Income Taxes
Overview
We are subject to U.S. federal, state and foreign income taxes with respect to our allocable share of any taxable income or loss of Desert Newco, as well as any stand-alone income or loss we generate. Desert Newco has been and will continue to be treated as a partnership for U.S. income tax purposes and for most applicable state and local income tax purposes. As such, Desert Newco is considered a pass-through entity and generally does not pay income taxes on its taxable income in most jurisdictions. Instead, Desert Newco's taxable income or loss is passed through to and included in the taxable income or loss of its members, including us. Despite its partnership treatment, Desert Newco is liable for income taxes in certain foreign jurisdictions in which it operates, in those states not recognizing its pass-through status and for certain of its subsidiaries not taxed as pass-through entities. We have acquired the outstanding stock of various domestic and foreign entities taxed as corporations, which are now owned 100% by us or our subsidiaries. Where required or allowed, these subsidiaries also file and pay tax as a consolidated group for U.S. federal and state income tax purposes and internationally, primarily within the United Kingdom and Germany. We anticipate this structure to remain in existence for the foreseeable future.
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the TCJA) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. federal 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. We have calculated the impact of the TCJA in accordance with our understanding of the TCJA and guidance available as of the date of this filing, as shown below. The one-time transition tax on the mandatory deemed repatriation of foreign earnings had no effect on our benefit (provision) for income taxes as a result of an estimated accumulated deficit in the earnings of our controlled foreign corporations as of the measurement date. We do not expect the provisions of the TCJA unrelated to the rate reduction or one-time transition tax to have a material impact, primarily due to our corporate structure.
On December 22, 2017, the SEC issued guidance to address the application of 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 TCJA. The completion of our 2017 income tax returns, future guidance and additional information and interpretations with the respect to the TCJA may cause us to adjust the provisional amounts recorded as of December 31, 2017. In accordance with the SEC's guidance, we will record such adjustments as current tax expense in the period in which relevant guidance or additional information becomes available and our analysis is complete.
In January 2018, the FASB released guidance on the accounting for the global intangible low-taxed income (GILTI) provisions of the TCJA. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows an accounting policy election either to account for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs. We are still evaluating the potential impacts.
Benefit (Provision) for Income Taxes
Our tax benefit (provision) includes U.S. federal, state and foreign income taxes. The domestic and foreign components of our income (loss) from continuing operations before income taxes were as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | 180.6 |
| | $ | (28.5 | ) | | $ | (121.2 | ) |
Foreign | (73.8 | ) | | 7.0 |
| | 0.6 |
|
Income (loss) from continuing operations before income taxes | $ | 106.8 |
| | $ | (21.5 | ) | | $ | (120.6 | ) |
Our benefit (provision) for income taxes was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (1.4 | ) | | $ | (0.3 | ) | | $ | (0.3 | ) |
State | (0.6 | ) | | (0.3 | ) | | (0.1 | ) |
Foreign | (9.5 | ) | | (3.5 | ) | | (2.4 | ) |
| (11.5 | ) | | (4.1 | ) | | (2.8 | ) |
Deferred: | | | | | |
Federal | 9.6 |
| | 3.1 |
| | 2.4 |
|
State | 0.8 |
| | 0.3 |
| | 0.4 |
|
Foreign | 20.0 |
| | 0.3 |
| | 0.2 |
|
| 30.4 |
| | 3.7 |
| | 3.0 |
|
Benefit (provision) for income taxes | $ | 18.9 |
| | $ | (0.4 | ) | | $ | 0.2 |
|
A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected benefit (provision) at U.S. federal statutory tax rate of 35% | $ | (37.4 | ) | | $ | 7.5 |
| | $ | 42.2 |
|
Effect of TCJA U.S. federal rate reduction from 35% to 21%, net of the effect on valuation allowances | 7.9 |
| | — |
| | — |
|
Effect of Desert Newco's corporate subsidiaries | 27.4 |
| | (0.1 | ) | | 2.8 |
|
TRA liability adjustment | 24.3 |
| | (3.8 | ) | | — |
|
Foreign earnings | (15.3 | ) | | (0.9 | ) | | (2.2 | ) |
State taxes, net of federal benefit | (3.1 | ) | | 0.1 |
| | 5.4 |
|
Income of non-controlling interests | 0.9 |
| | (1.8 | ) | | (15.6 | ) |
Other | (0.4 | ) | | 0.1 |
| | (0.7 | ) |
Effect of changes in valuation allowances, excluding effect of TCJA U.S. federal rate reduction | 14.6 |
| | (1.5 | ) | | (31.7 | ) |
Benefit (provision) for income taxes | $ | 18.9 |
| | $ | (0.4 | ) | | $ | 0.2 |
|
The TCJA changed the U.S. federal corporate statutory tax rate from 35% to 21%. The application of this rate reduction to the ending DTAs and DTLs in our U.S. entities provisionally impacted our benefit for income taxes by a net of $7.9 million. This net benefit results from a $327.4 million reduction in deferred tax expense, which was primarily offset by a $335.3 million increase in the associated valuation allowance as we concluded, based primarily on our limited operating history and our historical losses, that the majority of our U.S. DTAs will more-likely-than-not not be realized. The increase in the impact of foreign earnings primarily results from our acquisition of HEG. The TRA liability adjustment primarily represents the non-deductible portion of the benefit resulting from the provisional decrease in the liability under the TRAs due to the TCJA rate reduction.
Deferred Taxes
The components of our net (DTL) DTAs were as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
DTAs: | | | |
NOLs | $ | 247.8 |
| | $ | 164.8 |
|
Credits and incentives | 3.0 |
| | 2.7 |
|
Investment in Desert Newco | 429.9 |
| | 180.6 |
|
Deferred interest | 10.9 |
| | 10.8 |
|
TRA liability | 16.8 |
| | 14.1 |
|
Unrealized gains/losses | 9.7 |
| | — |
|
Other | 4.4 |
| | 2.2 |
|
Valuation allowance | (711.1 | ) | | (361.5 | ) |
Total DTAs | 11.4 |
| | 13.7 |
|
DTLs: | | | |
Identified intangible assets | (155.8 | ) | | (8.7 | ) |
Total DTLs | (155.8 | ) | | (8.7 | ) |
Net (DTL) DTAs | $ | (144.4 | ) | | $ | 5.0 |
|
During 2017, the DTAs associated with our investment in Desert Newco increased $674.6 million due to exchanges of LLC Units in the secondary offerings discussed in Note 6, exchanges of additional LLC Units and stock option exercises. Our DTAs were provisionally reduced by a net of $7.9 million as a result of the TCJA U.S. federal rate reduction, as discussed above. Preliminary purchase accounting for our 2017 acquisitions resulted in an increase to our DTLs of $173.7 million, primarily related to intangible assets not deductible for tax purposes. In 2017, we also recorded additional DTAs of $201.6 million as a result of our portion of Desert Newco's losses, primarily those resulting from the impact of an Internal Revenue Service approved filing election made in the current year, offset by a provisional decrease of $118.7 million as a result of the TCJA rate reduction.
As a result of the pre-IPO organizational transactions and the IPO, we acquired LLC Units and have recognized a DTA for the difference between the financial reporting and tax basis of our investment in Desert Newco. In addition, we acquired certain tax attributes from these transactions, including $89.2 million of NOL and credit carryforwards, net of tax. During 2016, the DTAs associated with our investment in Desert Newco increased $183.6 million due to exchanges of LLC Units in the secondary offering discussed in Note 6, exchanges of additional LLC Units and stock option exercises. In 2016, we also recorded additional DTAs of $36.7 million as a result of our portion of Desert Newco's losses.
Based primarily on our limited operating history and our historical losses, we believe there is significant uncertainty as to when we will be able to utilize our NOLs, credit carryforwards and other DTAs. Therefore, we have recorded a valuation allowance against the DTAs for which we have concluded it is more-likely-than-not they will not be realized. As part of the acquisition of HEG, our valuation allowance increased as we believe there is significant uncertainty as to our ability to utilize our NOLs and other carryforwards related to the HEG entities in the United Kingdom.
As of December 31, 2017, we have U.S. federal, state and foreign gross NOLs, credits and incentives, a portion of which will begin to expire in 2030 and continue through 2036, as follows:
|
| | | | | | | |
| Gross NOLs, Credits and Incentives | | Portion Subject to a Valuation Allowance |
Federal NOLs and credits | $ | 913.5 |
| | $ | 893.9 |
|
State NOLs, credits and incentives | 1,118.8 |
| | 1,101.0 |
|
Foreign NOLs | 30.3 |
| | 30.0 |
|
Total NOLs, credits and incentives | $ | 2,062.6 |
| | $ | 2,024.9 |
|
Other
We have filed all income tax returns for years through 2016, other than for Germany for which the 2016 pre-acquisition HEG tax returns have not yet been filed. These returns are subject to examination by the taxing authorities in the respective jurisdictions, generally for three or four years after they were filed. Based on our analysis of tax positions taken on income tax returns filed, we have determined no material liabilities related to uncertain income tax positions were required. Although we believe the amounts reflected in our tax returns substantially comply with applicable U.S. federal, state and foreign tax regulations, the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully changed by a taxing authority could result in an adjustment to our benefit for income taxes in the period in which a final determination is made.
As of December 31, 2017, we have provided income taxes on the earnings of foreign subsidiaries, except to the extent such earnings are considered indefinitely reinvested. We have determined the amount of unrecognized DTL related to these temporary differences to be immaterial.