Income Taxes
The components of the Company’s income before income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (3,015 | ) | | $ | (155,058 | ) | | $ | (114,862 | ) |
Non-U.S. | (52,264 | ) | | 17,059 |
| | (19,461 | ) |
Loss before income taxes | $ | (55,279 | ) | | $ | (137,999 | ) | | $ | (134,323 | ) |
The Company’s provision (benefit) for income taxes from continuing operations for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
U.S. Federal and state | $ | (1,426 | ) | | $ | (38,589 | ) | | $ | 43 |
|
Non-U.S. | 5,398 |
| | 6,956 |
| | 8,264 |
|
Total current | 3,972 |
| | (31,633 | ) | | 8,307 |
|
Deferred | | | | | |
U.S. Federal and state | 6,415 |
| | (18,290 | ) | | (19,071 | ) |
Non-U.S. | (6,266 | ) | | (6,128 | ) | | (4,175 | ) |
Total deferred | 149 |
| | (24,418 | ) | | (23,246 | ) |
Provision for income tax expense (benefit) | $ | 4,121 |
| | $ | (56,051 | ) | | $ | (14,939 | ) |
The reconciliation between the actual provision for income taxes from continuing operations and that computed by applying the U.S. statutory rate to income before income taxes and noncontrolling interests are outlined below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income tax expense at the statutory rate | $ | (19,348 | ) | (35.0 | )% | | $ | (48,300 | ) | (35.0 | )% | | $ | (47,013 | ) | (35.0 | )% |
State taxes, net of federal tax benefit | (294 | ) | (0.5 | )% | | (1,425 | ) | (1.0 | )% | | (1,157 | ) | (0.9 | )% |
Non-U.S. operations | 6,337 |
| 11.5 | % | | (5,791 | ) | (4.2 | )% | | 6,300 |
| 4.7 | % |
Domestic incentives | (254 | ) | (0.5 | )% | | (170 | ) | (0.1 | )% | | (250 | ) | (0.2 | )% |
Prior year federal, non-U.S. and state tax | (1,283 | ) | (2.3 | )% | | (777 | ) | (0.6 | )% | | (518 | ) | (0.4 | )% |
Nondeductible expenses | 644 |
| 1.2 | % | | 345 |
| 0.3 | % | | 279 |
| 0.2 | % |
Goodwill impairment | 14,731 |
| 26.6 | % | | — |
| — | % | | 27,210 |
| 20.3 | % |
Global Tubing acquisition | (9,160 | ) | (16.6 | )% | | — |
| — | % | | — |
| — | % |
U.S. tax reform | 10,138 |
| 18.3 | % | | — |
| — | % | | — |
| — | % |
U.K. valuation allowance | 4,523 |
| 8.2 | % | | — |
| — | % | | — |
| — | % |
Other | (1,913 | ) | (3.4 | )% | | 67 |
| — | % | | 210 |
| 0.2 | % |
Provision for income tax expense (benefit) | $ | 4,121 |
| 7.5 | % | | $ | (56,051 | ) | (40.6 | )% | | $ | (14,939 | ) | (11.1 | )% |
Our effective tax rate was 7.5%, (40.6)%, and (11.1)% for the years ended December 31, 2017, 2016 and 2015, respectively. For the year ended December 31, 2017, we recognized the following significant items impacting our effective tax rate:
| |
– | $10.1 million of tax expense associated with U.S. tax reform, as described below, |
| |
– | $14.7 million of tax expense associated with the impairment of non-tax deductible goodwill for our Subsea reporting unit, |
| |
– | $9.2 million reduction in tax expense associated with the gain on acquisition of the remaining 52% interest of Global Tubing, |
| |
– | a charge of $4.5 million for a valuation allowance against our net operating loss carry-forward for our U.K. operations, and |
| |
– | losses in our non-U.S. operations in which the corresponding tax benefit is applied at lower statutory rates in certain jurisdictions |
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”), a comprehensive U.S. tax reform package that, effective January 1, 2018, among other things, lowered the corporate income tax rate from 35% to 21% and moved the country towards a territorial tax system with a one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. The effects of U.S. Tax Reform on us include two major categories: (i) recognition of liabilities for taxes on mandatory deemed repatriation and (ii) re-measurement of deferred taxes. As described further below, we recorded a total charge of $10.1 million in the year ended December 31, 2017 related to U.S. Tax Reform. As we do not have all the necessary information to analyze all income tax effects of the new rules, this is a provisional amount which we believe represents a reasonable estimate of the accounting implications of U.S. Tax Reform. The ultimate impact of U.S. Tax Reform is subject to adjustment as further guidance is provided by the U.S. Internal Revenue Service regarding the application of the new U.S. corporate income tax laws. We expect to complete our detailed analysis no later than the fourth quarter of 2018. Below is a brief description of the two categories of effects from U.S. tax reform and their impact on us:
(1) Liability for taxes due on mandatory deemed repatriation - under the Act, a company’s non-U.S. earnings accumulated under the legacy tax laws are deemed to be repatriated into the U.S. We recorded a provisional estimate of federal and state tax related to deemed repatriation in the amount of approximately $27.7 million. While there is no cash tax component in this amount as a result of using current year losses to offset the deemed repatriation tax, should we ultimately incur a cash tax obligation, such amount will be payable over eight years. We continue to analyze the potential tax liabilities attributable to any additional repatriation. We will record the tax effects of any change in the period that we complete our analysis.
(2) Re-measurement of deferred taxes - under the Act, the U.S. corporate income tax rate was reduced from 35% to 21%. Accordingly, we re-measured our net U.S. deferred tax liabilities as of December 31, 2017 to a 21% rate, resulting in a tax benefit of $17.6 million.
The primary components of deferred taxes include (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets | | | |
Reserves and accruals | $ | 5,932 |
| | $ | 6,603 |
|
Inventory | 20,836 |
| | 24,677 |
|
Stock awards | 6,235 |
| | 10,984 |
|
Net operating loss and other tax credit carryforwards | 31,164 |
| | 30,317 |
|
Other | 1,419 |
| | 982 |
|
Gross deferred tax assets | 65,586 |
| | 73,563 |
|
Valuation allowance | (4,523 | ) | | — |
|
Total deferred tax assets | 61,063 |
| | 73,563 |
|
Deferred tax liabilities | | | |
Property and equipment | (12,172 | ) | | (13,593 | ) |
Goodwill and intangible assets | (76,454 | ) | | (73,074 | ) |
Investment in unconsolidated subsidiary | — |
| | (10,000 | ) |
Unremitted non-U.S. earnings | — |
| | (740 | ) |
Prepaid expenses and other | (325 | ) | | (1,490 | ) |
Total deferred tax liabilities | (88,951 | ) | | (98,897 | ) |
Net deferred tax liabilities | $ | (27,888 | ) | | $ | (25,334 | ) |
At December 31, 2017, the Company had $72.3 million of U.S. net operating loss carryforwards and $5.1 million of state net operating losses. The losses will expire no later than 2036 if they are not utilized prior to that date. The Company also had $66.9 million of non-U.S. net operating loss carryforwards with indefinite expiration dates. The Company anticipates being able to fully utilize the losses prior to their expiration in all jurisdictions except the U.K. See discussion below regarding the valuation allowance for the U.K. Where the Company has unrecognized tax benefits in jurisdictions with existing net operating losses, the Company utilizes the unrecognized tax benefits as a source of income to offset such losses.
At December 31, 2017, the Company had $5.0 million of foreign tax credit carryforwards which will generally expire no later than 2026. The Company anticipates being able to fully utilize the foreign tax credits prior to their expiration.
Goodwill from certain acquisitions is tax deductible due to the acquisition structure as an asset purchase or due to tax elections made by the Company and the respective sellers at the time of acquisition.
The Company has evaluated the use of deferred tax assets in each jurisdiction to offset future taxable income, including the reversal of taxable temporary differences, and believes that it is more likely than not that deferred tax assets at December 31, 2017 and 2016 will be utilized for all jurisdictions except the U.K. Consequently, a valuation allowance of $4.5 million has been recorded related to the U.K. deferred tax asset. No other valuation allowances have been recorded in the financial statements.
Taxes are provided as necessary with respect to non-U.S. earnings that are not permanently reinvested. For all other non-U.S. earnings, no U.S. taxes are provided because such earnings are intended to be reinvested indefinitely to finance non-U.S. activities. The determination of the amount of the unrecognized deferred tax liability for temporary differences related to investments in non-US subsidiaries is not practicable.
The Company files income tax returns in the U.S. as well as in various states and non-U.S. jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities in these jurisdictions prior to 2011.
The Company accounts for uncertain tax positions in accordance with guidance in FASB ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in thousands):
|
| | | | |
Balance at January 1, 2017 | | $ | 14,220 |
|
Additional based on tax positions related to current year | | 1,490 |
|
Lapse of statute of limitations | | (942 | ) |
Balance at December 31, 2017 | | 14,768 |
|
The total amount of unrecognized tax benefits at December 31, 2017 was $14.8 million, of which it is reasonably possible that $3.1 million could be settled during the next twelve-month period as a result of the conclusion of various tax audits or due to the expiration of the applicable statute of limitations. Substantially all of the unrecognized tax benefits at December 31, 2017 would impact the Company’s future effective income tax rate, if recognized.
The Company recognizes interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statement of income. As of December 31, 2017 and 2016, we had accrued approximately $0.6 million and $0.5 million in interest and penalties, respectively. During the years ended December 31, 2017 and 2016, we recognized no material change in the interest and penalties related to uncertain tax positions.