7. INCOME TAXES
Significant components of income (loss) before income taxes and income tax expense (benefit) for the fiscal years ended September 30, 2017, September 30, 2016 and September 25, 2015 consisted of the following:
|
| | | | | | | | | | | | |
(in thousands) | | September 30, 2017 | | September 30, 2016 | | September 25, 2015 |
Components of income (loss) before income taxes: | | | | | | |
United States | | $ | 116,580 |
| | $ | 78,016 |
| | $ | (11,739 | ) |
Non-U.S | | 9,545 |
| | 8,765 |
| | 3,868 |
|
Income (loss) before income taxes | | $ | 126,125 |
| | $ | 86,781 |
| | $ | (7,871 | ) |
| | | | | | |
Income tax expense (benefit): | | | | | | |
Current: | | | | | | |
United States: | | | | | | |
Federal | | $ | 33,127 |
| | $ | 18,748 |
| | $ | (2,017 | ) |
State | | 4,246 |
| | 4,655 |
| | 1,562 |
|
Non-U.S: | | 3,175 |
| | 2,026 |
| | 1,189 |
|
Current income tax expense | | $ | 40,548 |
| | $ | 25,429 |
| | $ | 734 |
|
| | | | | | |
Deferred: | | | | | | |
United States: | | | | | | |
Federal | | $ | 224 |
| | $ | 642 |
| | $ | (3,721 | ) |
State | | 469 |
| | 1,872 |
| | (929 | ) |
Non-U.S: | | 245 |
| | 42 |
| | 1,000 |
|
Deferred income tax expense (benefit) | | 938 |
| | 2,556 |
| | (3,650 | ) |
Income tax expense (benefit) | | $ | 41,486 |
| | $ | 27,985 |
| | $ | (2,916 | ) |
The mix of foreign losses and domestic losses, along with rate reconciling items as outlined below, impacts the effective tax rate for the periods. Differences between the statutory federal income tax rate and effective income tax rate are summarized below:
|
| | | | | | | | | |
(in thousands) | | September 30, 2017 | | September 30, 2016 | | September 25, 2015 |
Statutory federal tax | | 35 | % | | 35 | % | | 35 | % |
Adjustments to reconcile to the effective income tax rate: | | | | | | |
State income taxes | | 3 | % | | 5 | % | | 1 | % |
Nondeductible expenses | | — | % | | 2 | % | | (7 | )% |
Valuation allowance | | — | % | | 1 | % | | (15 | )% |
Foreign rate differential | | (1 | )% | | (2 | )% | | 3 | % |
Domestic Manufacturing Deduction | | (2 | )% | | (3 | )% | | — | % |
Prior period adjustments | | — | % | | — | % | | (2 | )% |
Indemnified uncertain tax benefits | | — | % | | (5 | )% | | 22 | % |
Stock-based compensation | | (3 | )% | | — | % | | — | % |
Other | | 1 | % | | (1 | )% | | — | % |
Effective income tax rate | | 33 | % | | 32 | % | | 37 | % |
The Company's effective tax rate for fiscal 2017 differs from the statutory rate primarily due to a $3,589 excess tax benefit associated with the exercise of stock options, a $2,761 tax benefit for domestic manufacturing deduction, offset by $3,459 of state income tax expense.
The Company's effective tax rate for fiscal 2016 differs from the statutory rate primarily due to a $4,332 tax benefit from the release of indemnified uncertain tax positions, a $2,805 tax benefit for domestic manufacturing deduction, offset by $4,625 of state income tax expense and $1,685 of non-deductible transaction costs.
The Company's effective tax rate for fiscal 2015 differs from the statutory rate due to a $1,779 tax benefit from the release of indemnified uncertain tax positions offset by nondeductible expenses and additional valuation allowance against deferred tax assets and foreign jurisdictions in which the deferred tax assets are not expected to be realized.
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax assets are as follows:
|
| | | | | | | | |
(in thousands) | | September 30, 2017 | | September 30, 2016 |
Deferred tax assets: | | | | |
Accrued liabilities and reserves | | $ | 48,619 |
| | $ | 50,221 |
|
Tax loss and credit carryforwards | | 15,340 |
| | 14,138 |
|
Postretirement benefits | | 9,863 |
| | 14,232 |
|
Inventory | | 6,482 |
| | 6,526 |
|
Other | | 877 |
| | 1,320 |
|
| | $ | 81,181 |
| | $ | 86,437 |
|
Deferred tax liabilities: | | | | |
Property, plant and equipment | | $ | (13,770 | ) | | $ | (12,785 | ) |
Intangible assets | | (65,072 | ) | | (70,037 | ) |
Loss on investment | | (6,085 | ) | | (5,151 | ) |
Other | | (2,549 | ) | | (1,695 | ) |
| | $ | (87,476 | ) | | $ | (89,668 | ) |
Net deferred tax liability before valuation allowance | | (6,295 | ) | | (3,231 | ) |
Valuation allowance | | (9,512 | ) | | (8,658 | ) |
Net deferred tax liability | | $ | (15,807 | ) | | $ | (11,889 | ) |
As of September 30, 2017, the Company has $66,114 of state net operating loss carryforwards which expire beginning in 2018 through 2036. In certain non-U.S. jurisdictions, the Company has net operating loss carryforwards of $42,494 which have an expiration period ranging from five years to unlimited.
Valuation allowances have been established on net operating losses and other deferred tax assets in Australia, France, Asia Pacific, and other foreign and United States state jurisdictions as a result of the Company's determination that there is less than 50% likelihood that these assets will be realized. Evidence for this determination includes three year cumulative loss positions, future reversal of temporary differences, and expectations of future losses. For fiscal 2016, the Company reassessed the need for a valuation allowance against deferred tax assets in the Company's Asia Pacific business based on recent earnings and utilization of net operating losses. As a result, the Company released its historic valuation allowance related to the $1,360 of deferred taxes of its Asia Pacific business.
As of September 30, 2017, the Company had unrecognized tax benefits of $3,578 which, if recognized, would positively benefit the effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2017 and September 30, 2016, the Company had accrued interest and penalties of $3,193 and $3,035, respectively, in the consolidated balance sheets.
A reconciliation of the beginning and ending amount of unrecognized tax benefit, excluding interest and penalties, is as follows:
|
| | | | |
(in thousands) | | For the period from September 26, 2014 to September 30, 2017 |
Balance as of September 26, 2014 | | $ | 10,242 |
|
Additions based on tax positions related to prior years | | 69 |
|
Settlements | | (2,210 | ) |
Balance as of September 25, 2015 | | 8,101 |
|
Additions based on tax positions related to prior years | | 62 |
|
Settlements | | (4,360 | ) |
Balance as of September 30, 2016 | | 3,803 |
|
Additions based on tax positions related to prior years | | 63 |
|
Settlements | | (288 | ) |
Balance as of September 30, 2017 | | $ | 3,578 |
|
During fiscal 2017, the balance of unrecognized tax benefits decreased by $288 as a result of Tyco completing tax audits and the expiration of the statute of limitations in various state jurisdictions. The related accrued penalties and interest for uncertain tax positions increased by $158.
During fiscal 2016, the balance of unrecognized tax benefits decreased by $4,360 as a result of Tyco completing tax audits and the expiration of the statute of limitations in various state jurisdictions. The related accrued penalties and interest for uncertain tax positions decreased by $2,458.
During fiscal 2015, the balance of unrecognized tax benefits decreased by $2,210 as a result of Tyco completing tax audits and the expiration of the statute of limitations in various state jurisdictions. The related accrued penalties and interest for uncertain tax positions decreased by $596.
Many of the Company's uncertain tax positions relate to tax years that remain subject to audit by the taxing authorities. The following tax years remain subject to examination by the major tax jurisdictions as follows:
|
| | |
Jurisdiction | | Years Open to Audit |
France | | 2010-2012 |
United States | | 2011-2014, 2016 |
The Company's income tax returns are examined periodically by various taxing authorities. The Company's federal tax return for fiscal 2015 has been completed by the Internal Revenue Service with no change, and the Company is currently under examination in various state jurisdictions. Based on the current status of its income tax audits, the Company believes that it is reasonably possible that there would be no material changes to the unrecognized tax benefits in the next twelve months. Should any unrecognized tax benefits be resolved, the Company will seek reimbursement from Tyco under the terms of the Investment Agreement relative to the periods prior to the Transactions.
Other Income Tax Matters—During the fiscal years ended September 30, 2017 and September 30, 2016, the Company made no additional provision for United States or non-U.S. income taxes on the undistributed income of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such income is expected to be indefinitely reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of the distribution of such income.
As of September 30, 2017, certain subsidiaries had approximately $33,307 of undistributed income that the Company intends to permanently reinvest. A liability could arise if the Company's intention to permanently reinvest such income were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested income or the basis differences related to investments in subsidiaries.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across its global operations. The Company records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on the Company's estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carry-forwards. The Company adjusts these reserves in light of changing facts and circumstances. However, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. For uncertain tax liabilities (including penalties and interest) arising in the periods prior to the Transactions that are resolved in a future period, the Company plans to seek repayment from Tyco under the terms of an investment agreement. Accordingly, the Company has reflected those liabilities with an offsetting receivable due from Tyco of $5,787 on the consolidated balance sheet as of September 30, 2017. If the Company's estimate of uncertain tax liabilities arising in the periods following the Transactions proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.
Under the terms of an investment agreement between the Company and Tyco, Tyco has agreed to indemnify and hold harmless the Company and its subsidiaries and their respective affiliates from and against any taxes of the Company with respect to any tax period ending on or before the closing of the Transactions, as well as all tax liabilities relating to events or transactions occurring on or prior to the closing date of the Transactions. In addition, the Company has agreed to indemnify and hold harmless Tyco and its affiliates from and against any liability for any taxes of the Company with respect to any post-Transactions tax period.