11. Income Taxes
The effective tax rate from continuing operations was 31.0% in 2017, 39.5% in 2016 and 31.5% in 2015. A reconciliation of the Federal statutory income tax rate to the Company’s effective tax rate is as follows:
|
|
|
Percent of Income before Income Taxes |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory Federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes - net of Federal tax benefit |
|
|
8.3 |
|
|
|
3.0 |
|
|
|
0.2 |
|
|
Foreign tax rate differential |
|
|
(1.6 |
) |
|
|
(0.9 |
) |
|
|
(2.2 |
) |
|
Domestic production deduction |
|
|
(5.2 |
) |
|
|
(3.2 |
) |
|
|
(3.4 |
) |
|
Non-deductible expenses |
|
|
0.4 |
|
|
|
2.9 |
|
|
|
1.5 |
|
|
Impact of tax law changes |
|
|
(7.4 |
) |
|
|
— |
|
|
|
— |
|
|
Changes in unrecognized tax benefits |
|
|
0.9 |
|
|
|
(0.8 |
) |
|
|
(1.6 |
) |
|
Foreign tax incentives |
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
|
Valuation allowances |
|
|
— |
|
|
|
3.2 |
|
|
|
— |
|
|
Other |
|
|
0.6 |
|
|
|
0.7 |
|
|
|
2.0 |
|
|
Effective tax rate for the year |
|
|
31.0 |
% |
|
|
39.5 |
% |
|
|
31.5 |
% |
Income from continuing operations before income taxes was attributable to the following sources:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
12,979 |
|
|
$ |
17,010 |
|
|
$ |
19,546 |
|
|
Foreign |
|
|
2,729 |
|
|
|
1,709 |
|
|
|
5,962 |
|
|
Totals |
|
$ |
15,708 |
|
|
$ |
18,719 |
|
|
$ |
25,508 |
|
Income tax expense (benefit) from continuing operations consisted of the following:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||||||||||||
|
|
|
Current |
|
|
Deferred |
|
|
Current |
|
|
Deferred |
|
|
Current |
|
|
Deferred |
|
||||||
|
Federal |
|
$ |
6,304 |
|
|
$ |
(4,394 |
) |
|
$ |
5,684 |
|
|
$ |
(413 |
) |
|
$ |
6,677 |
|
|
$ |
(368 |
) |
|
Foreign |
|
|
1,821 |
|
|
|
(883 |
) |
|
|
515 |
|
|
|
741 |
|
|
|
337 |
|
|
|
1,308 |
|
|
State and local |
|
|
2,402 |
|
|
|
(386 |
) |
|
|
641 |
|
|
|
227 |
|
|
|
812 |
|
|
|
(729 |
) |
|
|
|
$ |
10,527 |
|
|
$ |
(5,663 |
) |
|
$ |
6,840 |
|
|
$ |
555 |
|
|
$ |
7,826 |
|
|
$ |
211 |
|
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Tax Act”). Effective January 1, 2018, the Tax Act establishes a corporate income tax rate of 21%, replacing the current 35% rate, and creates a territorial tax system rather than a worldwide system, which generally eliminates the U.S. federal income tax on dividends from foreign subsidiaries. The transition to the territorial system includes a one-time deemed repatriation transition tax (“Transition Tax”) on certain foreign earnings previously untaxed in the United States. The Company has made reasonable estimates for certain provisions under the Tax Act and has recorded a provisional net benefit to income tax expense of $1.2 million related to its enactment. This net benefit includes a provisional deferred tax benefit of $3.0 million related to revaluing the net U.S. deferred tax liabilities to reflect the lower U.S. corporate tax rate. The deferred tax benefit is offset by a provision of $1.8 million related to the Transition Tax. In general, the Transition Tax imposed by the Tax Act results in the taxation of foreign earnings and profits (“E&P”) at a 15.5% rate on liquid assets and 8% on the remaining unremitted foreign E&P, both net of foreign tax credits. The provisional amounts for the Transition Tax recorded by the Company in 2017 included the undistributed E&P for all the Company’s foreign subsidiaries.
Additional provisions of the Tax Act which may have an impact to the Company in future periods include, but are not limited to, the repeal of the domestic production deduction, limitations on interest expense deductions, accelerated depreciation that will allow for full expensing of qualified property, provisions related to performance-based executive compensation and other international provisions resulting from the territorial tax system established, as noted above.
In response to the complexities and timing of issuance of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). Management believes that it has made reasonable estimates of the impacts of the Tax Act in its 2017 consolidated financial statements. However, as the Company completes its analysis of the Tax Act, collects further data and reviews additional information and guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the provisional amounts included in the 2017 financial statements may be subject to adjustment. Per the guidance in SAB 118, adjustments to the provisional amounts recorded by the Company in 2017 that are identified within a subsequent period of up to one year from the enactment date will be included as an adjustment in the period the amounts are determined.
Except as provided for under the Transition Tax, no additional provision has been recorded as of December 31, 2017, related to the unremitted earnings of foreign subsidiaries. In accordance with SAB 118, the Company will continue to evaluate the impact of the Tax Act on its assertion that these earnings will be indefinitely reinvested. As noted above, the E&P for all foreign subsidiaries has been included in the calculation of the provisional Transition Tax, and thus, should there be a repatriation of earnings from any foreign subsidiaries in future periods, the Company would be subject to only foreign withholding tax.
Significant components of the Company’s deferred taxes as of December 31, 2017 and 2016 are as follows:
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred income tax liabilities |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
6,255 |
|
|
$ |
11,529 |
|
|
Tax-deductible goodwill |
|
|
5,202 |
|
|
|
9,136 |
|
|
State deferred taxes |
|
|
132 |
|
|
|
360 |
|
|
Other |
|
|
149 |
|
|
|
889 |
|
|
|
|
|
11,738 |
|
|
|
21,914 |
|
|
Deferred income tax assets |
|
|
|
|
|
|
|
|
|
Compensation |
|
|
3,030 |
|
|
|
5,686 |
|
|
Inventory valuation |
|
|
502 |
|
|
|
769 |
|
|
Allowance for uncollectible accounts |
|
|
268 |
|
|
|
487 |
|
|
Non-deductible accruals |
|
|
2,195 |
|
|
|
3,525 |
|
|
Non-deductible intangibles |
|
|
1,193 |
|
|
|
1,165 |
|
|
Capital loss carryforwards |
|
|
1,982 |
|
|
|
— |
|
|
Net operating loss carryforwards |
|
|
405 |
|
|
|
— |
|
|
|
|
|
9,575 |
|
|
|
11,632 |
|
|
Valuation Allowance |
|
|
(1,982 |
) |
|
|
— |
|
|
|
|
|
7,593 |
|
|
|
11,632 |
|
|
Net deferred income tax liability |
|
$ |
4,145 |
|
|
$ |
10,282 |
|
ASC 740, Income Taxes, requires that deferred tax assets be reduced by a valuation allowance, if based on all available evidence, it is more likely than not that the deferred tax asset will not be realized. Available evidence includes the reversal of existing taxable temporary differences, future taxable income exclusive of temporary differences, taxable income in carryback years and tax planning strategies.
As further discussed in Note 4, the Company sold its investments in certain Brazilian subsidiaries on December 18, 2017. In connection with this divestiture, the Company incurred a capital loss of $9.5 million on its investment in the Myers do Brazil business and recorded a deferred tax asset of $2.0 million as the result of this capital loss carryforward. A valuation allowance of $2.0 million has been recorded against this deferred tax asset as the recovery of the asset is not more likely than not as of December 31, 2017. In addition, in accordance with ASC 740, for the year ended December 31, 2016 the Company allocated $0.6 million of a valuation allowance related to the Brazil Business to income from continuing operations in the Consolidated Statement of Operations, as this valuation allowance related to the change in estimated realizability of the beginning of the year net deferred tax asset in the Brazil Business.
The Company recorded a tax benefit of approximately $15 million generated as a result of a worthless stock deduction for the Novel do Nordeste business included in the divestiture. Although management believes that the worthless stock deduction is valid, there can be no assurance that the IRS will not challenge it and, if challenged, that the Company will prevail. This tax benefit is included in the net loss from discontinued operations in the Consolidated Statements of Operations for the year ended December 31, 2017.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at January 1 |
|
$ |
478 |
|
|
$ |
151 |
|
|
$ |
483 |
|
|
Increases related to previous year tax positions |
|
|
359 |
|
|
|
478 |
|
|
|
151 |
|
|
Reductions due to lapse of applicable statute of limitations |
|
|
(478 |
) |
|
|
(151 |
) |
|
|
(483 |
) |
|
Reduction due to settlements |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at December 31 |
|
$ |
359 |
|
|
$ |
478 |
|
|
$ |
151 |
|
The total amount of gross unrecognized tax benefits that would reduce the Company’s effective tax rate was $0.4 million, $0.5 million and $0.2 million at December 31, 2017, 2016 and 2015.
The Company and its subsidiaries file U.S. Federal, state and local, and non-U.S. income tax returns. As of December 31, 2017, the Company is no longer subject to U.S. Federal examinations by tax authorities for tax years before 2014. The Company is subject to state and local examinations for tax years of 2012 through 2016. In addition, the Company is subject to non-U.S. income tax examinations for tax years of 2012 through 2016.