Constellation Brands, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Feb. 29, 2016

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES:

Income before income taxes was generated as follows:



	For the Years Ended
	February 29, 2016		February 28, 2015		February 28, 2014
(in millions)
Domestic	$	599.3	$	481.6	$	2,050.8
Foreign	901.9		698.0		151.5
	$	1,501.2	$	1,179.6	$	2,202.3

The income tax provision consisted of the following:



	For the Years Ended
	February 29, 2016		February 28, 2015			February 28, 2014
(in millions)
Current
Federal	$	126.2	$	195.0		$	141.7
State	19.9		20.1			18.5
Foreign	43.5		49.0			57.4
Total current	189.6		264.1			217.6

Deferred
Federal	232.4		84.6			61.4
State	15.6		4.8			4.4
Foreign	3.0		(10.1		)	(24.2		)
Total deferred	251.0		79.3			41.6
Income tax provision	$	440.6	$	343.4		$	259.2

The foreign provision (benefit) for income taxes is based on foreign pretax earnings. Earnings of foreign subsidiaries would be subject to U.S. income taxation on repatriation to the U.S. Our financial statements provide for anticipated tax liabilities on amounts that may be repatriated.

Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income.

Significant components of deferred tax assets (liabilities) consist of the following:



	February 29, 2016			February 28, 2015
(in millions)
Deferred tax assets
Net operating losses	$	74.2		$	13.3
Stock-based compensation	50.1			51.9
Inventory	14.1			12.5
Derivative instruments	5.1			3.4
Insurance accruals	3.8			3.4
Employee benefits	2.8			2.7
Unrealized foreign exchange	1.3			0.4
Other accruals	39.4			50.2
Gross deferred tax assets	190.8			137.8
Valuation allowances	(35.7		)	(35.3		)
Deferred tax assets, net	155.1			102.5

Deferred tax liabilities
Intangible assets	(688.1		)	(531.5		)
Property, plant and equipment	(264.2		)	(263.2		)
Provision for unremitted earnings	(199.9		)	(72.6		)
Investments in equity method investees	(24.3		)	(25.1		)
Total deferred tax liabilities	(1,176.5		)	(892.4		)
Deferred tax liabilities, net	$	(1,021.4	)	$	(789.9	)

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. In making this assessment, we consider the projected reversal of deferred tax liabilities and projected future taxable income. Based upon this assessment, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of any valuation allowances.

Operating loss carryforwards totaling $436.7 million at February 29, 2016, are being carried forward in a number of jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. Of these operating loss carryforwards, $404.3 million will expire in 2018 through 2036 and $32.4 million of operating losses in certain jurisdictions may be carried forward indefinitely.

A reconciliation of the total tax provision (benefit) to the amount computed by applying the statutory U.S. Federal income tax rate to income before provision for (benefit from) income taxes is as follows:



	For the Years Ended
	February 29, 2016					February 28, 2015					February 28, 2014
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
(in millions, except % of pretax income data)
Income tax provision at statutory rate	$	525.4		35.0	%	$	412.8		35.0	%	$	770.8		35.0	%
State and local income taxes, net of federal income tax benefit	23.1			1.5	%	16.1			1.4	%	14.8			0.7	%
Net operating loss valuation allowance	2.3			0.2	%	11.1			0.9	%	16.3			0.8	%
Earnings of subsidiaries taxed at other than U.S. statutory rate	(103.5		)	(6.9	%)	(86.4		)	(7.3	%)	(61.2		)	(2.8	%)
Impairment of nondeductible goodwill	—			—	%	—			—	%	97.5			4.4	%
Gain on remeasurement to fair value of equity method investment	—			—	%	—			—	%	(574.7		)	(26.1	%)
Miscellaneous items, net	(6.7		)	(0.5	%)	(10.2		)	(0.9	%)	(4.3		)	(0.2	%)
Income tax provision at effective rate	$	440.6		29.3	%	$	343.4		29.1	%	$	259.2		11.8	%

For the years ended February 29, 2016, February 28, 2015, and February 28, 2014, the state and local income taxes, net of federal income tax benefit, includes benefits resulting from adjustments to the current and deferred state effective tax rates. These benefits include the recognition of prior period income tax refunds, decreases in uncertain tax positions and adjustments to the current and deferred state effective tax rates. The effect of earnings of foreign subsidiaries includes the difference between the U.S. statutory rate and local jurisdiction tax rates, as well as the provision for incremental U.S. taxes on unremitted earnings of foreign subsidiaries offset by foreign tax credits and other foreign adjustments.

The liability for income taxes associated with uncertain tax positions, excluding interest and penalties, and a reconciliation of the beginning and ending unrecognized tax benefit liabilities is as follows:



	For the Years Ended
	February 29, 2016			February 28, 2015			February 28, 2014
(in millions)
Balance as of March 1	$	85.5		$	101.5		$	100.6
Increases as a result of tax positions taken during a prior period	0.1			0.1			2.3
Decreases as a result of tax positions taken during a prior period	(1.2		)	(4.0		)	(3.3		)
Increases as a result of tax positions taken during the current period	3.7			7.7			11.1
Decreases related to settlements with tax authorities	(54.7		)	(13.9		)	(6.7		)
Decreases related to lapse of applicable statute of limitations	(3.0		)	(5.9		)	(2.5		)
Balance as of last day of February	$	30.4		$	85.5		$	101.5

As of February 29, 2016, and February 28, 2015, we had $32.3 million and $79.7 million, respectively, of non-current unrecognized tax benefit liabilities, including interest and penalties, recorded on our balance sheets. These liabilities are recorded as non-current as payment of cash is not anticipated within one year of the balance sheet date.

As of February 29, 2016, and February 28, 2015, we had $30.4 million and $85.5 million, respectively, of unrecognized tax benefit liabilities that, if recognized, would decrease the effective tax rate.

We file U.S. Federal income tax returns and various state, local and foreign income tax returns. Major tax jurisdictions where we are subject to examination by tax authorities include Canada, Luxembourg, Mexico, New Zealand and the U.S. Various U.S. Federal, state and foreign income tax examinations are currently in progress. It is reasonably possible that the liability associated with our unrecognized tax benefit liabilities will increase or decrease within the next twelve months as a result of these examinations or the expiration of statutes of limitation. As of February 29, 2016, we estimate that unrecognized tax benefit liabilities could change by a range of $1 million to $6 million. With few exceptions, we are no longer subject to U.S. Federal, state, local or foreign income tax examinations for fiscal years prior to February 28, 2009.

We provide for additional tax expense based on probable outcomes of ongoing tax examinations and assessments in various jurisdictions. While it is often difficult to predict the outcome or the timing of resolution of any tax matter, we believe the reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution would be recognized as a reduction to the effective tax rate in the year of resolution.

The Internal Revenue Service (“IRS”) concluded its examination of our fiscal years ended February 28, 2010, and February 28, 2011. We received a Revenue Agent’s Report (“RAR”) from the IRS proposing tax assessments for those years. We disagree with certain assessments in this report and have submitted a written protest stating our formal disagreement with the conclusions presented in the RAR. We believe that our position will be successfully sustained. For other items that were effectively settled, we reduced our liability for uncertain tax positions and recorded a tax benefit of $31.9 million for the second quarter of fiscal 2016. In addition, during the year ended February 29, 2016, various U.S. state and international examinations were finalized. In total, tax benefits of $51.0 million were recorded related to the resolution of certain tax positions in connection with those examinations and the expiration of statutes of limitation.