|
11. |
INCOME TAXES |
The components of (loss) income before income taxes are as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Domestic source |
|
$ |
(544.4 |
) |
|
$ |
(190.6 |
) |
|
$ |
179.4 |
|
|
Foreign source |
|
|
19.8 |
|
|
|
(4.8 |
) |
|
|
(8.2 |
) |
|
Income (loss) before income taxes |
|
$ |
(524.6 |
) |
|
$ |
(195.4 |
) |
|
$ |
171.2 |
|
The following table presents the components of the 2017, 2016, and 2015 provision for income taxes:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(17.6 |
) |
|
$ |
33.7 |
|
|
$ |
57.2 |
|
|
State |
|
|
(0.4 |
) |
|
|
4.5 |
|
|
|
9.3 |
|
|
Foreign |
|
|
10.7 |
|
|
|
7.5 |
|
|
|
(4.2 |
) |
|
Total current |
|
|
(7.3 |
) |
|
|
45.7 |
|
|
|
62.3 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(214.3 |
) |
|
|
(5.0 |
) |
|
|
(5.7 |
) |
|
State |
|
|
(15.4 |
) |
|
|
(0.2 |
) |
|
|
(2.0 |
) |
|
Foreign |
|
|
(1.4 |
) |
|
|
(7.3 |
) |
|
|
1.7 |
|
|
Total deferred |
|
|
(231.1 |
) |
|
|
(12.5 |
) |
|
|
(6.0 |
) |
|
Total income tax expense |
|
$ |
(238.4 |
) |
|
$ |
33.2 |
|
|
$ |
56.3 |
|
The following is a reconciliation of income tax expense computed at the U.S. federal statutory tax rate to the income tax expense reported in the Consolidated Statements of Operations:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Tax at statutory rate |
|
$ |
(183.7 |
) |
|
$ |
(68.4 |
) |
|
$ |
59.9 |
|
|
State income taxes |
|
|
(10.3 |
) |
|
|
2.8 |
|
|
|
4.7 |
|
|
Tax benefit of cross-border intercompany financing structure |
|
|
(3.9 |
) |
|
|
(3.8 |
) |
|
|
(4.0 |
) |
|
Domestic production activities deduction |
|
|
(0.4 |
) |
|
|
(5.1 |
) |
|
|
(5.4 |
) |
|
Excess tax benefits related to stock-based compensation |
|
|
(2.4 |
) |
|
|
(3.9 |
) |
|
|
— |
|
|
Section 956 inclusion, Section 78 Gross-Up |
|
|
13.2 |
|
|
|
— |
|
|
|
— |
|
|
Goodwill impairment |
|
|
91.8 |
|
|
|
112.0 |
|
|
|
— |
|
|
Remeasurement of Deferred Tax Assets/Liabilities |
|
|
(113.9 |
) |
|
|
— |
|
|
|
— |
|
|
Transition Tax |
|
|
9.6 |
|
|
|
— |
|
|
|
— |
|
|
Foreign Tax Credit |
|
|
(29.7 |
) |
|
|
— |
|
|
|
— |
|
|
Other, net |
|
|
(8.7 |
) |
|
|
(0.4 |
) |
|
|
1.1 |
|
|
Total provision for income taxes |
|
$ |
(238.4 |
) |
|
$ |
33.2 |
|
|
$ |
56.3 |
|
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(In millions) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits |
|
$ |
19.9 |
|
|
$ |
35.6 |
|
|
Accrued liabilities |
|
|
26.8 |
|
|
|
48.0 |
|
|
Stock compensation |
|
|
13.3 |
|
|
|
19.4 |
|
|
Inventory Reserves |
|
|
9.4 |
|
|
|
12.9 |
|
|
Loss and credit carryovers |
|
|
62.2 |
|
|
|
22.1 |
|
|
Other |
|
|
11.4 |
|
|
|
32.2 |
|
|
Total deferred tax assets |
|
|
143.0 |
|
|
|
170.2 |
|
|
Valuation allowance |
|
|
(14.9 |
) |
|
|
(8.9 |
) |
|
Total deferred tax assets, net of valuation allowance |
|
|
128.1 |
|
|
|
161.3 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Fixed assets and intangible assets |
|
|
(306.5 |
) |
|
|
(583.5 |
) |
|
Total deferred tax liabilities |
|
|
(306.5 |
) |
|
|
(583.5 |
) |
|
Net deferred income tax liability |
|
$ |
(178.4 |
) |
|
$ |
(422.2 |
) |
On December 22, 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%, limitation of the tax deduction for interest expense to 30% of adjusted earnings, the transition of U.S international taxation from a worldwide tax system to a territorial system, allowing for the full expensing of certain qualified property and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The changes are effective for tax years beginning after December 31, 2017.
Shortly after enactment of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of US GAAP in situations where 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. To the extent that a company’s accounting for the Tax Act is incomplete but it is able to provide a reasonable estimate, it must record a provisional amount in the financial statements. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.
In relation to our initial analysis of the impact of the Tax Act, we have recorded a net tax benefit of $104.2 million primarily consisting of (1) a $108.4 million benefit related to adjustments to our net deferred tax liability and (2) a $9.6 million expense related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The adjustments to our net deferred tax liability and the liability related to the transition tax are provisional amounts based on information available as of December 31, 2017. These amounts are subject to change due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter when the analysis is complete.
The Tax Act also creates a new requirement that certain income (i.e., Global Intangible Low Taxed Income or “GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC’s U.S. shareholder. Because of the complexity of the GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy election of either (1) treating taxes due of future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into the company’s measurement of deferred taxes. We have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.
The Company has income tax net operating loss carryforwards related to its domestic and international operations which have a 20 year definite life. The Company has recorded a deferred tax asset of $10.5 million reflecting the benefit of $42.2 million in loss carryforwards. All of the loss carryforwards expire between 2033 and 2037. The Company has recorded a deferred tax asset of $28.4 million reflecting the benefit of foreign tax credit carryforwards. The foreign tax credits have a 10 year life and expire in 2026 and 2027. The Company also has state net operating loss and income tax credit carryforwards. The Company has recorded a deferred tax asset of $8.3 million reflecting the benefit of state net operating losses of $168.2 million. The state net operating loss carryforwards have a 1 to 20 year life and expire between 2018 and 2037. The Company has recorded a deferred tax asset of $13.2 million reflecting the benefit of state tax credit carryforwards. The state income tax credits have a 1 to 15 year life and expire between 2018 and 2031.
The Company has recorded a valuation allowance of $14.9 million and $8.9 million for the years ended December 31, 2017 and 2016, respectively. The Company assessed the realizability of its deferred tax assets and has determined that certain foreign non-capital loss carryforwards, state net operating loss carryforwards, and state tax credit carryforwards will more likely than not expire unused.
The Company or one of its subsidiaries files income tax returns in the U.S., Canada, Italy, and various U.S. states. In the U.S. federal jurisdiction, the Company is open to examination for the tax year ended December 31, 2014 and forward; for Canadian purposes, the Company is open to examination for the tax year ended December 31, 2008 and forward; for Italian purposes, the Company is open to examination for the tax years ended September 30, 2012 and forward; and for the various U.S. states the Company is generally open to examination for the tax year ended December 31, 2012 and forward.
The Internal Revenue Service (“IRS”) is currently examining the TreeHouse Foods, Inc. & Subsidiaries’ 2015 tax year. Our Canadian operations are under exam by the Canadian Revenue Agency (“CRA”) for tax years 2008 through 2015. These examinations are expected to be completed in 2018. The Italian Agency of Revenue (“IAR”) is examining the 2007 through 2009 and 2013 tax years of our Italian operations. The IAR examinations are not expected to be completed prior to 2020 due to a backlog of appeals before the agency. The Company has examinations in process with various state taxing authorities, which are expected to be completed in 2018.
During the year, the Company recorded adjustments to its unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Unrecognized tax benefits beginning balance |
|
$ |
31.4 |
|
|
$ |
19.5 |
|
|
|
13.2 |
|
|
Additions and reductions based on tax positions related to the current year |
|
|
1.1 |
|
|
|
— |
|
|
|
0.1 |
|
|
Additions and reductions based on tax positions of prior years |
|
|
0.4 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
Additions resulting from acquisitions |
|
|
— |
|
|
|
14.4 |
|
|
|
6.4 |
|
|
Reductions due to statute lapses |
|
|
(4.6 |
) |
|
|
(4.2 |
) |
|
|
(1.4 |
) |
|
Reductions related to settlements with taxing authorities |
|
|
(2.0 |
) |
|
|
— |
|
|
|
— |
|
|
Foreign currency translation |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
Unrecognized tax benefits ending balance |
|
$ |
26.4 |
|
|
$ |
31.4 |
|
|
$ |
19.5 |
|
Unrecognized tax benefits are included in the Other long-term liabilities line of the Consolidated Balance Sheets. Included in the balance at December 31, 2017 are amounts that are offset by deferred taxes (i.e., temporary differences). Of the amount accrued at December 31, 2017 and 2016, $5.7 million and $7.3 million, respectively, would impact net income when settled. Of the amounts accrued at December 31, 2017 and 2016, $20.7 million and $20.1 million, respectively, relates to unrecognized tax benefits assumed in prior acquisitions, which have been indemnified by the previous owners.
Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $9.5 million within the next 12 months, primarily as a result of the resolution of audits currently in progress and the lapsing of statutes of limitations. Approximately $1.4 million of the $9.5 million would affect net income when settled.
The Company recognizes interest expense (income) and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2017, 2016, and 2015, the Company recognized $1.2 million, $0.8 million, and $0.1 million of interest and penalties in income tax expense, respectively. The Company has accrued approximately $5.5 million and $4.6 million for the payment of interest and penalties at December 31, 2017 and 2016, respectively, of which $5.3 million and $4.3 million is indemnified.
As of December 31, 2017, the Company has approximately $82.3 million of undistributed earnings generated by its foreign subsidiaries which was subject to the one-time transition tax on cumulative foreign earnings required by the Tax Act. As there will not be an incremental tax cost on the future repatriation of these earnings, the Company no longer considers the earnings to be permanently reinvested outside the U.S.
During the first quarter of 2008, the Company entered into an intercompany financing structure that results in the recognition of foreign earnings subject to a low effective tax rate. For the years ended December 31, 2017 and 2016, the Company recognized a tax benefit of approximately $3.9 and $3.8 million, respectively, related to this item.