11. Income Taxes
The components of income tax expense (benefit) included in continuing operations were as follows for the years ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,831 |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
2,213 |
|
|
|
2,115 |
|
|
|
1,100 |
|
|
|
|
|
4,044 |
|
|
|
2,115 |
|
|
|
1,100 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
49,710 |
|
|
|
(110,720 |
) |
|
|
2,530 |
|
|
State |
|
|
(606 |
) |
|
|
(14,067 |
) |
|
|
757 |
|
|
|
|
|
49,104 |
|
|
|
(124,787 |
) |
|
|
3,287 |
|
|
Income tax expense (benefit) |
|
$ |
53,148 |
|
|
$ |
(122,672 |
) |
|
$ |
4,387 |
|
Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred tax assets related to: |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
9,615 |
|
|
$ |
13,664 |
|
|
Insurance reserves |
|
|
11,299 |
|
|
|
15,128 |
|
|
Stock-based compensation expense |
|
|
4,702 |
|
|
|
7,429 |
|
|
Accounts receivable |
|
|
3,355 |
|
|
|
5,023 |
|
|
Inventories |
|
|
11,370 |
|
|
|
24,628 |
|
|
Operating loss and credit carryforwards |
|
|
68,066 |
|
|
|
87,610 |
|
|
|
|
|
108,407 |
|
|
|
153,482 |
|
|
Valuation allowance |
|
|
(2,409 |
) |
|
|
(4,821 |
) |
|
Total deferred tax assets |
|
|
105,998 |
|
|
|
148,661 |
|
|
Deferred tax liabilities related to: |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(2,706 |
) |
|
|
(3,799 |
) |
|
Goodwill and other intangible assets |
|
|
(19,431 |
) |
|
|
(15,956 |
) |
|
Property, plant and equipment |
|
|
(8,593 |
) |
|
|
(13,058 |
) |
|
Other |
|
|
(163 |
) |
|
|
(528 |
) |
|
Total deferred tax liabilities |
|
|
(30,893 |
) |
|
|
(33,341 |
) |
|
Net deferred tax asset |
|
$ |
75,105 |
|
|
$ |
115,320 |
|
A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below for the years ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes, net of federal income tax |
|
|
7.7 |
|
|
|
6.1 |
|
|
|
8.3 |
|
|
Valuation allowance |
|
|
(3.1 |
) |
|
|
(607.9 |
) |
|
|
(52.1 |
) |
|
Stock compensation windfall benefit |
|
|
(5.5 |
) |
|
|
— |
|
|
|
— |
|
|
Enactment of federal income tax rate change |
|
|
31.5 |
|
|
|
— |
|
|
|
— |
|
|
Permanent difference – 162(m) limitation |
|
|
0.8 |
|
|
|
0.6 |
|
|
|
(5.4 |
) |
|
Permanent difference – warrant mark to market |
|
|
— |
|
|
|
— |
|
|
|
(8.6 |
) |
|
Permanent difference – credits |
|
|
(9.6 |
) |
|
|
(1.2 |
) |
|
|
1.9 |
|
|
Permanent difference – other |
|
|
0.9 |
|
|
|
0.4 |
|
|
|
(2.8 |
) |
|
Other |
|
|
0.1 |
|
|
|
0.9 |
|
|
|
0.1 |
|
|
|
|
|
57.8 |
% |
|
|
(566.1 |
)% |
|
|
(23.6 |
)% |
As discussed in Note 2 the Company adopted updated guidance related to the accounting for stock compensation in 2017. As a result of this updated guidance all windfalls and shortfalls are now recognized as a component of income tax expense in the period they occur.
On December 22, 2017, the President signed into law the 2017 Tax Act, which includes a broad range of tax reform proposals affecting businesses, including corporate tax rates and business deductions. The 2017 Tax Act reduces the statutory federal corporate tax rate from 35% to 21% for periods beginning after December 31, 2017. The Income Taxes topic of the Codification requires that the effect of a tax rate change on deferred tax assets and liabilities be recognized in the period the rate change was enacted. As such, we recorded income tax expense of $29.0 million for the year ended December 31, 2017 related to the revaluation of our net deferred tax assets. We do not expect the 2017 Tax Act to impact the realizability of our deferred tax assets. There were no other material impacts recognized or unrecognized for the year ended December 31, 2017 as a result of the enactment of the 2017 Tax Act.
At December 31, 2017 and 2016, the Company had deferred tax assets, net of deferred tax liabilities, of $77.5 million and $120.1 million, respectively, offset by valuation allowances of $2.4 million and $4.8 million, respectively. We have $338.5 million of state net operating loss carryforwards and $2.8 million of state tax credit carryforwards expiring at various dates through 2037. We also have $190.8 million of federal net operating loss carryforwards and $11.4 million of federal tax credit carryforwards expiring at various dates through 2037. As of December 31, 2017, the Company needed to generate approximately $281.4 million of pre-tax income in future periods to realize its federal deferred tax assets.
We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with the Income Taxes topic of the Codification we assess whether it is more likely than not that some or all of our deferred tax assets will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets and in making this determination, we consider all available positive and negative evidence and make certain assumptions. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. We consider nature, frequency, and severity of current and cumulative losses, as well as historical and forecasted financial results, the overall business environment, our industry's historic cyclicality, the reversal of existing deferred tax liabilities, and tax planning strategies in our assessment. Changes in our estimates of future taxable income and tax planning strategies will affect our estimate of the realization of the tax benefits of these tax carryforwards.
We recorded a full valuation allowance in 2008 due to our cumulative three year loss position at that time, compounded by the negative industry-wide business trends and outlook. We remained in a cumulative three year loss position until the second quarter of 2016. In the third quarter of 2016, management determined that there was sufficient positive evidence to conclude that it was more likely than not that the valuation allowance should be released against our net federal and some state deferred tax assets. As a result, for the year ended December 31, 2016 we recorded a cumulative reduction to the valuation allowance against our net deferred tax assets of $131.7 million. During 2017, as a result of various activities and tax initiatives that impacted our assessment of the future utilization and realizability of our state net operating losses (“NOLs”) we recorded a reduction to the associated valuation allowance of $2.8 million for the year ended December 31, 2017. For the year ended December 31, 2015, we recorded a valuation allowance of $9.7 million related to our continuing operations.
Section 382 of the Internal Revenue Code imposes annual limitations on the utilization of NOL carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in the Company’s stock by more than 50 percentage points over a three year testing period (“Section 382 Ownership Change”). In 2017, affiliates of a significant shareholder sold their investment in the Company, which triggered a Section 382 Ownership Change. As a result of triggering a Section 382 Ownership Change, an annual limitation is now imposed on the Company’s tax attributes, including its NOLs and other credits. The Company has evaluated the impact of this limitation on its NOLs and other credits and does not expect it to have a material impact on their future utilization or realizability.
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.
Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.
The following table shows the changes in our valuation allowance:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Balance at January 1, |
|
$ |
4,821 |
|
|
$ |
136,548 |
|
|
$ |
133,183 |
|
|
Additions charged to expense |
|
|
— |
|
|
|
— |
|
|
|
9,624 |
|
|
Reductions credited to expense |
|
|
(2,839 |
) |
|
|
(131,727 |
) |
|
|
— |
|
|
Enactment of federal income tax rate change |
|
|
427 |
|
|
|
— |
|
|
|
— |
|
|
Deductions |
|
|
— |
|
|
|
— |
|
|
|
(6,259 |
) |
|
Balance at December 31, |
|
$ |
2,409 |
|
|
$ |
4,821 |
|
|
$ |
136,548 |
|
The balance for uncertain tax positions, excluding penalties and interest, was $0.3 million, $0.2 million and $0.2 million as of December 31, 2017, 2016 and 2015, respectively with no significant impact recorded in the Company’s consolidated statement of operations and comprehensive income (loss) for the years ended December 31, 2017, 2016 or 2015. We accrue interest and penalties on our uncertain tax positions as a component of our provision for income taxes. We accrued no significant interest and penalties in 2017, 2016 or 2015.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Based on completed examinations and the expiration of statutes of limitations, we have concluded all U.S. federal income tax matters for years through 2013. We report in 41 states with various years open to examination.