|
6. |
INCOME TAXES |
The Company is subject to taxation in the U.S. and various states. The Company’s tax returns for the calendar years 2014 through 2016 remain open to examination by the IRS in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended 2012 through 2016 are eligible for examination by various state revenue services.
Tax Receivable Agreement—On the IPO date, NCM, Inc. and the founding members entered into a tax receivable agreement. Under the terms of this agreement, NCM, Inc. will make cash payments to the founding members in amounts equal to 90% of NCM, Inc.’s actual tax benefit realized from the tax amortization of the intangible assets described below. For purposes of the tax receivable agreement, cash savings in income and franchise tax will be computed by comparing NCM, Inc.’s actual income and franchise tax liability to the amount of such taxes that NCM, Inc. would have been required to pay had there been no increase in NCM, Inc.’s proportionate share of tax basis in NCM LLC’s tangible and intangible assets and had the tax receivable agreement not been entered into. The tax receivable agreement applies to NCM, Inc.’s taxable years up to and including the 30th anniversary date of the offering. The Company paid the founding members $18.8 million in 2017 ($18.8 million was net operating loss carrybacks for the 2016 tax year), $25.3 million in 2016 ($2.7 million was net operating loss carrybacks for the 2013 tax year and $22.6 million for the 2015 tax year), and $21.1 million in 2015 ($0.9 million was net operating loss carrybacks for the 2009, 2010 and 2011 tax year and $20.2 million for the 2014 tax year).
NCM, Inc. recorded a long-term payable to founding members related to the tax receivable agreement, which is recorded at its fair value. The Company recorded accretion of interest on the discounted payable of $18.5 million, $19.6 million and $19.4 million for the years ended December 28, 2017, December 29, 2016 and December 31, 2015, respectively. Further, changes in the tax rate each period resulted in re-measurement of the payable of $(103.6) million, $1.0 million and $(2.9) million during the years ended December 28, 2017, December 29, 2016 and December 31, 2015, respectively.
Provision for Income Taxes—The Company has provided total income taxes, as follows (in millions):
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|
|
Years Ended |
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|||||||||
|
|
|
December 28, 2017 |
|
|
December 29, 2016 |
|
|
December 31, 2015 |
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|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1.6 |
) |
|
$ |
(2.5 |
) |
|
$ |
4.5 |
|
|
State |
|
|
— |
|
|
|
0.2 |
|
|
|
1.2 |
|
|
Total current income tax (benefit)/expense |
|
$ |
(1.6 |
) |
|
$ |
(2.3 |
) |
|
$ |
5.7 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
102.0 |
|
|
$ |
9.1 |
|
|
$ |
11.3 |
|
|
State |
|
|
28.6 |
|
|
|
0.7 |
|
|
|
2.5 |
|
|
Total deferred income tax expense |
|
$ |
130.6 |
|
|
$ |
9.8 |
|
|
$ |
13.8 |
|
|
Total income tax provision on Consolidated Statements of Income |
|
$ |
129.0 |
|
|
$ |
7.5 |
|
|
$ |
19.5 |
|
|
Income tax expense on other comprehensive income |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.3 |
|
A reconciliation of the provision for income taxes as reported and the amount computed by multiplying income before taxes, less noncontrolling interest, by the U.S. federal statutory rate of 35% was (in millions):
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|
Years Ended |
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|
|
|
December 28, 2017 |
|
|
December 29, 2016 |
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|
December 31, 2015 |
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|||
|
Provision calculated at federal statutory income tax rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
65.6 |
|
|
$ |
31.4 |
|
|
$ |
27.7 |
|
|
Less: Noncontrolling interests |
|
|
(19.7 |
) |
|
|
(21.6 |
) |
|
|
(16.9 |
) |
|
Income attributable to NCM, Inc. |
|
|
45.9 |
|
|
|
9.8 |
|
|
|
10.8 |
|
|
Current year change to enacted federal and state rate (1) |
|
|
81.2 |
|
|
|
(1.9 |
) |
|
|
1.9 |
|
|
State and local income taxes, net of federal benefit |
|
|
4.9 |
|
|
|
1.3 |
|
|
|
1.3 |
|
|
NCM LLC income taxes |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Share-based compensation |
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
0.3 |
|
|
Uncertain tax positions (2) |
|
|
(1.7 |
) |
|
|
(2.9 |
) |
|
|
4.9 |
|
|
Change in the valuation allowance |
|
|
(4.2 |
) |
|
|
— |
|
|
|
— |
|
|
NCM LLC membership unit issuance to NCM, Inc. |
|
|
0.5 |
|
|
|
0.9 |
|
|
|
0.2 |
|
|
Other |
|
|
1.4 |
|
|
|
0.3 |
|
|
|
— |
|
|
Total income tax provision |
|
$ |
129.0 |
|
|
$ |
7.5 |
|
|
$ |
19.5 |
|
|
|
(1) |
Refer to the discussion of the impact of the Tax Act within the ‘Tax Reform’ section below. |
|
|
(2) |
During the year ended December 31, 2015, the Company established a reserve for material, known tax exposures of $4.9 million, including accrued interest and penalties. The reserve relates to tax exposures from prior periods (2010 through 2014). The impact of this reserve was a total out of period impact of $4.9 million to income tax expense and income tax payable in the audited Consolidated Financial Statements during 2015. During the years ended December 28, 2017 and December 29, 2016, the Company reversed approximately $1.7 million of its reserve ($1.3 million of unrecognized tax benefits and $0.4 million of accrued interest and penalties) and $2.9 million of its reserve ($2.3 million of income tax benefits and $0.6 million of accrued interest and penalties), respectively, because the statute of limitations expired. Further information is provided below. |
Deferred Tax Assets—Significant components of the Company’s deferred tax assets consisted of the following (in millions):
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|
Years Ended |
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|||||
|
|
|
December 28, 2017 |
|
|
December 29, 2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Investment in consolidated subsidiary NCM LLC (1) |
|
$ |
241.0 |
|
|
$ |
384.4 |
|
|
Share-based compensation |
|
|
3.7 |
|
|
|
6.3 |
|
|
Net operating losses |
|
|
12.7 |
|
|
|
11.4 |
|
|
Accrued bonus |
|
|
0.4 |
|
|
|
0.8 |
|
|
Other |
|
|
1.3 |
|
|
|
1.6 |
|
|
Total gross deferred tax assets |
|
$ |
259.1 |
|
|
$ |
404.5 |
|
|
Valuation allowance (1) |
|
|
(98.1 |
) |
|
|
(110.3 |
) |
|
Total deferred tax assets, net of valuation allowance |
|
$ |
161.0 |
|
|
$ |
294.2 |
|
|
|
(1) |
The Company recognized a deferred tax asset in the amount of $241.0 million and $384.4 million as of 2017 and 2016, respectively, associated with the basis difference in our investment in NCM LLC. However, a portion of the total basis difference will only reverse upon a sale of the Company’s interest in NCM LLC, which the Company expects would result in a capital loss. Therefore, as of December 28, 2017 and December 29, 2016 the Company has a valuation allowance in the amount of $98.1 million and $110.3 million, respectively, against the deferred tax asset to which this portion relates. |
During the year ended December 28, 2017, the Company recorded a reduction to its deferred tax assets of approximately $32.2 million related to the tax affected difference between the tax basis and book basis of the intangible assets recorded for the extraordinary Common Unit Adjustment and offsetting integration payments, as discussed further in Note 3 – Intangible Assets. These items also resulted in a net reduction to additional paid-in capital of approximately $32.2 million. Further, the Company recognized a deferred tax asset related to a tax basis note receivable of $27.7 million in connection with the common membership unit redemptions that occurred in the third and fourth quarter of 2017, as discussed further in Note 4 – Related Party Transactions.
Tax Reform— On December 22, 2017, the U.S. government enacted the Tax Act which makes broad and complex changes to the U.S. tax code that will affect the Company’s fiscal year ending December 27, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate, (2) allowing full expensing of qualified property, (3) creating a new limitation on deductible interest expense; (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and (5) limiting the amount of compensation that can be deducted for highly compensated officers by terminating the exclusion of performance-based compensation from the $1 million per employee, per year limitation. Following the enactment of the Tax Act, the SEC staff issued SAB 118 which provides guidance on accounting for the tax effects of the Tax Act. 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. While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, the Company’s accounting for various elements of the Tax Act may be affected by other related analysis including, but not limited to, bonus depreciation that will allow for immediate expensing of qualified property and the state tax effect of adjustments made to federal temporary differences. As such, the impact of the Tax Act is an estimate pending further information and the analysis noted. The decrease in the U.S. federal corporate tax rate decreased NCM, Inc.’s blended state and federal rate from 38.58% to 25.38% during the year ended December 28, 2017.
The Company recorded a $97.5 million reduction to the ‘Payable to founding members under the tax receivable agreement’ related to the reduction of the U.S. federal corporate tax rate. The reduction was recorded as a gain of $97.5 million within non-operating income within the Consolidated Statements of Income. Additionally, the Company revalued its deferred balances utilizing the lower blended state and federal rate resulting in a reduction of the net deferred tax asset of $81.2 million. The reduction of the net deferred tax asset was recorded as an increase in deferred tax expense.
Carryforwards— As of December 28, 2017, the Company had gross federal net operating loss carryforwards of approximately $46.4 million, which expire in 2034 through 2037. As of December 28, 2017, the Company had gross state net operating loss carryforwards of approximately $62.5 million, which expire at various dates between 2018 and 2037. As of December 28, 2017, the Company had gross capital loss carryforwards of approximately $1.3 million, which expire in 2021.
Uncertain Tax Positions— The Company has established a reserve for material, known tax exposures. As of December 28, 2017 and December 29, 2016, the total amount of the tax reserve was $0.3 million and $2.0 million, including accrued interest and penalties, respectively. During the year ended December 28, 2017, the Company reversed approximately $1.7 million of its contingency reserve ($1.3 million of unrecognized tax benefits and $0.4 million of accrued interest and penalties) because the statute of limitations expired. It is reasonably possible that the Company’s total unrecognized tax benefits will decrease by approximately $0.3 million during the next twelve months due to the expiration of certain statutes of limitations. The Company’s reserve reflects management’s judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While the Company believes its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to the reserve, the Company’ income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue and (ii) any difference from the Company’s tax position as recorded in the financial statements and the final resolution of a tax issue during the period. Such resolution could materially increase or decrease income tax expense in the audited Consolidated Financial Statements in future periods and could impact operating cash flows.
Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the audited Consolidated Financial Statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
|
|
|
Years Ended |
|
|||||
|
|
|
December 28, 2017 |
|
|
December 29, 2016 |
|
||
|
Balance at beginning of period |
|
$ |
1.6 |
|
|
$ |
3.9 |
|
|
Additions based on tax positions related to prior years |
|
|
— |
|
|
|
— |
|
|
Reductions based on the lapse of applicable statute of limitations |
|
|
(1.3 |
) |
|
|
(2.3 |
) |
|
Balance at end of period |
|
$ |
0.3 |
|
|
$ |
1.6 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.3 million and $1.6 million as of December 28, 2017 and December 29, 2016, respectively, excluding interest and penalties. It is reasonably possible that the Company’s total unrecognized tax benefits will decrease by approximately $0.3 million during the next twelve months due to the expiration of certain statutes of limitations. The Company has accrued $0.0 million and $0.4 million for the payment of interest and penalties as of December 28, 2017 and December 29, 2016, respectively.
The Company recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income and records the liability in income taxes payable in the Consolidated Balance Sheets in accordance with ASC 740. The Company recognized 0.0 million, $(0.6) million and $1.0 million in interest and penalties during the years ended December 28, 2017, December 29, 2016 and December 31, 2015, respectively.