INCOME TAXES
Our consolidated federal and state income tax returns include the results of operations of acquired businesses from their dates of acquisition.
The components of income from continuing operations before income taxes and the income tax provision related to income from all operations in our consolidated statements of operations consist of (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income (loss) before income taxes: | | | | | |
U.S. | $ | 51,037 |
| | $ | 32,741 |
| | $ | (4,839 | ) |
Non-U.S. | (12,335 | ) | | (2,012 | ) | | 524 |
|
Total income (loss) from continuing operations before income taxes | $ | 38,702 |
| | $ | 30,729 |
| | $ | (4,315 | ) |
A reconciliation of the federal statutory corporate income tax rate to our effective income tax rate follows ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax expense (benefit) at statutory rate | $ | 13,546 |
| | 35.0 | % | | $ | 10,755 |
| | 35.0 | % | | $ | (1,510 | ) | | 35.0 | % |
Add (deduct): | | | | | |
| | | | | | |
Rates different from statutory | 2,289 |
| | 5.9 |
| | 621 |
| | 2.0 |
| | (165 | ) | | 3.8 |
|
Statutory income tax change | (7,574 | ) | | (19.6 | ) | | — |
| | — |
| | — |
| | — |
|
State income taxes | 3,525 |
| | 9.1 |
| | 1,429 |
| | 4.6 |
| | (2,322 | ) | | 53.8 |
|
Nondeductible items | 3,071 |
| | 7.9 |
| | 496 |
| | 1.6 |
| | 511 |
| | (11.8 | ) |
Unrecognized tax benefit relating to Warrants | 298 |
| | 0.7 |
| | 7,534 |
| | 24.5 |
| | 21,006 |
| | (486.8 | ) |
Valuation allowance | (2,542 | ) | | (6.6 | ) | | 852 |
| | 2.8 |
| | (21,057 | ) | | 487.9 |
|
Unrecognized tax benefit | — |
| | — |
| | — |
| | — |
| | 390 |
| | (9.0 | ) |
Capital loss carryforward expiration | — |
| | — |
| | — |
| | — |
| | 3,485 |
| | (80.8 | ) |
Depletion | — |
| | — |
| | — |
| | — |
| | (47 | ) | | 1.1 |
|
Other | (177 | ) | | (0.5 | ) | | (536 | ) | | (1.7 | ) | | 488 |
| | (11.3 | ) |
Income tax expense on continuing operations | $ | 12,436 |
| | 144.5 | % | | $ | 21,151 |
| | 68.8 | % | | $ | 779 |
| | (18.1 | )% |
The "Rates different from statutory" line above includes the input of differences between the U.S. federal tax rates and the tax rates in Canada and the U.S. Virgin Islands.
The amounts of our consolidated federal and state income tax expense (benefit) from continuing operations were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
U.S. Federal | | $ | 8,893 |
| | $ | 1,987 |
| | $ | 10,685 |
|
U.S. State | | 7,065 |
| | 2,352 |
| | 2,716 |
|
Non-U.S. | | (141 | ) | | 26 |
| | (43 | ) |
| | 15,817 |
| | 4,365 |
| | 13,358 |
|
Deferred: | | |
| | |
| | |
U.S. Federal | | $ | (621 | ) | | $ | 15,464 |
| | $ | (8,031 | ) |
U.S. State | | (3,540 | ) | | 1,946 |
| | (4,611 | ) |
Non-U.S. | | 780 |
| | (624 | ) | | 63 |
|
| | (3,381 | ) | | 16,786 |
| | (12,579 | ) |
Income tax expense on continuing operations | | $ | 12,436 |
| | $ | 21,151 |
| | $ | 779 |
|
Income tax expense (benefit) was allocated between continuing operations and discontinued operations as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Continuing operations | $ | 12,436 |
| | $ | 21,151 |
| | $ | 779 |
|
Discontinued operations | (454 | ) | | (435 | ) | | (180 | ) |
Income tax expense | $ | 11,982 |
| | $ | 20,716 |
| | $ | 599 |
|
Deferred income tax provisions result from temporary differences in the recognition of expenses for financial reporting purposes and for tax reporting purposes. We present the effects of those differences as deferred income tax liabilities and assets, as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | |
| | |
|
Goodwill and other intangibles | | $ | 7,022 |
| | $ | 5,748 |
|
Inventory | | 3,543 |
| | 4,303 |
|
Accrued insurance | | 5,284 |
| | 5,872 |
|
Other accrued expenses | | 6,595 |
| | 7,288 |
|
Net operating loss carryforwards | | 10,951 |
| | 5,914 |
|
Property, plant and equipment, net - Polaris | | 11,738 |
| | — |
|
Other | | 4,355 |
| | 6,784 |
|
Total gross deferred tax assets | | 49,488 |
| | 35,909 |
|
Valuation allowance | | (20,745 | ) | | (4,983 | ) |
Net deferred tax assets | | 28,743 |
| | 30,926 |
|
Deferred income tax liabilities: | | | | |
Property, plant and equipment, net - Non-Polaris | | (32,987 | ) | | (38,544 | ) |
Depletion | | (581 | ) | | (38 | ) |
Total gross deferred tax (liabilities) | | (33,568 | ) | | (38,582 | ) |
Net deferred tax (liability) asset | | $ | (4,825 | ) | | $ | (7,656 | ) |
On December 22, 2017, the President signed into law “H.R.1” for U.S. tax reform legislation (“Tax Act”). The Tax Act decreases the U.S. federal statutory tax rate from 35% to 21%. The Tax Act also enacts new tax laws that will impact our taxable income beginning in tax year 2018, including, but not limited to (1) creating a Base Erosion Anti-abuse Tax ("BEAT"), which is a new minimum tax; (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (3) a new provision designed to tax currently global intangible low-taxed income ("GILTI"), which allows for the possibility of utilizing foreign tax credits and a deduction equal to 50% to offset the income tax liability (subject to some limitations); (4) electing treatment of the GILTI as a period cost or in deferred taxes; (5) a provision that could limit the amount of deductible interest expense; (6) the repeal of the domestic production activity deduction; (7) limitations on the deductibility of certain executive compensation; and (8) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.
Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, (“SAB 118”) Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, we must reflect the income tax effects of the Tax Act in the reporting period in which we complete our accounting under ASC Topic 740. We have recorded provisional amounts related to the impact of the Tax Act on our deferred tax balances related to the change in tax rate and executive compensation in future years. SAB 118 allows a company to refrain from making a decision on certain provisions in the new tax law for our 2017 Form 10-K. As such we have delayed making a decision on the following until we are able to make a reasonable estimate of the related accounting: deemed repatriation, BEAT, choosing “BEAT” as a period cost or deferred tax issue, and GILTI. As a result, we will continue to review and assess the potential impact of the legislation on our consolidated financial statements.
In accordance with U.S. GAAP, the recognized value of deferred tax assets must be reduced to the amount that is more likely than not to be realized in future periods. The ultimate realization of the benefit of deferred tax assets from deductible temporary differences or tax carryovers depends on the generation of sufficient taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on these considerations, we relied upon the reversal of certain deferred tax liabilities to realize a portion of our deferred tax assets and established valuation allowances as of December 31, 2017 and 2016 in the amount of $20.7 million and $5.0 million, respectively, for other deferred tax assets because of uncertainty regarding their ultimate realization. The increase in the valuation allowance was primarily due to our Polaris acquisition (see Note 2). Our total net deferred tax liability was $4.8 million as of December 31, 2017, and $7.7 million as of December 31, 2016, respectively.
As of December 31, 2017, the Company has net operating loss (“NOL”) carryforwards related to tax losses in Canada and the United States that may be used to reduce future taxable income. The Canadian NOL carryforwards, approximately $18.7 million as of December 31, 2017, expire at various dates from 2025 to 2037. The U.S federal and state NOL carryforwards, approximately $27.0 million as of December 31, 2017, expire at various dates from 2025 to 2035. The income tax benefit, if any, of these NOL carryforwards have not been recorded in our consolidated financial statements because of the uncertainty of their recovery. A portion the NOL carryforwards in the U.S. are subject to limitation.
Non-cash impacts of changes in the derivative liabilities that we had from our Warrants that expired in August 2017 were not recognized for purposes of calculating our tax provision; instead, they were treated as an unrecognized tax benefit. Further, exercises of the Warrants were also treated as an unrecognized tax benefit for purposes of calculating our tax provision. For the years ended December 31, 2017 and 2016, our tax provision excluded $0.4 million and $7.5 million, respectively, related to this unrecognized tax benefit for federal and state tax purposes. There was no such effect to our tax provision in 2015 related to the Warrants due to a full valuation allowance on our deferred tax assets through the third quarter of 2015.
As of each reporting date, management considers all new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets. As of December 31, 2015, we achieved a history of positive pre-tax income and anticipated significant additional future pre-tax income to be generated, in part from our acquired businesses, which would result in higher U.S. Federal taxable income. For these reasons, management determined that sufficient positive evidence existed as of December 31, 2015 to conclude that it was more likely than not that additional deferred taxes of $21.1 million were realizable, and therefore, reversed a majority of the valuation allowance accordingly.
Under U.S. tax law, we have elected to treat our U.S. Virgin Island subsidiaries as controlled foreign corporations. As such, we would normally consider the undistributed earnings of our U.S. Virgin Island subsidiaries, if any, to be indefinitely reinvested and, accordingly, we would not record incremental U.S. income taxes thereon. As of December 31, 2017, our U.S. Virgin Islands subsidiaries had no undistributed earnings due to recent losses. However, we have not nor do we currently anticipate, in the foreseeable future, the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
At December 31, 2017, we had unrecognized tax benefits of $6.2 million which, if recognized, would impact the effective tax rate. It is unlikely a reduction of unrecognized tax benefits will occur within the next 12 months. The unrecognized tax benefits relating to amounts taken or expected to be taken in 2017 and prior tax returns are included as a component of other long-term obligations. During the years ended December 31, 2017, 2016 and 2015, we recorded interest and penalties related to unrecognized tax benefits of $0.4 million, $0.1 million and $0.1 million, respectively, which are included in income tax expense in our consolidated statement of operations. Total accrued penalties and interest at December 31, 2017 and 2016 was approximately $0.9 million and $0.5 million, respectively, which are included in the related tax liability in our consolidated balance sheet.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Unrecognized tax benefits at January 1 | | $ | 43,000 |
| | $ | 35,014 |
| | $ | 12,098 |
|
Additions for tax positions related to current year | | 6,809 |
| | 7,986 |
| | 22,916 |
|
Reductions - current year decrease | | (5,423 | ) | | — |
| | — |
|
Reductions - prior year decrease | | (38,165 | ) | | — |
| | — |
|
Unrecognized tax benefits at December 31 | | $ | 6,221 |
| | $ | 43,000 |
| | $ | 35,014 |
|
We recorded an unrecognized tax position in 2017 and 2016 of $0.4 million and $7.5 million, respectively, related to the Warrants, due to uncertainty about their deductibility for federal and state income tax purposes. Approximately $39.8 million of our unrecognized tax benefits as of December 31, 2016 related to the Warrants.
We conduct business in the United States, Canada and the U.S. Virgin Islands, and U.S. Concrete, Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction, the Canadian federal jurisdiction, and various state and local jurisdictions. In the normal course of business, we are subject to examination in the U.S. federal jurisdiction and generally in state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local tax examinations for years before 2014. With few exceptions, we are no longer subject to Canadian federal local tax examinations for years before 2013. Currently, the only active audit is being conducted by the State of Texas, for tax years 2013 - 2015, with regard to the Margin Tax. The resolution of this audit is still pending.