Income Taxes:
A reconciliation of the U.S. statutory rate and income taxes follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Income before income taxes | | Income tax expense | | Income before income taxes | | Income tax expense | | Income before income taxes | | Income tax expense/ (benefit) |
U.S. | $ | 8,026 |
| | $ | 20,230 |
| | $ | 24,727 |
| | $ | 10,989 |
| | $ | 11,574 |
| | $ | 3,474 |
|
Canada/Mexico/Europe/Asia | 48,611 |
| | 13,962 |
| | 45,591 |
| | 11,358 |
| | 28,549 |
| | 10,303 |
|
Total | $ | 56,637 |
| | $ | 34,192 |
| | $ | 70,318 |
| | $ | 22,347 |
| | $ | 40,123 |
| | $ | 13,777 |
|
Current income taxes | | | $ | 23,781 |
| | | | $ | 12,813 |
| | | | $ | 50,414 |
|
Deferred income taxes | | | 10,411 |
| | | | 9,534 |
| | | | (36,637 | ) |
Total | | | $ | 34,192 |
| | | | $ | 22,347 |
| | | | $ | 13,777 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax expense at the U.S. statutory rate | $ | 19,824 |
| | $ | 24,611 |
| | $ | 14,044 |
|
State income taxes | 741 |
| | 862 |
| | 1,207 |
|
Foreign tax rate differential | (1,606 | ) | | (1,549 | ) | | (1,163 | ) |
Non-taxable interest income | (5,951 | ) | | (5,582 | ) | | (3,903 | ) |
Change in valuation allowance | 1,984 |
| | (168 | ) | | 3,482 |
|
U.S. Tax Cuts and Jobs Act of 2017 | 17,286 |
| | — |
| | — |
|
Domestic manufacturing deduction | — |
| | (562 | ) | | (903 | ) |
Mexico entities tax de-consolidation adjustment | — |
| | (472 | ) | | 1,470 |
|
Repatriation of foreign earnings | — |
| | 496 |
| | (645 | ) |
Uncertain tax positions | — |
| | 736 |
| | 306 |
|
Foreign tax credits carryforward | — |
| | — |
| | (1,406 | ) |
Capital loss on note redemption | — |
| | — |
| | (1,062 | ) |
Other non-deductible permanent items (including translation) | 1,914 |
| | 3,975 |
| | 2,350 |
|
Provision for income taxes | $ | 34,192 |
| | $ | 22,347 |
| | $ | 13,777 |
|
Net deferred tax balances were reflected on the consolidated balance sheets as follows:
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| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Net noncurrent deferred tax assets | $ | 5,058 |
| | $ | 18,432 |
|
Net noncurrent deferred tax liabilities | (2,354 | ) | | (1,282 | ) |
Net deferred tax assets | $ | 2,704 |
| | $ | 17,150 |
|
The components of the Company’s deferred tax assets/ (liabilities) were as follows:
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Inventories | $ | 3,427 |
| | $ | 5,089 |
|
Accrued liabilities | 7,472 |
| | 10,800 |
|
Prepaid inventory | — |
| | 13,987 |
|
Tax credits | 3,846 |
| | 2,535 |
|
Tax losses | 22,196 |
| | 16,187 |
|
Total deferred tax assets | 36,941 |
| | 48,598 |
|
Deferred tax liabilities: | | | |
Gain on bond retirement | (170 | ) | | (530 | ) |
Intangibles | (11,012 | ) | | (7,033 | ) |
Fixed assets | (10,809 | ) | | (15,423 | ) |
Accrued liabilities | (1,800 | ) | | — |
|
Total deferred tax liabilities | (23,791 | ) | | (22,986 | ) |
Total valuation allowances | (10,446 | ) | | (8,462 | ) |
Net deferred tax assets (liabilities) | $ | 2,704 |
| | $ | 17,150 |
|
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits at January 1 | $ | 2,679 |
| | $ | 3,121 |
| | $ | 2,798 |
|
Additions for tax positions of prior years | — |
| | 973 |
| | 470 |
|
Reductions for tax positions of prior years | — |
| | — |
| | (147 | ) |
Reductions due to settlements | — |
| | (1,415 | ) | | — |
|
Gross unrecognized tax benefits at December 31 | 2,679 |
| | 2,679 |
| | 3,121 |
|
| | | | | |
Net uncertain tax benefits, that if recognized would impact the effective tax rate, at December 31 | $ | 2,116 |
| | $ | 1,741 |
| | $ | 1,311 |
|
The U.S. operations have deferred tax assets for federal tax loss carry forwards of $13.9 million and $9.3 million and state tax loss carry forwards of $1.6 million and $1.1 million as of December 31, 2017 and 2016, respectively. These tax loss carry forwards will expire in the years 2026 through 2036. The Company realized tax benefits of $0.8 million and $0.0 million from stock options exercised in 2017 and 2016, respectively.
The Company maintains full valuation allowances of $10.4 million and $8.5 million at December 31, 2017 and 2016, respectively, on its capital loss on note redemptions, foreign withholding tax credits and foreign net operating loss carryforwards as it is more likely than not that these tax benefits will not be realized. The increase in valuation allowances during 2017 is primarily a result of the generation of current year foreign tax withholding credits and foreign net operating losses which are not anticipated to be utilized in future years. Certain of these foreign tax attributes, approximately $4.6 million, do not expire, while the remaining tax attributes will expire in the years 2018 through 2037.
On December 22, 2017, the U.S. enacted the Tax Act. The Tax Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017 and transitioning U.S. international taxation from a worldwide tax system to a territorial tax system with a one-time mandatory transition or toll tax on post-1986 undistributed foreign earnings and profits of U.S. subsidiaries through the year ended December 31, 2017. The Company has calculated its best estimate of the impact of the Tax Act in its year end income tax provision in accordance with the Company's understanding of the Tax Act and guidance available as of the date of this filing and, as a result, have recorded $17.3 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. This amount consists of two components: (1) a $13.9 million charge payable over eight years and related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings of certain non-U.S. subsidiaries owned either wholly or partially by a U.S. subsidiary of the Company, and (2) a $3.4 million charge related to the remeasurement of certain U.S. deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future.
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 Act. In accordance with SAB 118, the Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these reasonably estimated 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 Act. Any subsequent adjustment to these amounts will be recorded within the one year measurement period allowed by SAB 118.
Beginning in 2018, the Tax Act includes two new U.S. tax base erosion provisions, the 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 Act eliminate 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.
As of December 31, 2017, the Company is in the process of evaluating the impact of the Tax Act on its permanent reinvestment assertion. With respect to accumulated earnings of foreign subsidiaries, no additional U.S. income taxes or foreign withholding taxes have been provided as all accumulated earnings of foreign subsidiaries are deemed to have been remitted as part of the one-time transition tax. The Company continues to evaluate its permanent reinvestment assertion in light of the Tax Act. The accounting is expected to be completed within the one-year measurement period as allowed by SAB 118.
Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns are filed and subject to examination by various federal, state and local tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported requiring several years to resolve. As such, the Company maintains liabilities for possible assessments by tax authorities resulting from known tax exposures for uncertain income tax positions. The Company’s policy is to accrue associated penalties in selling, general and administrative expenses and to accrue interest in net interest expense. Currently, the Company is under examination, or has been contacted for examination on income tax returns for the years 2009 through 2015. Certain state income tax assessments are under protest and the Company believes its financial position is sustainable. The Company estimates the liability for unrecognized tax benefits may decrease by approximately $0.7 million during the next twelve months as a result of possible settlements of income tax authority examinations. The Company has recorded an immaterial amount for interest and penalties in the statement of operations. Interest and penalties related to uncertain tax positions of $0.8 million and $0.7 million are accrued in other long-term liabilities as of December 31, 2017 and December 31, 2016, respectively. Other than the items mentioned above, as of December 31, 2017, no significant adjustments have been proposed to the Company's tax positions and the Company currently does not anticipate any adjustments that would result in a material change to its financial position during the next twelve months.
Income taxes paid (net of refunds) were $14.9 million, $27.9 million and $17.0 million for 2017, 2016 and 2015, respectively.