Income Taxes
The U.S. Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 resulting in broad and complex changes to U.S. income tax law. The Tax Act includes a one-time transition tax in 2017 on accumulated foreign subsidiary earnings not previously subject to U.S. income tax, reduces the U.S. corporate statutory tax rate from 35% to 21% effective January 1, 2018, generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, creates new tax on certain foreign-sourced earnings, makes other changes to limit certain deductions and changes rules on how certain tax credits and net operating loss carryforwards can be utilized.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our 2017 financial statements. As we finalize the necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the United States Internal Revenue Service (“IRS”), or other standard-setting bodies, we may make adjustments to the provisional amounts.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018.
One-time transition tax
The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount in 2017 for our one-time transitional tax liability and income tax expense of $6.9 million. We have recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed.
Taxes on repatriation of foreign earnings
We previously considered the unremitted earnings in our non-US subsidiaries held directly by a U.S. parent to be indefinitely reinvested and, accordingly, had not provided any deferred income taxes. We intend to pursue repatriation of unremitted earnings in our non-US subsidiaries held directly by a U.S. parent to the extent that such earnings have been included in the one-time transition tax discussed above, and subject to cash requirements to support the strategic objectives of the non-US subsidiary. We recorded a provisional amount in 2017 for the estimated liability and income tax expense for any U.S. federal or state income taxes or additional foreign withholding taxes related to repatriation of such earnings of $7.0 million. In 2017, we recognized certain foreign tax credits of $5.5 million in the U.S. related to the provisional accounting for taxes on repatriation of foreign earnings, however, we also recognized a full valuation allowance related to such tax assets as it is more likely than not that these assets will not be realized.
Deferred tax effects
The Tax Act reduces the U.S. corporate statutory tax rate from 35% to 21% for years after 2017. Accordingly, we have remeasured our U.S. net deferred tax liabilities as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a provisional deferred tax benefit in 2017 of $17.4 million to reflect the reduced U.S. tax rate on our estimated U.S. net deferred tax liabilities. Although the tax rate reduction is known, we have not completed our analysis of the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of December 31, 2017 are provisional.
The net tax benefit recognized in 2017 related to the Tax Act was $3.4 million. As we complete our analysis of the Tax Act and incorporate additional guidance that may be issued by the U.S. Treasury Department, the IRS or other standard-setting bodies, we may identify additional effects not reflected as of December 31, 2017. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
While we have not completed our analysis of the impacts of the Tax Act on our effective tax rate going forward, we anticipate the overall impacts of the Tax Act described above will reduce our effective tax rate in 2018 compared to 2017, excluding the $3.4 million net benefit included in our 2017 income tax provision. The impact of the Tax Act on our effective tax rate in 2018 will depend in large part on the relative contribution of our domestic earnings and finalization of the provisional accounting for the Tax Act.
The provision (benefit) for income taxes related to continuing operations was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2017 | | 2016 | | 2015 |
Current: | | | | | |
U.S. Federal | $ | (236 | ) | | $ | (37,854 | ) | | $ | (32,272 | ) |
State | 561 |
| | 20 |
| | (34 | ) |
Foreign | 10,301 |
| | 10,440 |
| | 11,411 |
|
Total current | 10,626 |
| | (27,394 | ) | | (20,895 | ) |
Deferred: | | | | | |
U.S. Federal | (3,848 | ) | | 2,670 |
| | (2,624 | ) |
State | (796 | ) | | (181 | ) | | 179 |
|
Foreign | (1,089 | ) | | 863 |
| | 1,942 |
|
Total deferred | (5,733 | ) | | 3,352 |
| | (503 | ) |
Total income tax expense (benefit) | $ | 4,893 |
| | $ | (24,042 | ) | | $ | (21,398 | ) |
The total provision (benefit) was allocated to the following components of income (loss):
|
| | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2017 | | 2016 | | 2015 |
Income (loss) from continuing operations | $ | 4,893 |
| | $ | (24,042 | ) | | $ | (21,398 | ) |
Loss from discontinued operations | (4,616 | ) | | — |
| | — |
|
Total provision (benefit) | $ | 277 |
| | $ | (24,042 | ) | | $ | (21,398 | ) |
Income (loss) from continuing operations before income taxes was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2017 | | 2016 | | 2015 |
U.S. | $ | (27,282 | ) | | $ | (76,805 | ) | | $ | (122,082 | ) |
Foreign | 43,394 |
| | 12,051 |
| | 9,856 |
|
Income (loss) from continuing operations before income taxes | $ | 16,112 |
| | $ | (64,754 | ) | | $ | (112,226 | ) |
The effective income tax rate for continuing operations is reconciled to the statutory federal income tax rate as follows: |
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax expense (benefit) at federal statutory rate | 35.0 | % | | (35.0 | %) | | (35.0 | %) |
Nondeductible expenses | 16.2 | % | | 2.8 | % | | 2.8 | % |
Net impact of Tax Act | (22.3 | %) | | — |
| | — |
|
Worthless stock deduction - Brazil | — |
| | (14.4 | %) | | — |
|
Goodwill and other asset impairments | — |
| | 3.5 | % | | 15.7 | % |
Manufacturing deduction | — |
| | 0.8 | % | | 1.8 | % |
Different rates on earnings of foreign operations | (13.3 | %) | | (1.2 | %) | | (3.6 | %) |
Dividend taxes on unremitted earnings | 9.3 | % | | 2.2 | % | | 1.4 | % |
Change in valuation allowance | 1.5 | % | | 6.9 | % | | 2.8 | % |
Uncertain tax positions | — |
| | — |
| | (2.2 | %) |
State tax expense (benefit), net | (1.8 | %) | | (2.5 | %) | | (1.5 | %) |
Other items, net | 5.8 | % | | (0.2 | %) | | (1.3 | %) |
Total income tax expense (benefit) | 30.4 | % | | (37.1 | %) | | (19.1 | %) |
Our effective tax rate in 2017 includes a $3.4 million benefit resulting from the provisional accounting for the Tax Act as described above. In addition, the 2017 effective tax rate was negatively impacted primarily by non-deductible expenses relative to the amount of pre-tax income.
Our effective tax rate in 2016 includes a $9.3 million benefit associated with a worthless stock deduction and related impacts from restructuring the investment in our Brazilian subsidiary, partially offset by a $4.5 million charge for increases to the valuation allowance for certain deferred tax assets which may not be realized (primarily related to our Australian subsidiary and certain U.S. state net operating losses).
Our effective tax rate for 2015 was primarily impacted by the impairment of non-deductible goodwill. In addition, the 2015 income tax provision also includes a $4.6 million charge for increases to the valuation allowance for certain deferred tax assets which may not be realized (primarily related to our Australian subsidiary and certain U.S. state net operating losses). These 2015 charges were partially offset by a $4.4 million benefit associated with the forgiveness of certain inter-company balances due from our Brazilian subsidiary and a $2.2 million benefit from the release of U.S. tax reserves, following the expiration of statutes of limitation.
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at December 31 are as follows:
|
| | | | | | | |
(In thousands) | 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating losses | $ | 23,490 |
| | $ | 18,771 |
|
Capitalized inventory costs | 4,581 |
| | 12,378 |
|
Stock based compensation | 3,793 |
| | 6,955 |
|
Accruals not currently deductible | 7,730 |
| | 4,883 |
|
Unrealized foreign exchange losses, net | 2,595 |
| | 3,087 |
|
Foreign tax credits | 9,262 |
| | 3,269 |
|
Other | 10,451 |
| | 1,871 |
|
Total deferred tax assets | 61,902 |
| | 51,214 |
|
Valuation allowance | (30,154 | ) | | (21,847 | ) |
Total deferred tax assets, net of allowances | 31,748 |
| | 29,367 |
|
Deferred tax liabilities: | | | |
Accelerated depreciation and amortization | (34,265 | ) | | (43,225 | ) |
Original issue discount on 2021 Convertible Notes | (4,299 | ) | | (8,553 | ) |
Tax on unremitted earnings | (16,821 | ) | | (8,555 | ) |
Other | (3,190 | ) | | (6,030 | ) |
Total deferred tax liabilities | (58,575 | ) | | (66,363 | ) |
Total net deferred tax liabilities | $ | (26,827 | ) | | $ | (36,996 | ) |
| | | |
Non-current deferred tax assets | $ | 4,753 |
| | $ | 1,747 |
|
Non-current deferred tax liabilities | (31,580 | ) | | (38,743 | ) |
Net deferred tax liabilities | $ | (26,827 | ) | | $ | (36,996 | ) |
For state income tax purposes, we have net operating loss carryforwards (“NOLs”) of approximately $245.9 million available to reduce future state taxable income. These NOLs expire in varying amounts beginning in 2018 through 2037. Foreign NOLs of approximately $30.5 million are available to reduce future taxable income, some of which expire beginning in 2018.
The realization of our net deferred tax assets is dependent on our ability to generate taxable income in future periods. At December 31, 2017 and 2016, we have recorded a valuation allowance in the amount of $30.2 million and $21.8 million, respectively, primarily related to certain U.S. state and foreign NOL carryforwards, including Australia, as well as for certain tax credits recognized in 2017 related to the provisional accounting for the impact of the Tax Act, which may not be realized.
We file income tax returns in the United States and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. We are no longer subject to income tax examinations for U.S. federal and substantially all state jurisdictions for years prior to 2012 and for substantially all foreign jurisdictions for years prior to 2008. We are currently under examination by the United States federal tax authorities for tax years 2014 and 2015. During the second quarter of 2017, we received a Revenue Agent Report from the IRS disallowing a deduction claimed on our 2015 tax return associated with the forgiveness of certain inter-company balances due from our Brazilian subsidiary and assessing tax due of approximately $3.9 million. We submitted our response to the IRS in the third quarter of 2017 and are proceeding with the tax appeals process. We believe our tax position is properly reported in accordance with applicable U.S. tax laws and regulations and intend to vigorously defend our position through the tax appeals process.
We are also under examination by various tax authorities in other countries, and certain foreign jurisdictions have challenged the amounts of taxes due for certain tax periods. These audits are in various stages of completion. We fully cooperate with all audits, but defend existing positions vigorously. We evaluate the potential exposure associated with various filing positions and record a liability for tax contingencies as circumstances warrant. Although we believe all tax positions are reasonable and properly reported in accordance with applicable tax laws and regulations in effect during the periods involved, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and tax contingency accruals.
A reconciliation of the beginning and ending provision for uncertain tax positions is as follows:
|
| | | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | 665 |
| | $ | 419 |
| | $ | 3,786 |
|
Additions (reductions) for tax positions of prior years | (399 | ) | | 477 |
| | (95 | ) |
Additions (reductions) for tax positions of current year | — |
| | — |
| | — |
|
Reductions for settlements with tax authorities | — |
| | — |
| | (575 | ) |
Reductions for lapse of statute of limitations | (9 | ) | | (231 | ) | | (2,697 | ) |
Balance at December 31 | $ | 257 |
| | $ | 665 |
| | $ | 419 |
|
Approximately $0.3 million of unrecognized tax benefits at December 31, 2017, if recognized, would favorably impact the effective tax rate. In 2015, we recognized a $2.2 million benefit to the income tax provision relating to uncertain tax positions for which the applicable statutes of limitation expired.
We recognize accrued interest and penalties related to uncertain tax positions in operating expenses. The amount of interest and penalties was immaterial for all periods presented.