Income Taxes
Income taxes are recorded utilizing an asset and liability approach. This method gives consideration to the future tax consequences associated with the differences between the financial accounting and tax basis of the assets and liabilities as well as the ultimate realization of any deferred tax asset resulting from such differences.
Our income tax benefit was a $57.9 million, a $92.0 million benefit, and a $6.9 million expense for the years ended December 31, 2017, 2016, and 2015, respectively. Our effective tax rates for the years ended December 31, 2017, 2016, and 2015 were a 166.5% benefit, a 724.8% benefit, and a 124.3% expense, respectively. Our effective tax rates differed from the U.S. corporate statutory tax rate of 35.0%, primarily due to the mix of pre-tax income or loss earned in certain jurisdictions and the change in our valuation allowance. Excluding the change in our valuation allowance and the impact of U.S. tax reform, our effective tax rates would have been a benefit of 31.3%, 38.9%, and 75.4% for the years ended December 31, 2017, 2016, and 2015, respectively.
The provision for income taxes is comprised of the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Current tax expense: | | | | | |
U.S. | $ | (522 | ) | | $ | (4,460 | ) | | $ | (34 | ) |
Foreign | (7,598 | ) | | (2,469 | ) | | (10,023 | ) |
Current tax expense | (8,120 | ) | | (6,929 | ) | | (10,057 | ) |
Deferred tax benefit: | | | | | |
U.S. | 57,248 |
| | 91,626 |
| | 2,683 |
|
Foreign | 8,756 |
| | 7,257 |
| | 431 |
|
Deferred tax benefit | 66,004 |
| | 98,883 |
| | 3,114 |
|
Income tax benefit (expense) | $ | 57,884 |
| | $ | 91,954 |
| | $ | (6,943 | ) |
Income (loss) before income taxes is comprised of the following:
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Income (loss) before income taxes: | | | | | |
U.S. | $ | (17,177 | ) | | $ | (4,556 | ) | | $ | (41,455 | ) |
Foreign | 51,939 |
| | 17,242 |
| | 35,869 |
|
Income (loss) before income taxes | $ | 34,762 |
| | $ | 12,686 |
| | $ | (5,586 | ) |
The provision for income taxes differs from the amount computed by applying the U.S. corporate statutory income tax rate to income (loss) before income taxes for the reasons set forth below:
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Income taxes at the statutory rate | $ | (12,167 | ) | | $ | (4,440 | ) | | $ | 1,955 |
|
Foreign tax rate differential | 15,920 |
| | 4,779 |
| | 1,639 |
|
State taxes, net of federal benefit | 373 |
| | (597 | ) | | 315 |
|
Permanent differences | 9,288 |
| | 889 |
| | 88 |
|
Tax credits | 2,647 |
| | 4,924 |
| | 46 |
|
Alternative minimum tax | (2,647 | ) | | (593 | ) | | — |
|
Transaction costs | — |
| | (753 | ) | | — |
|
Uncertain tax positions | 627 |
| | 1,809 |
| | (126 | ) |
Valuation allowance | (1,703 | ) | | 87,020 |
| | (11,156 | ) |
Impact of tax reform | 48,717 |
| | — |
| | — |
|
Other | (3,171 | ) | | (1,084 | ) | | 296 |
|
Income tax benefit (expense) | $ | 57,884 |
| | $ | 91,954 |
| | $ | (6,943 | ) |
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income taxes at the statutory rate | (35.0 | )% | | (35.0 | )% | | (35.0 | )% |
Foreign tax rate differential | 45.8 |
| | 37.7 |
| | (29.3 | ) |
State taxes, net of federal benefit | 1.1 |
| | (4.7 | ) | | (5.6 | ) |
Permanent differences | 26.7 |
| | 7.0 |
| | (1.6 | ) |
Tax credits | 7.6 |
| | 38.8 |
| | (0.8 | ) |
Alternative minimum tax | (7.6 | ) | | (4.7 | ) | | — |
|
Transaction costs | — |
| | (5.9 | ) | | — |
|
Uncertain tax positions | 1.8 |
| | 14.3 |
| | 2.3 |
|
Valuation allowance | (4.9 | ) | | 685.9 |
| | 199.7 |
|
Impact of tax reform | 140.1 |
| | — |
| | — |
|
Other | (9.1 | ) | | (8.6 | ) | | (5.4 | ) |
Effective tax rate | 166.5 | % | | 724.8 | % | | 124.3 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss and tax credit carryforwards. The tax effects of temporary differences are comprised of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 73,712 |
| | $ | 128,408 |
|
Tax credit carryforwards | 9,643 |
| | 11,461 |
|
Inventory | 5,339 |
| | 8,568 |
|
Benefit plans accrual | 29,561 |
| | 38,736 |
|
Other accruals and reserves | 10,295 |
| | 11,278 |
|
Valuation allowance for deferred tax assets | (51,278 | ) | | (44,695 | ) |
Deferred tax assets | 77,272 |
| | 153,756 |
|
Deferred tax liabilities: | | | |
Property, plant, and equipment | 106,407 |
| | 148,164 |
|
Intangible assets | 92,195 |
| | 153,380 |
|
Investment in subsidiaries | 18,356 |
| | 56,701 |
|
Deferred tax liabilities | 216,958 |
| | 358,245 |
|
Net deferred tax liabilities | $ | 139,686 |
| | $ | 204,489 |
|
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Net deferred tax liabilities consist of: | |
Non-current deferred tax assets | $ | 8,462 |
| | $ | 6,907 |
|
Non-current deferred tax liabilities | 148,148 |
| | 211,396 |
|
Net deferred tax liabilities | $ | 139,686 |
| | $ | 204,489 |
|
As of December 31, 2017, we had $297.1 million of net operating loss carryforwards, of which $153.7 million relates to foreign jurisdictions and $143.4 million relates to the U.S., which will expire beginning in 2024 through 2037, if not utilized. We expect to generate sufficient taxable income in future years that will allow utilization of the portion of the net operating loss carryforwards for which no valuation allowance has been provided.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We consider all available material evidence, both positive and negative, in assessing the appropriateness of a valuation allowance for our deferred tax assets. In determining whether a valuation allowance is required during the period, we evaluate primarily, the cumulative earnings and losses in recent years, historical taxable income or losses as it relates to our ability to utilize operating loss and tax credit carryforwards within the expiration period, trends indicating earnings or losses expected in future years along with our ability in prior years to reasonably project these future trends or operating results, length of the carryback and carryforward period, and prudent and feasible tax-planning strategies, particularly related to operational changes and the impact on the timing or taxability of relative amounts.
As of December 31, 2017 and December 31, 2016, a valuation allowance of $51.3 million and $44.7 million, respectively, has been provided for net operating loss carryforwards and other deferred tax assets. We increased our valuation allowance by $6.6 million during the year ended December 31, 2017, which includes a $4.9 million increase related to changes in other comprehensive income (loss) and $1.7 million primarily related to current period net operating losses in the U.S. As of December 31, 2017, $35.9 million and $8.8 million of the $51.3 million valuation allowance relates to net deferred tax assets in France and United Kingdom, respectively. During the year ended December 31, 2016, we released $55.5 million of the valuation allowances, of which $87.0 million primarily related to our U.S. net operating loss carryforwards and other deferred tax assets, partially offset by $31.3 million of new valuation allowances assumed in connection with the Arizona Chemical Acquisition. As of December 31, 2016, $30.5 million and $8.5 million of the $44.7 million valuation allowance relates to net deferred tax assets in France and United Kingdom, respectively. We consider the reversal of deferred tax liabilities within the net operating loss carryforward period, projected future taxable income and tax planning strategies in making this assessment. Excluding the change in our valuation allowance and impact of U.S. tax reform, our effective tax rates would have been a benefit of 31.3% and 38.9% for the years ended December 31, 2017 and 2016, respectively.
Following the acquisition of Arizona Chemical on January 6, 2016, we released $87.0 million of the valuation allowance related to the U.S. net operating loss carryforwards and other deferred tax assets. In assessing the appropriateness of the U.S. valuation allowance as of the acquisition date, we considered the significant cumulative earnings in recent years as well as consistent historical taxable income of our U.S. combined operations. Additionally, we consider our ability to utilize net operating loss carryforwards to offset future taxable income generated by our U.S. combined operations. Under U.S. tax law, we are permitted to utilize tax loss carryforwards as an offset to taxable income generated by members of our U.S. consolidated group, with the exception of a few separate state regulations. We do not expect any tax loss limitations under IRC §382 that would impact our utilization of the federal carryforwards in the future. We project that we will have sufficient combined pre-tax earnings in the U.S. to utilize net operating loss carryforwards within the expiration period. We maintain valuation allowance for carryforwards related to our foreign tax credits and certain state tax losses.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“Tax Act”) introduced significant changes to U.S. income tax law, which included a reduction to the U.S. statutory tax rate from 35.0% to 21.0% and a limitation on net operating loss carryforwards generated in 2018 and beyond. Additionally, the Tax Act extends bonus depreciation provisions and limits the amount of interest expense deductible in future years. In 2017, we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
The Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which provides registrants a measurement period to report the impact of the new U.S. tax law. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. 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. Certain items or estimates that result in impacts of the Tax Act being provisional include: the deemed repatriation tax on post-1986 accumulated earnings and profits, the deferred tax rate change effect of the new law, certain deferred taxes related to employee compensation, valuation allowances on certain deferred taxes, deferred taxes related to outside basis differences in certain foreign investments, detailed foreign earnings calculation for the most recent period, project foreign cash balances for certain foreign subsidiaries, and finalized computations of foreign tax credit availability. In addition, the companies 2017 U.S. income tax returns will not be finalized until later in 2018, and while historically this process has resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the U.S. tax rate will result in adjustment to our income tax provision or benefit when recorded. Finally, we consider it likely that further technical guidance regarding the new Tax Act provisions, as well as clarity regarding state income tax conformity to current federal tax code, may be issued.
In accordance with the Tax Act, our previously untaxed accumulated foreign earnings are subjected to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8.0% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $46.3 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.
The impact of the Tax Act to our deferred taxes was a benefit of $95.0 million, of which $68.9 million relates to the reduction of the U.S. statutory tax rate from 35.0% to 21.0% for years after 2017 and the remaining relates to changes in our investments in foreign subsidiaries. We have remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. Although the tax rate reduction is known, we have not collected the necessary data to complete 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. 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.
For the period ending December 31, 2017, a portion of the unremitted foreign earnings are permanently reinvested in the corresponding country of origin. Accordingly, we have not provided deferred taxes for the differences between the book basis and underlying tax basis in those subsidiaries or on the foreign currency translation adjustment amounts related to such operations.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. For our U.S. federal income tax returns, the statute of limitations has expired through the tax year ended December 31, 2003. As a result of net operating loss carryforwards from 2004, the statute remains open for all years subsequent to 2003. In addition, open tax years for state and foreign jurisdictions remain subject to examination.
We recognize the tax impact of certain tax positions only when it is more likely than not those such positions are sustainable. The taxes are recorded in accordance with ASC 740-10, “Accounting for Uncertainty in Income Taxes,” which prescribes the minimum recognition threshold.
As of December 31, 2017 and December 31, 2016, we had $24.4 million and $24.5 million, respectively, of unrecognized tax benefits related to uncertain foreign tax positions, all of which, if recognized, would impact our effective tax rate. For the years ending December 31, 2017, 2016, and 2015, we recorded $1.2 million, $1.2 million, and $0.2 million in interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2017 and December 31, 2016, we had $4.9 million and $4.4 million of penalties and interest included in the total unrecognized tax benefits. We believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within one year.
The following presents a roll forward of our unrecognized tax benefits including associated interest and penalties.
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Balance at January 1 | $ | 24,527 |
| | $ | 4,346 |
|
Increase in current year tax positions | 323 |
| | 1,546 |
|
Increase in prior year tax positions | 2,140 |
| | 813 |
|
Increase due to Arizona Chemical Acquisition | — |
| | 23,089 |
|
Decrease in prior year tax positions | (312 | ) | | — |
|
Lapse of statute of limitations | (2,257 | ) | | (1,946 | ) |
Settlements | — |
| | (3,321 | ) |
Balance at December 31 | $ | 24,421 |
| | $ | 24,527 |
|