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. 28, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES:

Income before income taxes was generated as follows:



	For the Years Ended
	February 28, 2019		February 28, 2018		February 28, 2017
(in millions)
Domestic	$	1,615.9	$	591.5	$	777.6
Foreign	2,529.1		1,746.5		1,305.4
	$	4,145.0	$	2,338.0	$	2,083.0

The income tax provision (benefit) consisted of the following:



	For the Years Ended
	February 28, 2019		February 28, 2018			February 28, 2017
(in millions)
Current
Federal	$	4.1	$	261.1		$	270.8
State	15.7		20.4			28.5
Foreign	239.2		158.4			126.2
Total current	259.0		439.9			425.5

Deferred
Federal	223.9		(475.9		)	109.9
State	75.0		0.4			7.1
Foreign	128.0		58.3			7.8
Total deferred	426.9		(417.2		)	124.8
Income tax provision	$	685.9	$	22.7		$	550.3

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was signed into law. The TCJ Act significantly changes U.S. corporate income taxes by, among other items, lowering the federal statutory rate from 35% to 21%, eliminating certain deductions, changing how foreign earnings are subject to U.S. tax and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries. In December 2017, the SEC issued guidance related to the income tax accounting implications of the TCJ Act. This guidance provides a measurement period, which extends no longer than one year from the enactment date of the TCJ Act, during which a company may complete its accounting for the income tax implications of the TCJ Act. In accordance with this guidance, we recognized a provisional net income tax benefit of $351.2 million for the year ended February 28, 2018. This amount is comprised primarily of (i) a benefit of $311.2 million from the remeasurement of our deferred tax assets and liabilities to the new, lower federal statutory rate and (ii) a benefit of $220.0 million from the reversal of deferred tax liabilities previously provided for unremitted earnings of foreign subsidiaries which were not considered to be indefinitely reinvested; partially offset by the recording of the mandatory one-time transition tax of $180.0 million on unremitted earnings of our foreign subsidiaries.

For the third quarter of fiscal 2019, we completed our analysis of the income tax implications of the TCJ Act. We recognized an additional income tax benefit of $37.6 million resulting from a decrease in the mandatory one-time transition tax on unremitted earnings of our foreign businesses.

The TCJ Act also creates a new requirement that certain income earned by foreign subsidiaries (“GILTI”), must be included in U.S. gross income. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat the tax effect of GILTI as a current period tax expense when incurred.

Prior to the third quarter of fiscal 2017, we had historically provided deferred income taxes for the repatriation to the U.S. of earnings from our foreign subsidiaries. During the third quarter of fiscal 2017, in connection with the agreement to divest the Canadian wine business and the ongoing Beer capacity expansion activities in Mexico, including the agreement to acquire the Obregon Brewery, we changed our assertion regarding our ability and intent to indefinitely reinvest unremitted earnings of certain foreign subsidiaries. Approximately $420 million of our earnings for the year ended February 28, 2017, and all future earnings for these foreign subsidiaries were expected to be indefinitely reinvested. Therefore, no deferred income taxes had been provided on these applicable unremitted earnings. Although we expect to continue to reinvest these foreign earnings, as the TCJ Act reduces the tax impact of repatriation, beginning in the fourth quarter of fiscal 2018, we have provided deferred income taxes, consisting primarily of foreign withholding and state taxes, on all applicable unremitted earnings of our foreign subsidiaries.

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 28, 2019					February 28, 2018					February 28, 2017
	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	$	870.5		21.0	%	$	765.4		32.7	%	$	729.1		35.0	%
State and local income taxes, net of federal income tax benefit ⁽¹⁾	81.3			2.0	%	18.0			0.8	%	23.1			1.1	%
Net income tax benefit from TCJ Act	(37.6		)	(0.9	%)	(351.2		)	(15.0	%)	—			—	%
Earnings of subsidiaries taxed at other than U.S. statutory rate ⁽²⁾	(149.0		)	(3.6	%)	(319.1		)	(13.7	%)	(160.4		)	(7.7	%)
Excess tax benefits from stock-based compensation awards ⁽³⁾	(82.9		)	(2.0	%)	(68.6		)	(2.9	%)	—			—	%
Canadian Divestiture	—			—	%	—			—	%	(25.5		)	(1.2	%)
Miscellaneous items, net	3.6			—	%	(21.8		)	(0.9	%)	(16.0		)	(0.8	%)
Income tax provision at effective rate	$	685.9		16.5	%	$	22.7		1.0	%	$	550.3		26.4	%


⁽¹⁾	Includes differences resulting from adjustments to the current and deferred state effective tax rates.


⁽²⁾	Consists of 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 certain foreign subsidiaries offset by foreign tax credits and other foreign adjustments.


⁽³⁾	Represents the recognition of the income tax effect of stock-based compensation awards in the income statement when the awards vest or are settled as a result of our March 1, 2017, adoption of FASB amended share-based compensation guidance (see Note 17).

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 28, 2019			February 28, 2018
(in millions)
Deferred tax assets
Intangible assets	$	1,616.7		$	—
Loss carryforwards	147.8			106.0
Stock-based compensation	33.4			29.1
Inventory	20.3			18.3
Other accruals	93.4			81.1
Gross deferred tax assets	1,911.6			234.5
Valuation allowances	(86.9		)	(112.1		)
Deferred tax assets, net	1,824.7			122.4

Deferred tax liabilities
Intangible assets	—			(499.8		)
Property, plant and equipment	(191.5		)	(197.8		)
Investments in unconsolidated investees	(448.9		)	(78.2		)
Provision for unremitted earnings	(22.8		)	(21.2		)
Derivative instruments	(7.9		)	(19.8		)
Total deferred tax liabilities	(671.1		)	(816.8		)
Deferred tax assets (liabilities), net	$	1,153.6		$	(694.4	)

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.

As of February 28, 2019, operating loss carryforwards, which are primarily state and foreign, totaling $833.3 million 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, $745.5 million will expire in fiscal 2020 through fiscal 2039 and $87.8 million of operating losses in certain jurisdictions may be carried forward indefinitely. Additionally, as of February 28, 2019, federal capital losses totaling $222.3 million are being carried forward and will expire in fiscal 2022.

We have recognized valuation allowances for operating loss carryforwards, capital loss carryforwards and other deferred tax assets when we believe it is more likely than not that these items will not be realized. The decrease in our valuation allowances as of February 28, 2019, primarily relates to the reversal of valuation allowances in connection with the sale of our Accolade Wine Investment in the first quarter of fiscal 2019.

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 28, 2019			February 28, 2018			February 28, 2017
(in millions)
Balance as of March 1	$	89.3		$	39.5		$	30.4
Increases as a result of tax positions taken during a prior period	56.4			7.5			—
Decreases as a result of tax positions taken during a prior period	(1.4		)	(0.1		)	(11.5		)
Increases as a result of tax positions taken during the current period	88.8			43.8			21.3
Decreases related to settlements with tax authorities	(0.8		)	(0.4		)	—
Decreases related to lapse of applicable statute of limitations	(8.0		)	(1.0		)	(0.7		)
Balance as of last day of February	$	224.3		$	89.3		$	39.5

As of February 28, 2019, and February 28, 2018, we had $239.0 million and $93.7 million, respectively, of non-current unrecognized tax benefit liabilities, including interest and penalties, recognized 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 28, 2019, and February 28, 2018, we had $224.3 million and $89.3 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, Switzerland 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 28, 2019, we estimate that unrecognized tax benefit liabilities could change by a range of $1 million to $13 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 29, 2012.

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.