15. Income taxes
The following table presents the provision for income taxes and our effective tax rate for the fiscal years ended July 31, 2017, 2016 and 2015:
|
|
|
For the Year ended |
|
|||||||||
|
|
|
July 31, |
|
|||||||||
|
(in millions except percentages) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Provision for income taxes |
|
$ |
8.0 |
|
|
$ |
8.2 |
|
|
$ |
7.6 |
|
|
Effective tax rate |
|
|
-12 |
% |
|
|
40 |
% |
|
|
18 |
% |
The effective income tax rate is based on the actual income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolution of tax audits, tax contingencies or other discrete items.
A reconciliation of income taxes at the U.S. statutory rate to the effective tax rate follows:
|
|
|
For the Year ended |
|
|||||||||
|
|
|
July 31, |
|
|||||||||
|
(in %) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. Federal statutory tax rate (%) |
|
|
35 |
|
|
|
35 |
|
|
|
35 |
|
|
State income taxes, net of federal tax benefit |
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
Domestic production benefit |
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
General business credit (U.S. R&D) |
|
|
2 |
|
|
|
(5 |
) |
|
|
(2 |
) |
|
Valuation allowance |
|
|
(25 |
) |
|
|
2 |
|
|
|
- |
|
|
Asset impairment |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
Effect of international operations |
|
|
3 |
|
|
|
(3 |
) |
|
|
(11 |
) |
|
Increase (decrease) in tax reserves |
|
|
2 |
|
|
|
8 |
|
|
|
(6 |
) |
|
Non-deductible royalty |
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
Other items, net |
|
|
(3 |
) |
|
|
3 |
|
|
|
2 |
|
|
Effective tax rate (%) |
|
|
(12 |
) |
|
|
40 |
|
|
|
18 |
|
Our effective tax rate for fiscal year 2017 is lower than the statutory rate of 35%, primarily due to the tax effect on the goodwill and asset impairment charges, and recording of an additional valuation allowance. Certain of the goodwill and asset impairment charges will not give rise to a tax deduction, and therefore did not give rise to a benefit in the tax rate. The tax provision for fiscal year 2017 includes certain discrete tax provisions totaling $15.7 million. The discrete tax provision for fiscal year 2017 consists primarily of a $16.6 million increase in valuation allowance on deferred tax assets, $0.8 million decrease in prepaid income taxes, offset by $0.7 million reduction in uncertain tax positions associated with the expiration of statute of limitations, $0.4 million decrease in uncertain tax positions associated with BK Medical matter, $0.5 million decrease in uncertain tax positions associated with settlement of a transfer pricing audit, along with $0.1 million benefit on other items.
Our effective tax rate for fiscal year 2016 is higher than the statutory rate of 35%, primarily due to certain discrete tax provisions totaling $1.2 million. The discrete tax provision for fiscal year 2016 consists primarily of a $1.5 million increase in uncertain tax positions primarily associated with the BK Medical matter, offset by a $0.4 million benefit associated with the extension of the federal R&D tax credit, a $0.3 million reduction in uncertain tax positions primarily associated with the expiration of statute of limitations, along with $0.3 million provision on other items.
The components of the provision (benefit from) for income taxes are as follows:
|
|
|
For the Year ended |
|
|||||||||
|
|
|
July 31, |
|
|||||||||
|
(in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current income taxes provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(0.2 |
) |
|
$ |
2.5 |
|
|
$ |
(2.8 |
) |
|
State |
|
|
0.2 |
|
|
|
(0.2 |
) |
|
|
- |
|
|
Non-U.S. |
|
|
2.9 |
|
|
|
6.4 |
|
|
|
6.0 |
|
|
Current income tax provision |
|
$ |
2.9 |
|
|
$ |
8.7 |
|
|
$ |
3.2 |
|
|
Deferred income taxes provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2.7 |
|
|
$ |
(2.9 |
) |
|
$ |
1.9 |
|
|
State |
|
|
- |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Non-U.S. |
|
|
2.4 |
|
|
|
2.5 |
|
|
|
2.3 |
|
|
Deferred income taxes provision (benefit) |
|
$ |
5.1 |
|
|
$ |
(0.5 |
) |
|
$ |
4.4 |
|
|
Provision for income taxes |
|
$ |
8.0 |
|
|
$ |
8.2 |
|
|
$ |
7.6 |
|
(Loss) income before income taxes from domestic and foreign operations is as follows:
|
|
|
For the Year ended |
|
|||||||||
|
|
|
July 31, |
|
|||||||||
|
(in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
(37.1 |
) |
|
$ |
7.9 |
|
|
$ |
7.5 |
|
|
Foreign |
|
|
(29.1 |
) |
|
|
12.4 |
|
|
|
33.5 |
|
|
(Loss) income before income taxes |
|
$ |
(66.2 |
) |
|
$ |
20.3 |
|
|
$ |
41.0 |
|
Net deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws:
|
|
|
As of |
|
|
As of |
|
||
|
|
|
July 31, |
|
|
July 31, |
|
||
|
(in millions) |
|
2017 |
|
|
2016 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
8.3 |
|
|
$ |
10.0 |
|
|
Accruals and reserves |
|
|
8.7 |
|
|
|
5.5 |
|
|
Comprehensive income |
|
|
1.2 |
|
|
|
2.0 |
|
|
Net operating losses and credit carryforwards |
|
|
17.5 |
|
|
|
17.0 |
|
|
Goodwill and intangibles |
|
|
3.3 |
|
|
|
- |
|
|
Other |
|
|
0.8 |
|
|
|
0.9 |
|
|
Deferred tax assets |
|
$ |
39.8 |
|
|
$ |
35.4 |
|
|
Valuation allowance |
|
|
(28.3 |
) |
|
|
(11.4 |
) |
|
Total deferred tax assets |
|
$ |
11.5 |
|
|
$ |
24.0 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Depreciation related |
|
$ |
(6.3 |
) |
|
$ |
(8.0 |
) |
|
Goodwill and intangibles |
|
|
- |
|
|
|
(5.3 |
) |
|
Total deferred tax liabilities |
|
$ |
(6.3 |
) |
|
$ |
(13.3 |
) |
|
Net deferred tax assets |
|
$ |
5.2 |
|
|
$ |
10.7 |
|
As of July 31, 2017, we had net operating loss carryforwards in the United States of approximately $5.3 million that will expire in 2037 and credit carryforwards of $0.8 million in the United States that will begin to expire in 2027, losses of approximately $2.9 million in Belgium which have no expiration date, losses of approximately $9.8 million in Denmark which have no expiration date, and losses of $4.9 million in Canada that will begin to expire in 2024. As of July 31, 2017, we also had state tax credit carryforwards of $15.2 million that will begin to expire in 2021 and credit carryforwards of $2.8 million in Canada that will begin to expire in 2021. We also have operating loss carryforwards in Luxembourg of approximately $16.2 million. We believe that the possibility of utilizing the Luxembourg loss carryforwards in the foreseeable future is remote, and therefore have provided a full valuation allowance against them.
We do not provide for U.S. Federal income taxes on undistributed earnings of consolidated foreign subsidiaries of approximately $57.4 million, as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations would be the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.
In addition to the Luxembourg valuation allowances discussed above, we have determined that it is more likely than not that we will not recognize the benefit of certain foreign losses, state losses, tax credits, and other deferred tax assets and, as a result, valuation allowances have been established at July 31, 2017 and 2016. We are in a cumulative three year loss position following the charges for impairment of goodwill and intangible assets. This creates substantial negative evidence of recoverability of our deferred tax assets, even after all sources of income and potential benefits of tax planning are taken into account. Because we could not overcome this substantial negative evidence, we booked a valuation allowance in the relevant jurisdictions. The change in the valuation allowance in fiscal year 2017 is primarily the result of the goodwill and intangible assets impairment, the addition of current year operating loss carryforwards and other deferred tax assets where use is not more likely than not.
We perform a two-step evaluation of all tax positions, ensuring that these tax return positions meet the “more likely than not” recognition threshold and can be measured with sufficient precision to determine the benefit recognized in the financial statements. These evaluations provide us with a comprehensive model for how we should recognize, measure, present, and disclose in our financial statements certain tax positions that we have taken or expect to take on our income tax returns.
The following table summarizes the changes in our unrecognized income tax benefits for fiscal years 2017 and 2016:
|
|
|
July 31, |
|
|||||
|
(in millions) |
|
2017 |
|
|
2016 |
|
||
|
Beginning balance |
|
$ |
7.6 |
|
|
$ |
6.0 |
|
|
Increases based on tax positions related to current year |
|
|
0.2 |
|
|
|
1.8 |
|
|
Increases for tax positions of prior years |
|
|
0.9 |
|
|
|
0.2 |
|
|
Decreases for tax positions of prior years |
|
|
(1.5 |
) |
|
|
- |
|
|
Decreases due to settlements with taxing authorities |
|
|
(0.2 |
) |
|
|
- |
|
|
Decreases due to lapse of applicable statute of limitations |
|
|
(0.7 |
) |
|
|
(0.4 |
) |
|
Adjustments due to foreign exchange rate |
|
|
- |
|
|
|
- |
|
|
Ending balance |
|
$ |
6.3 |
|
|
$ |
7.6 |
|
|
Net interest as of end of fiscal year |
|
$ |
0.1 |
|
|
$ |
0.4 |
|
The unrecognized tax benefits decreased to $6.3 million at July 31, 2017. If recognized in a future period, the timing of which is not estimable, we expect that approximately $2.3 million would reduce our effective tax rate, net of potential valuation allowances.
We are subject to U.S. Federal income tax as well as the income tax of multiple state and foreign jurisdictions. We have concluded all U.S. Federal income tax matters through the year ended July 31, 2013. In the next four quarters, the statute of limitations for our fiscal year ended July 31, 2014 may expire for U.S. Federal and state income taxes and for foreign subsidiaries and it is reasonably expected that net unrecognized benefits, including interest, of approximately $0.7 million may be recognized. During the fiscal year 2017, we reduced our uncertain tax benefits and accrued interest by $1.8 million as a result of the closing of statutes of limitation for the fiscal year 2013 for domestic entities, the remeasurement of uncertain tax benefits in open years, and settlement of transfer pricing audit in Denmark.
We accrue interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense is treated as a component of income tax expense. At July 31, 2017 and 2016, we had approximately $0.1 million and $0.4 million, respectively, accrued for interest and penalties on unrecognized tax benefits.
Refundable income taxes at July 31, 2017 consisted of refundable income tax assets of $4.7 million. Refundable income taxes at July 31, 2016 consisted of refundable income tax assets of $3.0 million. The refundable income tax assets include expected Federal, state, and foreign refunds that are expected to be received within the next twelve months.