Income Taxes
The components of domestic and foreign (loss) income before the provision for income taxes are as follows:
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| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. | | $ | (15,427 | ) | | $ | (43,041 | ) | | $ | (38,240 | ) |
Foreign | | 14,420 |
| | 30,705 |
| | 47,325 |
|
Total | | $ | (1,007 | ) | | $ | (12,336 | ) | | $ | 9,085 |
|
The components of the income tax provision (benefit) are as follows:
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| | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
U.S. | | $ | 1,002 |
| | $ | 929 |
| | $ | 1,196 |
|
Foreign | | 4,121 |
| | 8,134 |
| | 15,054 |
|
Total current | | 5,123 |
| | 9,063 |
| | 16,250 |
|
Deferred: | | | | | | |
U.S. | | 1,640 |
| | (1,707 | ) | | (195 | ) |
Foreign | | 6,876 |
| | 1,926 |
| | (2,590 | ) |
Total deferred | | 8,516 |
| | 219 |
| | (2,785 | ) |
Total provision | | $ | 13,639 |
| | $ | 9,282 |
| | $ | 13,465 |
|
For the years ended December 31, 2017 and 2016, the provision for income taxes was $13.6 million and $9.3 million respectively. The Company's effective income tax rate is primarily impacted by income the Company earns in tax-paying jurisdictions relative to income it earns in non-tax-paying jurisdictions. The majority of income recognized for purposes of computing the Company's effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.0%. The Company generates losses in certain jurisdictions for which it receives no tax benefit as the deferred tax assets in these jurisdictions (including the net operating losses) are fully reserved by a valuation allowance. For this reason, the Company recognizes minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States, Germany and Australia. Due to these reserves, the geographic mix of its pre-tax earnings has a direct correlation with how high or low its annual effective tax rate is relative to consolidated earnings.
On December 22, 2017, significant tax legislation was signed into U.S. law under the Tax Cuts & Jobs Act (“the Tax Act”). Key features of the Tax Act include a reduction of the corporate income tax rate from 35% to 21%; limitations on the deductibility of future interest expense; and the transition of the U.S. system for international taxation from a worldwide tax regime to a modified-territorial tax regime, including the imposition of a tax on unrepatriated earnings of foreign subsidiaries (the “transition tax”). In response, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements, or in circumstances where estimates cannot be made, to not report any impact and to disclose and recognize at a later date.
As of December 31, 2017, the Company has not completed its accounting related to the enactment of the Tax Act, as follows:
1. Remeasurement of U.S. deferred tax assets - The Company has recorded a provisional estimate of $31.8 million discrete deferred tax expense related to the remeasurement of the U.S. deferred tax assets as a result of the reduction in the corporate income tax rate. A corresponding tax benefit was recorded related to the reduction in valuation allowance.
2. Transition tax - The Company has recorded a provisional estimate related to accounting for the transition tax and its impact on tax accounting for unrepatriated foreign earnings and other foreign income inclusions. The provisional estimate results in $0 current or deferred tax impact primarily as a result of the historic tax loss carry-forwards and the corresponding valuation allowance against related deferred tax assets. In order to complete the accounting, the Company will continue to analyze foreign earnings calculations as well as to await clarification of certain provisions of the Tax Act.
3. Deferred tax accounting on outside basis differences of controlled foreign corporations - The Company has recorded a provisional estimate related to the deferred tax accounting for basis differences associated with foreign subsidiaries. Historically, the Company has accrued U.S. deferred taxes in connection with certain foreign earnings which were not considered to be permanently reinvested as these earnings were expected to be distributed to the U.S. However, the transition tax has resulted in immediate U.S. taxation of previously untaxed foreign earnings. As a result, the Company has reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, a provisional estimate has been recorded for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. No additional U.S. income taxes have been provided in connection with any remaining untaxed foreign earnings or any additional outside basis difference with respect to investments in foreign subsidiaries as the Company assesses whether any investments should be considered as indefinitely reinvested in foreign operations.
4. Global Intangible Low-Taxed Income (“GILTI”) - The deferred tax accounting is incomplete for basis differences associated with foreign subsidiaries as it relates to GILTI, a new provision under the Tax Act. No provisional estimate has been provided. Relevant to the current financial statements, the election of an accounting policy with respect to deferred tax accounting for GILTI will depend, in part, on analyzing foreign income to estimate future GILTI inclusions, as well as clarification of certain provisions of the Tax Act. Until such analyses and clarifications are made, the Company has not made a policy decision regarding tax accounting for the GILTI provision.
5. State and Local Income Taxes - The Company has recorded a provisional estimate related to the tax accounting for state and local income taxes upon enactment of the Tax Act. The Company continues to gather and analyze information available related to the impact of the Tax Act on state and local taxes and awaits clarification from the municipalities in order to complete the accounting.
To the extent a provisional estimate was made, the Company utilized previously issued guidance for the Tax Act in order to reach an estimate. However, these estimates are not capable of finalization given the lack of statutory and regulatory guidance in many areas, as well as the complexity in acquiring the data required to calculate the impact on the tax accounts. The Company will revise and conclude the accounting as and when additional information is obtained, which in many cases is contingent on the timing of issuance of guidance. For these reasons, the ultimate impact may differ from these provisional amounts due to, among other things, additional information, changes in interpretations and assumptions management has made, and changes based on additional statutory and regulatory guidance that may be issued. Acknowledging this uncertainty, accounting for the impacts of the Tax Act will be completed within the next twelve months.
The provision for income taxes differs from the amount computed by applying the U.S. statutory tax rate of 35% to income before income taxes, due to the following:
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| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Book income at U.S. 35% statutory rate | $ | (352 | ) | | $ | (4,318 | ) | | $ | 3,180 |
|
State income and other taxes due, net of federal benefit | 1,362 |
| | 1,168 |
| | 1,556 |
|
Foreign tax rate differential | (2,716 | ) | | (2,305 | ) | | (1,927 | ) |
Dividends and other foreign (loss) income | (18,756 | ) | | 11,233 |
| | 11,079 |
|
Change in valuation allowance | (944 | ) | | 4,922 |
| | (544 | ) |
Tax rate changes | 32,730 |
| | 290 |
| | (103 | ) |
Tax credits and refunds | (613 | ) | | (91 | ) | | (372 | ) |
Change in unrecognized tax benefits | 1,627 |
| | 2,097 |
| | (372 | ) |
Provision to return adjustments | (74 | ) | | (1,001 | ) | | (68 | ) |
Non-deductible expenses | 1,350 |
| | 2,246 |
| | 1,246 |
|
Other, net | (1,395 | ) | | (2,913 | ) | | (455 | ) |
Other foreign permanent items | 1,420 |
| | (2,046 | ) | | (314 | ) |
Settlement of tax assessments | — |
| | — |
| | 559 |
|
Total | $ | 13,639 |
| | $ | 9,282 |
| | $ | 13,465 |
|
The effective tax rate on continuing operations for the year ended December 31, 2017 varied from the statutory rate of 35% primarily due to the tax effect of intra-period tax allocations, tax rate changes, dividends and other foreign income, and changes in valuation allowances. Included in the effective tax rate is a benefit of $0.5 million from the impact on intra-period tax allocations, included in the Other, net line in the table above. Intra-period tax allocation rules require that all items, including other comprehensive income and discontinued operations, be considered for purposes of determining the amount of tax benefit that results from a loss in continuing operations. As a result, an income tax benefit was recorded in continuing operations for the year ended December 31, 2017, with offsets of income tax expense in other comprehensive income. The amount for tax rate changes of $32.7 million is primarily related to the remeasurement of U.S. deferred taxes under the Tax Act. The amount for dividends and other foreign income of $(18.8) million was primarily related to a change in deferred taxes on foreign unremitted earnings resulting from the Tax Act. The change in the valuation allowance primarily relates to a decrease in the U.S. valuation allowance partially offset by establishing a valuation allowance against certain German deferred tax assets.
The effective tax rate on continuing operations for the year ended December 31, 2016 varied from the statutory rate of 35% primarily due to the tax effect of intra-period tax allocations, dividends and other foreign income, foreign rate differentials and changes in valuation allowances. Included in the effective tax rate is a benefit of $(2.2) million from the impact on intra-period tax allocations, included in the Other, net line in the table above. Intra-period tax allocation rules require that all items, including other comprehensive income and discontinued operations, be considered for purposes of determining the amount of tax benefit that results from a loss in continuing operations. As a result, an income tax benefit was recorded in continuing operations for the year ended December 31, 2016, with offsets of income tax expense in other comprehensive income. The amount for dividends and other foreign income of $11.2 million was primarily related to residual U.S. taxes provided on foreign earnings no longer considered permanently reinvested. The foreign rate differential arises as a result of income earned in countries where the statutory income tax rates vary from the U.S. statutory rate of 35%, for which Austria creates the Company’s largest tax rate benefit. The change in the valuation allowance is $4.6 million from US and $0.3 million from an increase of pre-tax losses generated in other foreign jurisdictions for which the Company has determined no benefit should be recorded.
The effective tax rate on continuing operations for the year ended December 31, 2015 varied from the statutory rate of 35% primarily due to the tax effect of dividends and other foreign income, foreign rate differentials and changes in valuation allowances. The amount for dividends and other foreign income of $11.1 million was primarily related to residual U.S. taxes provided on foreign earnings no longer considered permanently reinvested. The foreign rate differential arises as a result of income earned in countries where the statutory income tax rates vary from the U.S. statutory rate of 35%, for which Austria creates the Company’s largest tax rate benefit. The change in the valuation allowance of $(0.5) million relates primarily to a decrease in domestic deferred tax assets of $(0.4) million, a removal of a portion of the Australian valuation allowance of $(1.1) million and an increase of pre-tax losses generated in other foreign jurisdictions for which the Company has determined no benefit should be recorded.
For the years ended December 31, 2017 and 2016, tax expense included a benefit of approximately $54 and $32 for a Chinese tax holiday that expired in the year ending December 31, 2017.
The Company utilizes the asset and liability method for accounting for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”). Under Topic 740, deferred tax assets and liabilities are determined based on the difference between their financial reporting and tax basis. The 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 Company reduces its deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making this determination, the Company evaluates all available information including the Company’s financial position and results of operations for the current and preceding years, as well as any available projected information for future years.
The tax effect of temporary differences which give rise to deferred income tax assets and liabilities are as follows:
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| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets arising from: | | | |
Loss carryforwards | $ | 94,881 |
| | $ | 117,485 |
|
Intangible assets, net | 204 |
| | 161 |
|
Pension and other benefit accruals | 10,678 |
| | 14,604 |
|
Tax credits | 1,838 |
| | 1,488 |
|
Investments | 2,506 |
| | 2,082 |
|
Interest and finance fees | 1,261 |
| | 972 |
|
Other allowances and accruals, net | 10,948 |
| | 10,676 |
|
Total | 122,316 |
| | 147,468 |
|
Deferred tax liabilities arising from: | | | |
Property and equipment, net | 18,689 |
| | 21,096 |
|
Intangible assets, net | 2,377 |
| | 2,074 |
|
Foreign income inclusions | 1,590 |
| | 21,243 |
|
Other allowances and accruals, net | 250 |
| | 1,616 |
|
Total | 22,906 |
| | 46,029 |
|
Valuation allowance | 102,204 |
| | 97,859 |
|
Net deferred tax (asset) liability | $ | 2,794 |
| | $ | (3,580 | ) |
Deferred taxes are recorded as follows in the consolidated balance sheets:
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Non-current deferred tax asset, net | $ | 10,103 |
| | $ | 10,737 |
|
Non-current deferred tax liability, net | 12,897 |
| | 7,157 |
|
Net deferred tax (asset) liability | $ | 2,794 |
| | $ | (3,580 | ) |
As of December 31, 2017, the Company has pre-tax net operating loss carry-forwards for U.S. federal income tax purposes of approximately $234.9 million that expire on various dates from 2025 through 2037 and federal tax credits of approximately $166 that either expire on various dates or can be carried forward indefinitely. As of December 31, 2017, the Company has pre-tax net operating loss carry-forwards for U.S. state income tax purposes of approximately $257.7 million that expire on various dates from 2018 through 2037. As of December 31, 2017, the U.S. federal and U.S. state net operating loss carry-forwards and federal tax credits are fully reserved in our valuation allowance. The Company has foreign federal net operating loss carry-forwards of approximately $126.7 million and capital loss carry forwards of $7.7 million, the majority of which can be carried forward indefinitely, and federal and provincial tax credits of approximately $1.7 million that begin to expire primarily in 2024 or are carried forward indefinitely. As of December 31, 2017, $103.8 million, $7.7 million and $0.2 million, of foreign federal net operating loss carry-forwards, capital loss carry-forwards and federal and provincial tax credits, respectively, are reserved in our valuation allowance. Historic and future ownership changes could potentially reduce the amount of net operating loss carry-forwards available for use.
As of December 31, 2017, the Company had a valuation allowance in place for certain of its deferred tax assets due to the Company’s accumulated loss position and its uncertainty around the future profitability in certain of its tax jurisdictions. The valuation allowance primarily relates to deferred tax assets for available net operating loss carry forwards in the United States, the U.K., Germany, Sweden, France, Australia, China, Turkey and Spain. While the Company believes it has adequately provided for its income tax assets and liabilities in accordance with Topic 740, it recognizes that adverse determinations by taxing authorities, or changes in tax laws and regulations could have a material adverse effect on its consolidated financial position, results of operations or cash flows.
During the year ended December 31, 2017, the Company reassessed its valuation allowance requirements related to its German operations, evaluating all available evidence in its analysis, both positive and negative, including historical and projected income and losses before the provision for income taxes, as well as reversals of temporary differences. The Company also considered tax planning strategies. During the year ended December 31, 2017, the Company recorded $4.2 million of tax expense related to establishing a valuation allowance against certain of its German deferred tax assets. The Company believes that it is more likely than not for the deferred tax assets to remain unrealized based on estimates of future taxable income generated by future earnings of its German businesses.
In light of the enactment of the Tax Act, the Company evaluated the recoverability of the U.S. deferred tax assets. It remains more likely than not that the deferred tax assets in connection with our U.S. operations will not be realized. Although projections of future U.S. taxable income indicate realization of the primary U.S. deferred tax asset (the tax loss carry-forwards) as a result of limitations on the deductibility of future interest expense, such limitations will have a corresponding increase to deferred tax assets. As the Company continues to reorganize and restructure its operations, it is possible that deferred tax assets, for which no income tax benefit has previously been provided, may more likely than not become realized. The Company continues to evaluate future operations and will record an income tax benefit in the period where it believes it is more likely than not that the deferred tax asset will be able to be realized.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $138.5 million at December 31, 2017. Prior to enactment of the Tax Act, earnings generated prior to 2013 were considered to be indefinitely reinvested for continued use in foreign operations except for a portion of the earnings generated by our Brazil and China operations. All earnings generated in all foreign subsidiaries after 2012 were not considered to be permanently reinvested, because of the Company's desire to manage global cash and liquidity related to ongoing financial obligations, capital expenditures, restructuring payments and other changes in business conditions going forward. However, the transition tax has resulted in immediate U.S. taxation of our previously untaxed foreign earnings. As a result, the Company has reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, the Company has recorded a provisional estimate for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. Foreign withholding taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable.
The Company accrues for certain known and reasonably anticipated income tax obligations after assessing the likely outcome. In the event that actual results differ from these accruals or if the Company becomes subject to a tax obligation for which the Company has made no accrual, the Company may need to make adjustments, which could materially impact the financial condition and results of operations. For example, taxing authorities may disagree with the Company’s tax accounting methodologies and may subject the Company to inquiries regarding such taxes, which potentially could result in additional income tax assessments. In accordance with ASC 740-10-25-6, the Company does not accrue for potential income tax obligations if management deems a particular tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. In making this determination, the Company assumes that the taxing authorities will have access to all relevant facts and information in accordance with ASC 740-10-25-7.
As of December 31, 2017, the Company had a gross unrecognized tax benefit of $10.0 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $0.7 million and $1.8 million during the years ended December 31, 2017 and 2016, respectively. The unrecognized tax benefit increased primarily as a result of current year positions related to transfer pricing policies and currency effects.
A reconciliation of the balances of the unrecognized tax benefits is as follows, excluding interest and penalties:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance as of January 1 | $ | 9,285 |
| | $ | 7,527 |
| | $ | 7,502 |
|
Gross increases (decreases)-tax positions in prior period-other | (1,942 | ) | | 849 |
| | (104 | ) |
Gross decreases-related to lapse in statute of limitations | (172 | ) | | (115 | ) | | (209 | ) |
Gross increases-tax positions in current period | 2,342 |
| | 1,046 |
| | 688 |
|
Currency effects | 499 |
| | (22 | ) | | (350 | ) |
Balance at December 31 | $ | 10,012 |
| | $ | 9,285 |
| | $ | 7,527 |
|
The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense, and accordingly, the Company recorded a $0.2 million expense, including currency effects, and a $0.9 million expense, including currency effects, for interest and penalties during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, the Company had accrued interest and penalties related to uncertain tax positions of approximately $2.3 million and $1.7 million, respectively. If the Company were to prevail on all unrecognized tax benefits recorded, approximately $7.9 million would benefit the effective tax rate. During the next twelve months, management estimates a range between $0 and $10 of the Company's gross unrecognized tax benefit will reverse due to expected settlements and statute of limitations expiring which relate to various items and will benefit the effective tax rate. The Company regularly evaluates, assesses and adjusts the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period.
The tax years 2005 through 2017 remain open to examination in the Company's U.S. Federal jurisdiction, and the tax years 2001 through 2017 remain open to examination in the Company's U.S. state jurisdictions. The tax years 2003 through 2017 remain open to examination in the major foreign tax jurisdictions to which the Company and its subsidiaries are subject. There are currently no U.S. Federal audits or examinations underway. The Company has ongoing audits or tax litigation in Italy. During 2017, tax audits related to the German Rolls business were closed, with no significant changes.
The Company believes that it has made adequate provisions for all income tax uncertainties.