Income Taxes
Consolidated income (loss) from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
United States | $ | (77,138 | ) | | $ | (113,512 | ) | | $ | (21,598 | ) |
Foreign | (274 | ) | | 40,187 |
| | 72,166 |
|
Total | $ | (77,412 | ) | | $ | (73,325 | ) | | $ | 50,568 |
|
The components of the income tax provision (benefit) with respect to income (loss) from continuing operations for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (11,288 | ) | | $ | (534 | ) | | $ | 7,221 |
|
State | 1,079 |
| | 1,053 |
| | 1,868 |
|
Foreign | 1,305 |
| | 10,148 |
| | 16,281 |
|
| (8,904 | ) | | 10,667 |
| | 25,370 |
|
Deferred: | | | | | |
Federal | 15,888 |
| | (34,816 | ) | | (5,656 | ) |
State | (729 | ) | | (2,807 | ) | | (496 | ) |
Foreign | 1,183 |
| | 17 |
| | 2,979 |
|
| 16,342 |
| | (37,606 | ) | | (3,173 | ) |
Total income tax provision (benefit) | $ | 7,438 |
| | $ | (26,939 | ) | | $ | 22,197 |
|
A reconciliation of the U.S. statutory tax provision (benefit) rate to the effective tax provision (benefit) rate for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.S. statutory tax provision (benefit) rate | (35.0 | )% | | (35.0 | )% | | 35.0 | % |
Effect of Tax Reform Legislation | 36.4 |
| | — |
| | — |
|
Effect of foreign income taxed at different rates | (0.3 | ) | | (4.3 | ) | | (11.1 | ) |
Valuation allowance against tax assets | 4.0 |
| | 3.1 |
| | 8.1 |
|
Non-deductible compensation | 1.0 |
| | 1.1 |
| | 7.6 |
|
Other non-deductible expenses | 2.7 |
| | 2.0 |
| | 4.5 |
|
Domestic manufacturing deduction | — |
| | — |
| | (2.6 | ) |
State income taxes, net of federal benefits | (1.4 | ) | | (2.1 | ) | | 1.3 |
|
Other, net | 2.2 |
| | (1.5 | ) | | 1.1 |
|
Effective tax provision (benefit) rate | 9.6 | % | | (36.7 | )% | | 43.9 | % |
The significant items giving rise to the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Foreign tax credit carryforwards | $ | 27,009 |
| | $ | 32,548 |
|
Net operating loss carryforwards | 12,692 |
| | 21,871 |
|
Employee benefits | 12,013 |
| | 18,060 |
|
Inventory reserves | 5,546 |
| | 7,152 |
|
Other reserves | 1,653 |
| | 2,939 |
|
Allowance for doubtful accounts | 1,332 |
| | 2,445 |
|
Other | 299 |
| | 668 |
|
Gross deferred tax asset | 60,544 |
| | 85,683 |
|
Valuation allowance | (37,904 | ) | | (7,033 | ) |
Net deferred tax asset | 22,640 |
| | 78,650 |
|
Deferred tax liabilities: | | | |
Tax over book depreciation | (31,535 | ) | | (62,403 | ) |
Intangible assets | (14,153 | ) | | (19,878 | ) |
Accrued liabilities | (856 | ) | | (1,016 | ) |
Deferred revenue | (295 | ) | | (268 | ) |
Deferred tax liability | (46,839 | ) | | (83,565 | ) |
Net deferred tax liability | $ | (24,199 | ) | | $ | (4,915 | ) |
|
| | | | | | | |
| 2017 | | 2016 |
Balance sheet classification: | | | |
Other non-current assets | $ | 519 |
| | $ | 121 |
|
Deferred tax liability | (24,718 | ) | | (5,036 | ) |
Net deferred tax liability | $ | (24,199 | ) | | $ | (4,915 | ) |
On December 22, 2017, the United States enacted legislation commonly known as the Tax Cuts and Jobs Act (“Tax Reform Legislation”) which resulted in significant changes to U.S. tax and related laws, including certain key federal income tax provisions applicable to multinational companies such as the Company. These changes include, among others, the implementation of a territorial tax system with a one-time mandatory tax on undistributed foreign earnings of subsidiaries and a reduction in the U.S. corporate income tax rate to 21% from 35% beginning in 2018.
As a result of these U.S. tax law changes, the Company recorded a net charge of $28.2 million within income tax provision (benefit), consisting primarily of incremental income tax expense of $41.4 million related to the one-time, mandatory transition tax on the Company’s unremitted foreign subsidiary earnings (the "Transition Tax") and a valuation allowance established against the Company’s foreign tax credit carryforwards which were recorded as assets prior to Tax Reform Legislation, offset by a tax benefit of $13.2 million related the remeasurement of the Company’s U.S. net deferred tax liabilities based on the new 21% U.S. corporate income tax rate. The Company does not expect to incur a material cash tax payable with respect to the Transition Tax.
The Tax Reform Legislation also includes many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, and potential incremental taxes related to certain foreign earnings. Many of these provisions do not apply to the Company until 2018. The Company is assessing the impact of such provisions of the Tax Reform Legislation. The Company’s net deferred tax liability, as of December 31, 2017, excludes the impact, if any, of potential future U.S. income taxes related to certain foreign activities and transactions as described in the Tax Reform Legislation.
The Company continues to examine the implications arising from the Transition Tax and other provisions of these new tax laws but believes the provisional estimates recorded reflect a reasonable estimate of the impact based on the information available to-date. As additional regulatory and accounting guidance becomes available and further information is obtained in connection with the preparation of the Company’s 2017 U.S. federal and various foreign income tax returns, the Company will record, if necessary, adjustments to these provisional estimates in 2018.
The ultimate impact of Tax Reform Legislation may differ from the Company’s provisional estimates, possibly materially, due to changes in the interpretations and assumptions made by the Company as well as additional regulatory and accounting guidance that may be issued and actions the Company may take as a result of the Tax Reform Legislation.
Additionally, during the third quarter of 2017 the Company decided to carryback its 2016 U.S. federal net operating loss ("NOL") to 2014 and received the related refund prior to December 31, 2017. The effect of the carryback resulted in the loss of certain previously claimed deductions. As a result, the Company recorded a discrete tax charge of $1.0 million in the period.
The Company had no U.S. federal NOL carryforwards as of December 31, 2017. The Company’s state NOL carryforwards as of December 31, 2017 totaled $75.2 million. As of December 31, 2017, the Company had NOL carryforwards related to certain of its international operations totaling $26.7 million, of which $14.9 million can be carried forward indefinitely. As of December 31, 2017 and 2016, the Company had recorded valuation allowances of $10.9 million and $7.0 million, respectively, with respect to state and foreign NOL carryforwards.
As of December 31, 2017, the Company’s foreign tax credit carryforwards totaled $27.0 million. These foreign tax credits will expire in varying amounts from 2021 to 2026. As discussed above, as a result of the enactment of Tax Reform Legislation, the Company provided a full valuation allowance on these foreign tax credits due to uncertainties with respect to its ability to utilize such credits in future periods.
Prior to December 22, 2017, appropriate U.S. and foreign income taxes were provided for earnings of foreign subsidiary companies that were expected to be remitted in the future. The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intended to indefinitely reinvest, and upon which foreign taxes were accrued or paid but no deferred U.S. income taxes had been provided, was approximately $240 million at December 31, 2016. During 2016, we repatriated $20.1 million from our foreign subsidiaries which was used to reduce outstanding borrowings under our Revolving Credit Facility.
The Company files tax returns in the jurisdictions in which they are required. All of these returns are subject to examination or audit and possible adjustment as a result of assessments by taxing authorities. The Company believes that it has recorded sufficient tax liabilities and does not expect that the resolution of any examination or audit of its tax returns will have a material adverse effect on its consolidated operating results, financial condition or liquidity.
Tax years subsequent to 2013 remain open to U.S. federal tax audit. Our foreign subsidiaries' federal tax returns subsequent to 2011 are subject to audit by the various foreign tax authorities.
We account for uncertain tax positions using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
The total amount of unrecognized tax benefits as of December 31, 2017 and 2016 was nil. The Company accrues interest and penalties related to unrecognized tax benefits as a component of the Company's provision for income taxes. As of December 31, 2017 and 2016, the Company had no accrued interest expense or penalties.