Income Taxes
The sources of income (loss) before income taxes are as follows:
|
| | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
United States | | $ | (28,577 | ) | | $ | 30,696 |
| | $ | 26,550 |
|
Foreign | | (841 | ) | | 7,070 |
| | 5,004 |
|
Income (loss) before income taxes | | $ | (29,418 | ) | | $ | 37,766 |
| | $ | 31,554 |
|
The provision for (benefit from) income taxes are as follows:
|
| | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
Current | | | | | | |
Federal | | $ | 10,107 |
| | $ | 12,261 |
| | $ | 8,598 |
|
State and local | | 2,372 |
| | 3,219 |
| | 1,697 |
|
Foreign | | 8,257 |
| | 5,668 |
| | 4,911 |
|
Current provision for income taxes | | 20,736 |
| | 21,148 |
| | 15,206 |
|
Deferred | | | | | | |
Federal | | 5,642 |
| | 727 |
| | (1,551 | ) |
State and local | | (2,951 | ) | | (370 | ) | | (180 | ) |
Foreign | | (4,210 | ) | | 848 |
| | 947 |
|
Deferred provision (benefit) for income taxes | | (1,519 | ) | | 1,205 |
| | (784 | ) |
Total provision for income taxes | | $ | 19,217 |
| | $ | 22,353 |
| | $ | 14,422 |
|
A reconciliation of the provision for income taxes to income taxes at the statutory U.S. federal income tax rate of 35% is as follows:
|
| | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
Income tax provision (benefit) at the statutory U.S. federal rate | | $ | (10,296 | ) | | $ | 13,218 |
| | $ | 11,044 |
|
State income tax provision (benefit), net of federal tax benefit | | (593 | ) | | 1,904 |
| | 1,272 |
|
Nondeductible expenses, net | | 3,282 |
| | 1,410 |
| | 262 |
|
Foreign taxes (includes rate differential and changes in foreign valuation allowance) | | 5,465 |
| | (2,133 | ) | | 368 |
|
Establishment (release) of valuation allowance | | (3,200 | ) | | 340 |
| | — |
|
U.S. tax on foreign dividends | | — |
| | 5,898 |
| | 1,120 |
|
Current/deferred true-up | | 567 |
| | 1,226 |
| | 241 |
|
Tax reform | | 23,732 |
| | — |
| | — |
|
Other, net | | 260 |
| | 490 |
| | 115 |
|
Total provision for income taxes | | $ | 19,217 |
| | $ | 22,353 |
| | $ | 14,422 |
|
The deferred tax assets and liabilities are attributable to the following components:
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets attributable to: | | | | |
Foreign net operating loss carryforwards | | $ | 31,960 |
| | $ | 26,902 |
|
Accrued compensation and employee benefits | | 15,809 |
| | 18,625 |
|
Deferred compensation | | 13,600 |
| | 17,851 |
|
Foreign tax credit carryforwards | | 8,128 |
| | 12,112 |
|
Accrued rent | | 3,607 |
| | 5,113 |
|
Other accrued expenses | | 2,179 |
| | 3,388 |
|
Deferred tax assets, before valuation allowance | | 75,283 |
| | 83,991 |
|
Valuation allowance | | (35,624 | ) | | (25,020 | ) |
Deferred tax assets, after valuation allowance | | 39,659 |
| | 58,971 |
|
Deferred tax liabilities attributable to: | | | | |
Goodwill | | 306 |
| | 17,130 |
|
Taxes provided on unremitted earnings | | 129 |
| | 3,331 |
|
Depreciation on property and equipment | | 3,216 |
| | 4,723 |
|
Other | | 606 |
| | 966 |
|
Deferred tax liabilities | | 4,257 |
| | 26,150 |
|
Net deferred tax assets | | $ | 35,402 |
| | $ | 32,821 |
|
The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company considers all positive and negative evidence, and all potential sources of taxable income including scheduled reversals of deferred tax liabilities, tax-planning strategies, projected future taxable income and recent financial performance.
The valuation allowance increased from $25.0 million at December 31, 2016 to $35.6 million at December 31, 2017. The valuation allowance at December 31, 2017 was related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and certain foreign deferred tax assets. The Company intends to maintain these valuation allowances until sufficient evidence exists to support their reversal.
At December 31, 2017, the Company had a net operating loss carryforward of $126.0 million related to its foreign tax filings and $0.1 million related to its U.S. state tax filings. Of the $126.0 million net operating loss carryforward, $95.4 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also has a foreign tax credit carryforward of $8.1 million subject to a valuation allowance of $8.1 million recorded as a result of the Tax Reform Act described below.
At December 31, 2016, the Company had a net operating loss carryforward of $101.7 million related to its foreign tax filings and $0.5 million related to its U.S. state tax filings. Of the $101.7 million net operating loss carryforward, $79.9 million is subject to a valuation allowance. Depending on the tax rules of the tax jurisdictions, the losses can be carried forward indefinitely or for periods ranging from five to twenty years. The Company also had a foreign tax credit carryforward of $12.1 million, expiring in 2017 through 2025.
As of December 31, 2017, the Company had unremitted earnings held in its foreign subsidiaries of approximately $74.1 million, of which the company has provided $1.6 million of tax on $15.7 million of earnings that are intended to be remitted. The Company did not recognize a tax liability for income taxes and foreign withholding taxes related to the unremitted earnings of its foreign operations because the Company intends to reinvest those earnings indefinitely, net of any allowable deductions. An estimate of these taxes; however, is not practicable. A tax liability will be recognized if and when the Company is no longer able to demonstrate that it plans to permanently reinvest unremitted earnings.
As of December 31, 2016, the Company had unremitted earnings held in its foreign subsidiaries of approximately $72.7 million, of which the company has provided $3.3 million of tax on $15.6 million of earnings that are intended to be remitted. In 2016, the Company repatriated dividends from foreign operations to the United States. This resulted in additional book tax expense which will be offset by utilizing foreign tax credits. The Company did not recognize a deferred tax liability for U.S. income taxes and foreign withholding taxes related to the unremitted earnings of its foreign operations because the Company intends to reinvest those earnings indefinitely. If a distribution of these earnings were to be made, the Company might be subject to both foreign withholding taxes and U.S. income taxes, net of any allowable foreign tax credits or deductions. An estimate of these taxes; however, is not practicable. A deferred tax liability will be recognized if and when the Company is no longer able to demonstrate that it plans to permanently reinvest unremitted earnings.
As of January 1, 2017, the Company had $1.0 million of unrecognized tax benefits. As of December 31, 2017, the Company had $0.7 million of unrecognized tax benefits of which, if recognized, would be recorded as a component of income tax expense.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits at January 1, | | $ | 1,038 |
| | $ | 130 |
| | $ | 143 |
|
Gross increases for tax positions of prior years | | 167 |
| | 2,146 |
| | 22 |
|
Gross decreases for tax positions of prior years | | — |
| | (4 | ) | | (15 | ) |
Settlements | | (465 | ) | | (1,234 | ) | | (20 | ) |
Lapse of statute of limitations | | — |
| | — |
| | — |
|
Gross unrecognized tax benefits at December 31, | | $ | 740 |
| | $ | 1,038 |
| | $ | 130 |
|
In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. Years 2014 through 2016 are subject to examination by the state taxing authorities. The years 2014 and 2016 are subject to examination by the federal taxing authority. There are certain foreign jurisdictions that are subject to examination for years prior to 2014.
The Company is currently under audit by some jurisdictions. It is likely that the examination phase of several of these audits will conclude in the next twelve months. No significant increases or decreases in unrecognized tax benefits are expected to occur by December 31, 2018.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the Consolidated Statements of Comprehensive Income (Loss). Accrued interest and penalties are $0.1 million as of December 31, 2017.
The “Tax Cuts and Jobs Act” was enacted in December 22, 2017. Certain changes of the 2017 Tax Reform Act to the U.S tax code include: permanently reducing the corporate tax rate from 35% to a flat 21% for tax years beginning after December 31, 2017. The Tax Act includes the Transition Tax ‘Toll Charge’ and two additions to the tax base erosion: the global intangible low-taxed income (“GILTI”) of U.S. shareholders of CFCs, and the base-erosion and anti-abuse tax (“BEAT”).
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax assets at December 31, 2017 and recognized a $14.2 million tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. As a result of the changes in the Tax Reform Act, the Company also reduced its deferred tax assets by $1.4 million.
The Tax Reform Act provided for a one-time deemed mandatory repatriation (“Toll Tax”) of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company does not have undistributed foreign subsidiary E&P and therefore did not record a Toll Tax liability for the year ended December 31, 2017.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018, due to expense allocations required by the U.S. foreign tax credit rules. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities, foreign earnings intended to be remitted, and the tax on foreign earnings intended to be remitted. The Company has included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.