1.9 | ) | | (17.0 | ) | | (2.0 | ) |
Total deferred | (26.7 | ) | | (26.1 | ) | | (20.7 | ) |
Provision for income taxes | $ | 7.9 |
| | $ | 17.1 |
| | $ | 16.8 |
|
The provision (benefit) for income taxes differs from the United States statutory income tax rate due to the following items (in millions):
|
| | | | | | | | | | | |
| Year ended March 31, |
| 2017 | | 2016 | | 2015 |
Provision for income taxes at U.S. federal statutory income tax rate | $ | 28.7 |
| | $ | 30.1 |
| | $ | 37.9 |
|
State and local income taxes, net of federal benefit | 0.8 |
| | 2.7 |
| | 2.6 |
|
Net effects of foreign rate differential | (1.3 | ) | | (3.0 | ) | | (3.3 | ) |
Net effects of foreign operations | (4.4 | ) | | (2.1 | ) | | 8.9 |
|
Net effect to deferred taxes for changes in tax rates | (0.3 | ) | | (0.8 | ) | | 0.2 |
|
Unrecognized tax benefits, net of federal benefit | 0.5 |
| | (11.3 | ) | | (0.5 | ) |
Domestic production activities deduction | (2.7 | ) | | (1.3 | ) | | (2.3 | ) |
Research and development credit | (7.6 | ) | | — |
| | — |
|
Excess tax benefits related to equity compensation | (7.0 | ) | | — |
| | — |
|
Change in valuation allowance | 0.5 |
| | 2.3 |
| | (27.4 | ) |
Other | 0.7 |
| | 0.5 |
| | 0.7 |
|
Provision for income taxes | $ | 7.9 |
| | $ | 17.1 |
| | $ | 16.8 |
|
The provision for income taxes was calculated based upon the following components of income from continuing operations before income taxes (in millions):
|
| | | | | | | | | | | |
| Year ended March 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 50.4 |
| | $ | 45.3 |
| | $ | 89.9 |
|
Non-United States | 31.6 |
| | 40.7 |
| | 18.7 |
|
Income before income taxes | $ | 82.0 |
| | $ | 86.0 |
| | $ | 108.6 |
|
Deferred Income Tax Assets and Liabilities
Deferred income taxes consist of the tax effects of the following temporary differences (in millions):
|
| | | | | | | |
| March 31, 2017 | | March 31, 2016 |
Deferred tax assets: | | | |
Compensation and retirement benefits | $ | 79.9 |
| | $ | 84.4 |
|
General accruals and reserves | 18.1 |
| | 18.3 |
|
State tax net operating loss carryforwards | 19.2 |
| | 19.6 |
|
Foreign tax credit carryforwards | — |
| | 4.3 |
|
Foreign net operating loss and interest carryforwards | 22.5 |
| | 17.7 |
|
Other | 7.9 |
| | 14.5 |
|
Total deferred tax assets before valuation allowance | 147.6 |
| | 158.8 |
|
Valuation allowance | (27.7 | ) | | (27.2 | ) |
Total deferred tax assets | 119.9 |
| | 131.6 |
|
Deferred tax liabilities: | | | |
Property, plant and equipment | 39.9 |
| | 42.8 |
|
Inventories | 31.5 |
| | 30.1 |
|
Intangible assets and goodwill | 217.5 |
| | 197.7 |
|
Cancellation of indebtedness | 27.6 |
| | 43.4 |
|
Total deferred tax liabilities | 316.5 |
| | 314.0 |
|
Net deferred tax liabilities | $ | 196.6 |
| | $ | 182.4 |
|
| | | |
Net amount on Consolidated Balance Sheet consists of: | | | |
Other assets | $ | 12.2 |
| | $ | 3.6 |
|
Deferred income taxes | (208.8 | ) | | (186.0 | ) |
Net long-term deferred tax liabilities | $ | (196.6 | ) | | $ | (182.4 | ) |
Management has reviewed its deferred tax assets and has analyzed the uncertainty with respect to ultimately realizing the related tax benefits associated with such assets. Based upon this analysis, management has determined that a valuation allowance should be established for certain foreign NOL carryforwards and related deferred tax assets, as well as certain state NOL carryforwards as of March 31, 2017. Significant factors considered by management in this determination included the historical operating results of the Company, as well as anticipated reversals of future taxable temporary differences. Similarly, a valuation allowance was recorded at March 31, 2016 for certain foreign NOL carryforwards and related deferred tax assets, as well as certain state NOL carryforwards for which utilization was deemed uncertain. The increase in the valuation allowance presented above was generally due to an increase in certain foreign NOL carryforwards and other related deferred tax assets which management has deemed the realization of such assets as not being more-likely-than-not. The carryforward period for the foreign tax credit is ten years. The carryforward period for the U.S. federal NOL carryforward is twenty years. The carryforward periods for the state NOLs range from five to twenty years. Certain foreign NOL carryforwards are subject to a five year expiration period, and the carryforward period for the remaining foreign NOLs is indefinite.
At March 31, 2017, the Company had approximately $500.9 million of state NOL carryforwards, expiring over various years ending through March 31, 2036. The Company has a valuation allowance of $18.0 million recorded against the related deferred tax asset. In addition, at March 31, 2017, the Company had approximately $94.8 million of foreign NOL carryforwards in which the majority of these losses can be carried forward indefinitely. There exists a valuation allowance of $9.7 million against these NOL carryforwards as well as other related deferred tax assets.
No provision has been made for United States federal income taxes related to approximately $176.5 million of undistributed earnings of foreign subsidiaries considered to be permanently reinvested. Due to the resulting additional foreign tax credits, the additional income tax liability that would result if such earnings were repatriated to the U.S., other than potential out-of-pocket withholding taxes of approximately $5.7 million, would not be expected to be significant to the Company’s consolidated financial statements.
The Company’s total liability for net accrued income taxes as of March 31, 2017 and 2016 was $6.9 million and $13.3 million, respectively. This net amount was presented in the consolidated balance sheets as Income taxes payable (separately disclosed in Other current liabilities) of $17.8 million and $15.0 million as of March 31, 2017 and 2016, respectively; and as Income taxes receivable (included in Other current assets) of $10.9 million and $1.7 million as of March 31, 2017 and 2016, respectively. Net cash paid for income taxes to governmental tax authorities for the years ended March 31, 2017, 2016 and 2015 was $40.0 million, $46.9 million and $21.2 million, respectively.
Liability for Unrecognized Tax Benefits
The Company's total liability for net unrecognized tax benefits as of March 31, 2017 and March 31, 2016 was $18.1 million and $15.6 million, respectively.
The following table represents a reconciliation of the beginning and ending amount of the gross unrecognized tax benefits, excluding interest and penalties, for the fiscal years ended March 31, 2017 and March 31, 2016 (in millions):
|
| | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 |
Balance at beginning of period | $ | 13.2 |
| | $ | 21.7 |
|
Additions based on tax positions related to the current year | 0.8 |
| | 0.8 |
|
Additions for tax positions of prior years | 2.8 |
| | 1.2 |
|
Reductions for tax positions of prior years | — |
| | (0.1 | ) |
Reductions due to lapse of applicable statute of limitations | (1.7 | ) | | (10.3 | ) |
Cumulative translation adjustment | (0.1 | ) | | (0.1 | ) |
Balance at end of period | $ | 15.0 |
| | $ | 13.2 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2017 and March 31, 2016, the total amount of unrecognized tax benefits includes $4.7 million and $3.8 million of gross accrued interest and penalties, respectively. The amount of interest and penalties recorded as income tax expense (benefit) during the fiscal years ended March 31, 2017, 2016, and 2015 was $0.6 million, $(8.6) million, and $0.7 million, respectively.
The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions (including a review of a few specific items on certain corporate income tax returns of the Company’s Netherlands subsidiaries for the tax years ended March 31, 2011 through 2015). In addition, the U.S. Internal Revenue Service is currently examining the Company’s U.S. consolidated federal income tax return and related amended return for the tax year ended March 31, 2015. During fiscal 2017, the Company completed an examination of certain of its Italian subsidiaries’ corporate income tax returns for the tax years ended March 31, 2014 through 2016 and paid approximately $0.7 million upon the conclusion of such examination. In addition, during fiscal 2017, the Company completed an examination of certain of its German subsidiaries’ corporate income and trade tax returns for the tax years ended March 31, 2011 through 2014 and paid approximately $0.4 million upon conclusion of such examination. During fiscal 2016, the U.S. Internal Revenue Service completed an income tax examination of the Company’s U.S. consolidated federal income tax return for the tax year ended March 31, 2013. The conclusion of the audit resulted in no changes to previously reported taxable income or income tax for such return. It appears reasonably possible that the amounts of unrecognized income tax benefits could change in the next twelve months upon conclusion of the Company’s current ongoing examinations; however, any potential payments of income tax, interest and penalties are not expected to be significant to the Company's consolidated financial statements. With certain exceptions, the Company is no longer subject to U.S. federal income tax examinations for tax years ending prior to March 31, 2014, state and local income tax examinations for years ending prior to fiscal 2013 or significant foreign income tax examinations for years ending prior to fiscal 2012. With respect to the Company's U.S. federal NOL carryforward (which was fully utilized for the tax year ended March 31, 2015), the short tax period from July 21, 2006 to March 31, 2007 (due to the change in control when Apollo Management, L.P. acquired the Company) and the tax years ended March 31, 2008 through March 31, 2013 are open under statutes of limitations; whereby, the Internal Revenue Service may not adjust the income tax liability for these years, but may reduce the NOL carryforward and any other tax attribute carryforwards to currently open tax years.