Income Taxes

12 Months Ended

Sep. 27, 2019

The following table presents the components of our consolidated income tax expense for continuing operations for years ended September 27, 2019, September 28, 2018 and September 29, 2017 (in thousands):



	For the Years Ended
	September 27, 2019			September 28, 2018			September 29, 2017
Current income tax (benefit) expense from continuing operations:
Federal	$	25,549		$	49,829		$	22,825
State	6,639			(1,546		)	7,481
Foreign	57,156			20,858			9,194
Total current tax expense from continuing operations	89,344			69,141			39,500
Deferred income tax expense (benefit) from continuing operations:
Federal	6,607			230,358			22,854
State	20,408			17,318			1,832
Foreign	(79,405		)	8,815			8,917
Total deferred tax expense (benefit) from continuing operations	$	(52,390	)	$	256,491		$	33,603
Consolidated income tax expense from continuing operations	$	36,954		$	325,632		$	73,103

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted in the United States and significantly revised the U.S. corporate income tax laws. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” like that used when accounting for business combinations. As of December 22, 2018, we have completed our accounting for the tax effects of the enactment of the Act. For the deferred tax balances, we remeasured the U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company’s revised remeasurement resulted in cumulative charges to income tax expense of $144.4 million attributable to fiscal year 2018. Additionally, in fiscal year 2019, the Company recorded $24.4 million of tax expense associated with the revaluation of U.S. net operating losses that were expected to be recovered at 35%, but were actually utilized at 21%.

The Act calls for a one-time tax on deemed repatriation of foreign earnings. This one-time transition tax is based on our total post-1986 earnings and profits (E&P) of certain of our foreign subsidiaries. The Company has made a revised provisional estimate of the transition tax. In fiscal 2019, the Company filed its tax return which reflected the transition tax. The net tax liability after considering foreign tax credits resulted in a tax liability of $0.8 million.

In the prior fiscal year, the Company adopted ASU No 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income that the FASB refers to as having been stranded in accumulated other comprehensive income as a result of tax reform. As a result of adoption of ASU 2018-02, the Company reclassified $10.2 million in accumulated other comprehensive income to retained earnings relating to the fiscal 2018 year deferred tax activity for its U.S. pension plans resulting from the Act.

Deferred taxes reflect the tax effects of temporary differences between the amounts recorded as assets and liabilities for financial reporting purposes and the comparable amounts recorded for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The following table presents the components of our net deferred tax assets at September 27, 2019 and September 28, 2018 (in thousands):



	September 27, 2019			September 28, 2018
Deferred tax assets:
Obligations relating to:
Defined benefit pension plans	$	56,854		$	39,777
Other employee benefit plans	149,276			135,713
Net operating losses	241,033			149,256
Foreign tax credit	84,553			145,931
Other credits	13,881			13,972
Contract revenues and costs	62,318			144,383
Deferred rent	21,847			5,654
Restructuring	8,205			5,289
Other	3,821			—
Valuation allowance	(153,257		)	(256,948		)
Gross deferred tax assets	488,531			383,027
Deferred tax liabilities:
Depreciation and amortization	(177,002		)	(159,312		)
Self-insurance programs				—
Unremitted earnings	(29,761		)	(48,578		)
Other, net	(246		)	(8,345		)
Gross deferred tax liabilities	(207,009		)	(216,235		)
Net deferred tax assets	$	281,522		$	166,792

A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts. The valuation allowance was $153.3 million at September 27, 2019 and $256.9 million at September 28, 2018. Of the $103.7 million decrease in the valuation allowance, $85.4 million relates to the direct net write-off of the gross deferred tax asset which has no impact on income tax expense. The remaining decrease includes $29.1 million related to a change in judgment in the realizability of certain deferred tax assets in the current year which resulted in a benefit recorded to income tax expense, offset by a $10.9 million increase associated with acquisitions.

Net operating loss carry forwards of foreign subsidiaries at September 27, 2019 and September 28, 2018 totaled $710.5 million and $470.4 million, respectively. In addition, as of September 27, 2019, the Company has U.S. federal net operating loss carryforwards of $234.6 million. The Company's net operating losses have various expiration periods between 2020 and indefinite periods. At September 27, 2019, the Company has foreign tax and research credit carryforwards of $84.6 million and $6.1 million, respectively, expiring between 2022 and 2037.

The following table presents the income tax benefits from continuing operations realized from the exercise of non-qualified stock options and disqualifying dispositions of stock sold under our employee stock purchase plans for the years ended September 27, 2019, September 28, 2018 and September 29, 2017 (in millions):



For the Years Ended
September 27, 2019		September 28, 2018		September 29, 2017
$	7.9	$	2.2	$	1.8

The Company’s consolidated effective income tax rate is lower than the US statutory rate of 21.0% primarily due to a $29.1 million benefit from foreign valuation allowance releases, $15.7 million of foreign tax and other credits generated in the current year, a benefit of $17.9 million from foreign deferred adjustments and a reduction in uncertain tax positions of $6.9 million. The decreases in tax expense were offset by a $36.6 million charge from the remeasurement of net deferred tax assets and other miscellaneous U.S. tax reform charges.

The following table reconciles total income tax expense from continuing operations using the statutory U.S. federal income tax rate to the consolidated income tax expense for continuing operations shown in the accompanying Consolidated Statements of Earnings for the years ended September 27, 2019, September 28, 2018 and September 29, 2017 (dollars in thousands):



	For the Years Ended
	September 27, 2019			%		September 28, 2018			%		September 29, 2017			%
Statutory amount	$	73,701		21.0	%	$	81,421		24.6	%	$	85,104		35	%
State taxes, net of the federal benefit	10,183			2.9	%	15,772			4.8	%	6,983			2.9	%
Exclusion of tax on non-controlling interests	(4,839)			(1.4	)%	(2,389		)	(0.7	)%	2,223			0.9	%
Foreign:
Difference in tax rates of foreign operations	1,083			0.3	%	2,815			0.9	%	(880		)	(0.4	)%
Benefit from foreign valuation allowance release	(29,125)			(8.3	)%	(5,088		)	(1.5	)%	(3,085		)	(1.3	)%
Nontaxable income from foreign affiliate	—			—	%	—			—	%	(1,320		)	(0.5	)%
U.S. tax cost (benefit) of foreign operations	(17,760		)	(5.1	)%	4,030			1.2	%	10,147			4.2	%
Tax differential on foreign earnings	(45,802		)	(13.1	)%	1,757			0.6	%	4,862			2.0	%
Foreign tax credits	(15,682)			(4.5	)%	(21,735		)	(6.6	)%	(16,337		)	(6.7	)%
Tax reform	36,674			10.4	%	155,756			47.1	%	—			—
Valuation allowance	(207)			(0.1	)%	104,221			31.5	%	—			—
Uncertain tax positions	(6,883)			(2.0	)%	(1,402		)	(0.4	)%	(5,624		)	(2.3	)%
Other items:
IRS §179D deduction	(2,957)			(0.8	)%	(4,557		)	(1.4	)%	(2,613		)	(1.1	)%
IRS §199D deduction	—			—		—			—	%	(1,647		)	(0.7	)%
Disallowed officer compensation	5,568			1.6	%	1,510			0.5	%	1,255			0.5	%
Stock compensation	(7,864)			(2.2	)%	(2,158		)	(0.7	)%	(1,783		)	(0.7	)%
Foreign partnership income/(loss)	—			—	%	(3,678		)	(1.1	)%	(725		)	(0.3	)%
Other items – net	(4,938)			(1.4	)%	1,114			0.3	%	1,405			0.6	%
Total other items	(10,191)			(2.8	)%	(7,769		)	(2.4	)%	(4,108		)	(1.7	)%
Taxes on income from continuing operations	$	36,954		10.5	%	$	325,632		98.4	%	$	73,103		30.1	%

The Company’s consolidated effective income tax rate for continuing operations for the year ended September 27, 2019 decreased to 10.5% from 98.4% for fiscal 2018. Key drivers for this year over year decrease in the effective tax rate include a reduction of $119.1 million associated with remeasurement of U.S. deferred tax items due to tax reform and a decrease in the amount charged for valuation allowance related to foreign tax credits of $104.2 million.

The Company’s consolidated effective income tax rate for continuing operations for the year ended September 28, 2018 increased to 98.4% from 30.1% for fiscal 2017. Key drivers for this year over year increase include the reduction in the U.S. statutory tax rate in fiscal year 2018 causing a detriment for remeasurement of the deferred tax items in the U.S. of $139.8 million, as well as a charge for valuation allowance related to foreign tax credits of $104.2 million. In addition, there was an increase due to the difference in foreign tax rates compared to the new U.S. statutory rate of $19.8 million. These detriments were partially offset by a $4.6 million benefit related to internal revenue service code section 179D, a nonrecurring benefit of $2.8 million related to tax accounting method changes and a $5.7 million federal hurricane credit.

The following table presents income tax payments made during the years ended September 27, 2019, September 28, 2018 and September 29, 2017 (in millions):



September 27, 2019		September 28, 2018		September 29, 2017
$	291.7	$	44.3	$	78.4

The following table presents the components of our consolidated earnings from continuing operations before taxes for the years ended September 27, 2019, September 28, 2018 and September 29, 2017 (in thousands):



	For the Years Ended
	September 27, 2019		September 28, 2018		September 29, 2017
United States earnings	$	225,898	$	263,991	$	177,599
Foreign earnings	125,061		66,990		65,555
	$	350,959	$	330,981	$	243,154

The tax cost, net of applicable credits, have been provided on the undistributed earnings of the Company’s foreign subsidiaries. As of September 27, 2019, the estimate of repatriating earnings to the United States is estimated at $29.8 million. The Company does not assert any earnings to be permanently reinvested.

The Company accounts for unrecognized tax benefits in accordance with ASC Topic 740, Income Taxes. It accounts for interest and penalties on unrecognized tax benefits as interest and penalties (i.e., not as part of income tax expense). The Company’s liability for gross unrecognized tax benefits was $85.2 million and $76.7 million at September 27, 2019 and September 28, 2018, respectively, all of which, if recognized, would affect the Company’s consolidated effective income tax rate. The Company had $51.1 million and $56.3 million in accrued interest and penalties at September 27, 2019 and September 28, 2018, respectively. The Company estimates that, within twelve months, we may realize a decrease in our uncertain tax positions of approximately $4.3 million as a result of concluding various tax audits and closing tax years. As of September 27, 2019, the Company’s U.S. federal income tax returns for tax years 2010 and forward remain subject to examination.

The following table presents the reconciliation of the beginning and ending amount of unrecognized tax benefits for both continuing and discontinued operations, with ECR-sale related impacts removed in the current year Acquisitions/Divestitures row, for the years ended September 27, 2019, September 28, 2018 and September 29, 2017 (in thousands):



	For the Years Ended
	September 27, 2019			September 28, 2018			September 29, 2017
Balance, beginning of year	$	179,140		$	38,580		$	44,167
Acquisitions/Divestitures	(31,004		)	137,912			—
Additions based on tax positions related to the current year	7,455			9,780			5,900
Additions for tax positions of prior years	1,994			5,561			237
Reductions for tax positions of prior years	(49,849		)	(8,962		)	(4,524		)
Settlement	(3,381		)	(3,731		)	(7,200		)
Balance, end of year	$	104,355		$	179,140		$	38,580

On June 12, 2019, the Company completed the acquisition of KeyW and on December 15, 2017 the Company completed the acquisition of CH2M. For income tax purposes, the transactions were accounted for as stock purchases. As a result of the acquisitions, the Company adjusted its U.S. GAAP opening balance sheet of KeyW and CH2M to reflect estimates of the fair value of the net assets acquired. For income tax purposes, the tax attributes and basis of net assets acquired carryover without any step-up to fair value. For KeyW, the Company has made preliminary estimates and recorded deferred taxes associated with the purchase accounting. It is expected that the Company will make adjustments to the purchase accounting over the relevant measurement period as allowed by ASC 805. For CH2M, the Company completed its purchase accounting in the first quarter of the current fiscal year.