Income Taxes
The following table summarizes the expense (benefit) for income taxes (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Predecessor | | | Successor |
| | July 1, 2014 to February 1, 2015 | | | November 20, 2014 to June 30, 2015 | | Fiscal Year Ended June 30, 2016 | | Fiscal Year Ended June 30, 2017 |
Current: | | | | | | | | | |
Federal | | $ | (1.7 | ) | | | $ | (0.2 | ) | | $ | 18.4 |
| | $ | 16.8 |
|
State | | 1.4 |
| | | 0.6 |
| | 5.0 |
| | 3.6 |
|
Deferred: | | | | | | | | | |
Federal | | 4.4 |
| | | (11.4 | ) | | (17.4 | ) | | (16.0 | ) |
State | | (0.9 | ) | | | (1.6 | ) | | (2.2 | ) | | (1.8 | ) |
Total income tax expense (benefit) | | $ | 3.2 |
| | | $ | (12.6 | ) | | $ | 3.8 |
| | $ | 2.6 |
|
The difference between the tax provision at the statutory federal income tax rate and the effective rate on income was as follows:
|
| | | | | | | | | | | | | |
| | Predecessor | | | Successor |
| | July 1, 2014 to February 1, 2015 | | | November 20, 2014 to June 30, 2015 | | Fiscal Year Ended
June 30, 2016 | | Fiscal Year Ended
June 30, 2017 |
Statutory federal income tax rate | | 35.0 | % | | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) in rate resulting from: | | | | | | | | | |
State taxes, net of federal benefits | | (7.1 | ) | | | 2.3 |
| | 175.0 |
| | 7.1 |
|
Permanent adjustments | | (187.1 | ) | | | (4.4 | ) | | 250.0 |
| | 11.4 |
|
Stock compensation adjustments | | — |
| | | — |
| | — |
| | (11.4 | ) |
State effective tax rate change on deferred items | | — |
| | | — |
| | 340.0 |
| | 1.5 |
|
Provision to return adjustments | | (5.8 | ) | | | — |
| | 125.0 |
| | (4.7 | ) |
Changes to unrecognized tax benefits | | (3.4 | ) | | | 1.2 |
| | 25.0 |
| | (3.2 | ) |
Other | | — |
| | | — |
| | — |
| | 1.4 |
|
Effective tax rate | | (168.4 | )% | | | 34.1 | % | | 950.0 | % | | 37.1 | % |
The Company’s effective income tax rate for the fiscal year ended June 30, 2017 was higher than the U.S. federal statutory rate primarily due to state income taxes and non-deductible meals and entertainment expenses which is offset by the favorable stock compensation excess benefit deduction.
The Company’s effective income tax rate for the fiscal year ended June 30, 2016 was higher than the U.S. federal statutory rate primarily due to the impact on the nominally small pre-tax income of unfavorable permanent differences and the impact of the revaluation of deferred tax balances related to the state effective tax rate change.
The Company’s effective income tax rate for the Successor period ended June 30, 2015 was lower than the U.S. federal statutory rate primarily due to the impact on the pre-tax loss of unfavorable permanent differences for the recognition of certain expenses in the Successor financial statements associated with the Presidio Acquisition as described in Note 2.
The Company’s effective income tax rate for the Predecessor period ended February 1, 2015 was lower than the U.S. federal statutory rate primarily due to the impact on the pre-tax loss of unfavorable permanent differences for the recognition of certain expenses in the Predecessor financial statements associated with the Presidio Acquisition. The impact of the permanent differences created income tax expense in relation to the short period pre-tax loss.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets (liabilities) were as follows (in millions):
|
| | | | | | | | |
| | Successor |
| | June 30, 2016 | | June 30, 2017 |
| | Non-current |
Deferred tax assets: | | | | |
Accrued expenses | | $ | 20.5 |
| | $ | 16.5 |
|
Bad debt | | 1.2 |
| | 1.5 |
|
Share-based compensation | | 3.8 |
| | 7.5 |
|
Acquisition related | | 4.6 |
| | 3.8 |
|
Net operating losses | | 0.1 |
| | — |
|
Total deferred tax assets | | 30.2 |
| | 29.3 |
|
Deferred tax liabilities: | | | | |
Intangibles | | (272.2 | ) | | (252.3 | ) |
Leases | | (33.3 | ) | | (34.2 | ) |
Debt issuance costs | | (8.4 | ) | | (8.6 | ) |
Depreciation | | (4.1 | ) | | (3.4 | ) |
Other | | (0.2 | ) | | (1.2 | ) |
Total deferred tax liabilities | | (318.2 | ) | | (299.7 | ) |
Total deferred tax assets (liabilities) | | $ | (288.0 | ) | | $ | (270.4 | ) |
The Company believes that it is more likely than not, based on the weight of available evidence, that the deferred tax assets as shown will be realized when future taxable income is generated through the reversal of existing taxable temporary differences and income that is expected to be generated by businesses that have a history of generating taxable income. As of June 30, 2017 and 2016, no valuation allowances have been recorded against the deferred tax assets.
The Company records a liability for uncertain tax positions if it is not more likely than not that the position will be sustained in an audit, including resolution of related appeals or litigation, if any. For positions that are more likely than not to be sustained, the liability recorded is measured as the largest benefit amount that is more than 50% likely to be realized upon ultimate settlement. As of June 30, 2017 and June 30, 2016, the Company had unrecognized tax benefits including interest and penalties of $1.1 million and $1.6 million, respectively. The $0.5 million net decrease in the liability is primarily attributed to statutes of limitation lapsing. As of June 30, 2017, the Company believes that it is reasonably possible that the total amounts of unrecognized tax benefits will decrease by $0.3 million all of which will impact the effective tax rate within the next 12 months related to statutes of limitations on certain federal and state income tax returns expiring. The liability for uncertain tax positions is presented within other liabilities in the consolidated balance sheets.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits excluding interest and penalties is as follows (in millions):
|
| | | | | | | | | | | | | | | | | |
| | Predecessor | | | Successor |
| | July 1, 2014 to February 1, 2015 | | | November 20, 2014 to June 30, 2015 | | Fiscal Year Ended
June 30, 2016 | | Fiscal Year Ended
June 30, 2017 |
Balance, beginning of the period | | $ | 2.4 |
| | | $ | — |
| | $ | 1.5 |
| | $ | 1.3 |
|
Increases for tax positions taken on acquired entities | | — |
| | | 2.4 |
| | — |
| | — |
|
Increases for tax positions taken in a previous period | | — |
| | | — |
| | 0.3 |
| | — |
|
Expiration of statutes of limitation | | — |
| | | (0.9 | ) | | (0.5 | ) | | (0.4 | ) |
Balance, end of period | | $ | 2.4 |
| | | $ | 1.5 |
| | $ | 1.3 |
| | $ | 0.9 |
|
Interest and penalties recognized as part of income taxes from continuing operations was a net benefit of less than $0.1 million for the fiscal years ended June 30, 2017 and 2016. Total interest and penalties expense was $0.3 million and $0.2 million for the Successor period ended June 30, 2015 and for the Predecessor period ended February 1, 2015, respectively. The cumulative interest and penalties recorded on the Company’s consolidated balance sheets was $0.2 million as of June 30, 2017 and $0.3 million as of June 30, 2016.
The income tax benefits realized by the Company related to share-based compensation expense were $1.2 million for the fiscal year ended June 30, 2017, $0.1 million for the fiscal year ended June 30, 2016 and $19.5 million for the Predecessor period ended February 1, 2015. There were no tax benefits realized by the Company related to share-based compensation expense for the Successor period ended June 30, 2015.
The Company files a consolidated federal income tax return and various consolidated state income tax returns. The Company’s federal and material state income tax years remain open to examination for the fiscal year ended June 30, 2013. The Company is currently under examination by the Internal Revenue Service for fiscal year ended June 30, 2015. We do not believe that the outcome of the examination will have a material impact on our financial statements.