NOTE 15 – INCOME TAXES:
On December 22, 2017, the U.S. federal government enacted the Tax Reform, to become effective as of January 1, 2018, which, among other things, lowered the U.S. corporate statutory income tax rate from 35% to 21%, implemented a modified territorial tax system and imposed a one-time tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform negatively impacted the Corporation’s income tax provision by approximately $1,565, principally related to the one-time repatriation transition tax offset by income tax benefits resulting from 100% bonus depreciation. There was no cash outlay due to the Tax Reform, however, it reduced the amount of the Corporation’s carryback refund that it would have been able to receive. Additionally, there was no significant impact from remeasuring its U.S. deferred income tax assets and liabilities at the new enacted statutory income tax rate since these net deferred income tax assets are fully valued. The Corporation will continue to analyze the Tax Reform and refine its provisional amounts, which could potentially impact the measurement of its tax balances.
In response to the enacted Tax Reform, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. Generally Accepted Accounting Principles 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 Reform. As of December 31, 2017, in accordance with SAB 118, the Corporation has made a reasonable estimate of the: (i) one-time repatriation transition tax; (ii) increased bonus depreciation for assets placed in service on or after September 27, 2017; and (iii) effects on the Corporation’s existing deferred tax balances, but has not completed its full accounting for the tax effects of enactment of the Tax Reform. The Corporation anticipates U.S. regulatory agencies will issue further regulations during 2018, which may alter this estimate. The Corporation is continuing to analyze its earnings and profits in foreign jurisdictions and its deferred tax balances.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Reform. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treating any taxes on GILTI inclusions as period cost are both acceptable methods, subject to an accounting policy election. The Corporation is still evaluating the GILTI provisions and has not yet elected an accounting policy for GILTI. The final determination of the tax effects of enactment of the Tax Reform will be completed within the measurement period of up to one year from the enactment date as permitted by SAB 118, and any adjustments to provisional amounts that are identified during the measurement period will be recorded in the reporting period in which the adjustment is determined.
Furthermore, the Corporation adopted ASU 2018-02, which allows for a reclassification from accumulated other comprehensive income (loss) to retained earnings for the stranded tax effects resulting from the Tax Reform. A stranded tax effect is defined as the difference in the tax effect of amounts recognized as other comprehensive income (loss) items, using the income tax rate in effect at the time of recognition and the newly enacted income tax rate. The new guidance is relevant only to the reclassification of the income tax effects of the Tax Reform; accordingly, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. As a result, $6,088 was reclassified between accumulated other comprehensive loss and retained earnings.
(Loss) income before income taxes and equity gains (losses) in joint venture is comprised of the following:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
(16,988 |
) |
|
$ |
(26,326 |
) |
|
$ |
6,000 |
|
|
Foreign |
|
|
3,295 |
|
|
|
(31,194 |
) |
|
|
(1,480 |
) |
|
(Loss) income before income taxes and equity gains (losses) in joint venture |
|
$ |
(13,693 |
) |
|
$ |
(57,520 |
) |
|
$ |
4,520 |
|
At December 31, 2017, the Corporation has federal net operating loss carryforwards of $3,208, which begin to expire in 2035. Under the Tax Reform, beginning with 2018, net operating losses can be carried forward indefinitely, but are limited to 80 percent of taxable income in any given year. Additionally, at December 31, 2017, the Corporation had state net operating loss carryforwards of $34,495 which begin to expire in 2018, foreign net operating loss carryforwards of $93,364 which begin to expire in 2018 and capital loss carryforwards of $814 which do not expire. During 2017, the Corporation received $6,540 of U.S. federal and state income tax refunds.
The income tax (benefit) provision consisted of the following:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(4,698 |
) |
|
$ |
(1,574 |
) |
|
$ |
4,577 |
|
|
State |
|
|
(440 |
) |
|
|
465 |
|
|
|
378 |
|
|
Foreign |
|
|
606 |
|
|
|
414 |
|
|
|
(20 |
) |
|
Current income tax (benefit) provision |
|
|
(4,532 |
) |
|
|
(695 |
) |
|
|
4,935 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,259 |
|
|
|
(2,688 |
) |
|
|
(2,203 |
) |
|
State |
|
|
(112 |
) |
|
|
(1,838 |
) |
|
|
197 |
|
|
Foreign |
|
|
1,876 |
|
|
|
(2,472 |
) |
|
|
(296 |
) |
|
Increase in valuation allowance |
|
|
154 |
|
|
|
30,405 |
|
|
|
0 |
|
|
Deferred income tax provision (benefit) |
|
|
3,177 |
|
|
|
23,407 |
|
|
|
(2,302 |
) |
|
Total income tax (benefit) provision |
|
$ |
(1,355 |
) |
|
$ |
22,712 |
|
|
$ |
2,633 |
|
In 2016, the income tax provision was affected by recognition of a valuation allowance against all U.S. and certain foreign entities as it was considered more-likely-than-not that the net deferred income tax assets would not be realized. The Corporation assessed available positive and negative evidence to estimate whether sufficient future taxable income would be generated to permit use of the existing deferred income tax assets. During 2016, the Corporation incurred three years of cumulative losses, inclusive of the acquired Åkers businesses as if the businesses were held during the entire three-year period. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth and profitability. On the basis of this evaluation, the Corporation established an increase in the valuation allowance to recognize the estimated portion of deferred income tax assets that is more-likely-than-not to not be realized. The Corporation has evaluated this position in the current year and determined that the valuation allowance against U.S. and certain foreign entities should remain. The decrease in the valuation allowance during 2017 is primarily due to the reduction in the U.S. corporate statutory income tax rate from 35% to 21%.
The difference between statutory U.S. federal income tax and the Corporation’s effective income tax was as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Computed at statutory rate |
|
$ |
(4,428 |
) |
|
$ |
(19,984 |
) |
|
$ |
1,402 |
|
|
Tax differential on non-U.S. earnings |
|
|
(389 |
) |
|
|
1,790 |
|
|
|
106 |
|
|
State income taxes |
|
|
(398 |
) |
|
|
(1,535 |
) |
|
|
226 |
|
|
Manufacturers deduction (I.R.C. Section 199) |
|
|
0 |
|
|
|
204 |
|
|
|
(433 |
) |
|
Meals and entertainment |
|
|
142 |
|
|
|
143 |
|
|
|
136 |
|
|
Tax credits |
|
|
0 |
|
|
|
0 |
|
|
|
(243 |
) |
|
Goodwill impairment |
|
|
0 |
|
|
|
9,191 |
|
|
|
0 |
|
|
Increase in valuation allowance |
|
|
154 |
|
|
|
30,405 |
|
|
|
0 |
|
|
Repatriation transition tax impact |
|
|
3,284 |
|
|
|
0 |
|
|
|
0 |
|
|
Change in tax rates |
|
|
0 |
|
|
|
1,913 |
|
|
|
224 |
|
|
Change in uncertain tax positions |
|
|
0 |
|
|
|
114 |
|
|
|
91 |
|
|
Acquisition-related costs |
|
|
0 |
|
|
|
571 |
|
|
|
981 |
|
|
Other – net |
|
|
280 |
|
|
|
(100 |
) |
|
|
143 |
|
|
Total income tax (benefit) provision |
|
$ |
(1,355 |
) |
|
$ |
22,712 |
|
|
$ |
2,633 |
|
Deferred income tax assets and liabilities as of December 31, 2017, and 2016, are summarized below. Unremitted earnings of the Corporation’s non-U.S. subsidiaries and affiliates are deemed to be permanently reinvested and, accordingly, no deferred income tax liability has been recorded. If the Corporation were to remit any foreign earnings to the U.S., the estimated tax impact would be insignificant.
|
|
|
2017 |
|
|
2016 |
|
||
|
Assets: |
|
|
|
|
|
|
|
|
|
Employment – related liabilities |
|
$ |
10,975 |
|
|
$ |
18,659 |
|
|
Pension liability – foreign |
|
|
1,633 |
|
|
|
2,241 |
|
|
Pension liability – domestic |
|
|
9,004 |
|
|
|
16,133 |
|
|
Liabilities related to discontinued operations |
|
|
186 |
|
|
|
241 |
|
|
Capital loss carryforwards |
|
|
308 |
|
|
|
282 |
|
|
Asbestos-related liability |
|
|
12,179 |
|
|
|
21,024 |
|
|
Net operating loss – domestic |
|
|
674 |
|
|
|
653 |
|
|
Net operating loss – state |
|
|
2,782 |
|
|
|
2,123 |
|
|
Net operating loss – foreign |
|
|
22,856 |
|
|
|
19,106 |
|
|
Inventory related |
|
|
2,764 |
|
|
|
2,157 |
|
|
Impairment charge associated with investment in MG |
|
|
1,155 |
|
|
|
2,184 |
|
|
Investment tax credits – foreign |
|
|
848 |
|
|
|
791 |
|
|
Other |
|
|
3,181 |
|
|
|
6,660 |
|
|
Gross deferred income tax assets |
|
|
68,545 |
|
|
|
92,254 |
|
|
Valuation allowance(1) |
|
|
(38,112 |
) |
|
|
(45,449 |
) |
|
|
|
|
30,433 |
|
|
|
46,805 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
(26,915 |
) |
|
|
(37,584 |
) |
|
Mark-to-market adjustment – derivatives |
|
|
(4 |
) |
|
|
(187 |
) |
|
Intangible assets – definite life |
|
|
(1,186 |
) |
|
|
(2,067 |
) |
|
Intangible assets – indefinite life |
|
|
(605 |
) |
|
|
(731 |
) |
|
Other |
|
|
(566 |
) |
|
|
(2,003 |
) |
|
Gross deferred income tax liabilities |
|
|
(29,276 |
) |
|
|
(42,572 |
) |
|
Net deferred income tax assets |
|
$ |
1,157 |
|
|
$ |
4,233 |
|
|
(1) |
The decrease in the valuation allowance in 2017 from 2016 is primarily due to the reduction in the U.S. corporate statutory income tax rate from 35% to 21%. Certain deferred income tax assets acquired in the ASW acquisition had valuation allowances recorded in the opening balance sheet. Accordingly, the valuation allowance indicated in the deferred income tax table for 2016 differs from the valuation allowance recognized in the income tax provision for 2016. |
The following summarizes changes in unrecognized tax benefits for the year ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at the beginning of the year |
|
$ |
236 |
|
|
$ |
315 |
|
|
$ |
52 |
|
|
Gross increases for tax positions taken in the current year |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Gross increases for tax positions taken in prior years |
|
|
0 |
|
|
|
0 |
|
|
|
283 |
|
|
Gross decreases in tax positions due to lapse in statute of limitations |
|
|
(119 |
) |
|
|
(79 |
) |
|
|
(20 |
) |
|
Gross decreases for tax positions taken in prior years |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Gross decreases for tax settlements with taxing authorities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Balance at the end of the year |
|
$ |
117 |
|
|
$ |
236 |
|
|
$ |
315 |
|
If the unrecognized tax benefits were recognized, $31 would reduce the Corporation’s effective income tax rate. The amount of penalties and interest recognized in the consolidated balance sheets as of December 31, 2017, and 2016, and in the consolidated statements of operations for 2017, 2016 and 2015 is insignificant. Unrecognized tax benefits of $117 are to reverse due to the lapse in the statute of limitations within the next 12 months.
The Corporation is subject to taxation in the United States, various states and foreign jurisdictions, and remains subject to examination by tax authorities for tax years 2014 – 2017. The Corporation is currently under audit by the Internal Revenue Service of its consolidated federal tax returns for the 2014 – 2016 tax years. Additionally, the Pennsylvania Department of Revenue has notified the Corporation’s subsidiary, Union Electric Steel, that it will audit its state income tax returns for the years 2015 and 2016. No material changes are anticipated.