On December 22, 2017, the President of the United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The legislation significantly changes U.S. tax law by lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries, among others. The Tax Reform Act also adds many new provisions including changes to bonus depreciation and the deductions for executive compensation and interest expense. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $11.1 million tax benefit in the Company’s consolidated statements of operations for the year ended December 31, 2017.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017. The Tax Reform Act imposes a tax on these earnings and profits at either a 15.5% rate or an 8.0% rate. The higher rate applies to the extent the Company's foreign subsidiaries have cash and cash equivalents at certain measurement dates, whereas the lower rate applies to any earnings that are in excess of the cash and cash equivalents balance. The Company had an estimated $54.5 million of undistributed foreign earnings and profits subject to the deemed mandatory repatriation and recognized a provisional $5.3 million of income tax expense in the Company’s consolidated statements of operations for the year ended December 31, 2017. After the utilization of existing net operating loss carryforwards, the Company will not incur any U.S. federal cash taxes resulting from the deemed mandatory repatriation.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“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 is still evaluating the potential impact of the GILTI provisions and accordingly has not recorded a provisional estimate for the year ended December 31, 2017. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Reform Act and the application of Accounting Standards Codification 740, and are considering available accounting policy alternatives to either adopt or record the U.S. income tax effect of future GILTI inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions. Our accounting policies depend, in part, on analyzing our global income to determine whether we expect a tax liability resulting from the application of this provision, and, if so, whether and when to record related current and deferred income taxes. Whether we intend to recognize deferred tax liabilities related to the GILTI provisions is dependent, in part, on our assessment of the Company's future operating structure. In addition, we are awaiting further interpretive guidance in connection with the computation of the GILTI tax. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore, we have not made any adjustments relating to potential GILTI tax in our consolidated financial statements and have not made a policy decision regarding our accounting for GILTI.
We are also currently analyzing certain additional provisions of the Tax Reform Act that come into effect for tax years starting January 1, 2018 and will determine if these items would impact the effective tax rate in the year the income or expense occurs. These provisions include the BEAT provisions, eliminating U.S. federal income taxes on dividends from foreign subsidiaries, the new provision that could limit the amount of deductible interest expense, and the limitations on the deductibility of certain executive compensation.
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 Reform Act. The Company has made a reasonable estimate of the financial statement impact as of January 31, 2018 and has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these 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 Reform Act. The accounting is expected to be completed within the one year measurement period as allowed by SAB 118.
The consolidated loss before income taxes consisted of the following: |
| | | | | | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | |
Domestic | $ | (27,919 | ) | | $ | (93,639 | ) | | $ | (126,334 | ) |
Foreign | 13,062 |
| | 9,290 |
| | 14,478 |
|
Loss before income taxes | $ | (14,857 | ) | | $ | (84,349 | ) | | $ | (111,856 | ) |
The consolidated benefit for income taxes included within the consolidated statements of operations consisted of the following: |
| | | | | | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | |
Current | | | | | |
Federal | $ | 208 |
| | $ | — |
| | $ | 161 |
|
State | (125 | ) | | 57 |
| | 104 |
|
Foreign | 6,878 |
| | 7,759 |
| | 5,703 |
|
Total current income tax provision | 6,961 |
| | 7,816 |
| | 5,968 |
|
| | | | | |
Deferred | | | | | |
Federal | (14,864 | ) | | (9,059 | ) | | (24,548 | ) |
State | (1,281 | ) | | (1,781 | ) | | (3,196 | ) |
Foreign | (1,200 | ) | | (3,272 | ) | | (479 | ) |
Total deferred income tax benefit | (17,345 | ) | | (14,112 | ) | | (28,223 | ) |
Total income tax benefit | $ | (10,384 | ) | | $ | (6,296 | ) | | $ | (22,255 | ) |
The income tax benefit recognized in the accompanying consolidated statements of operations differs from the amounts computed by applying the Federal income tax rate to loss before income tax benefit. A reconciliation of income taxes at the Federal statutory rate to the effective tax rate is summarized as follows: |
| | | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | |
Tax at Federal statutory rate of 35% | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes - net of Federal benefit | 7.7 |
| | 1.5 |
| | 2.7 |
|
Research and development incentives | 1.7 |
| | 0.5 |
| | 0.4 |
|
Foreign rate differential | 5.2 |
| | 1.3 |
| | 0.8 |
|
Valuation allowances | 5.0 |
| | (1.8 | ) | | 0.2 |
|
Change in foreign tax rates | (1.2 | ) | | 0.6 |
| | (1.0 | ) |
Decrease (increase) in tax reserves | (0.4 | ) | | 1.0 |
| | (0.2 | ) |
Stock compensation expense | (6.7 | ) | | (0.6 | ) | | (0.7 | ) |
U.S. taxation of foreign earnings(1) | (10.2 | ) | | (3.6 | ) | | (0.5 | ) |
Non-deductible meals and entertainment | (0.3 | ) | | (0.1 | ) | | (0.1 | ) |
Non-deductible impairment charges(2) | — |
| | (25.7 | ) | | (16.2 | ) |
Change in U.S. tax rate(3) | 72.5 |
| | — |
| | — |
|
Transition tax on unremitted foreign earnings(4) | (35.7 | ) | | — |
| | — |
|
Other | (2.7 | ) | | (0.6 | ) | | (0.5 | ) |
Effective tax rate | 69.9 | % | | 7.5 | % | | 19.9 | % |
| |
(1) | During the year ended December 31, 2017, the U.S. taxation of foreign earnings includes the recognition of a deferred tax liability for foreign earnings of the Company’s wholly-owned U.S. subsidiaries that are no longer considered permanently reinvested. During the year ended December 31, 2016, the amount includes the recognition of a deferred tax liability for the foreign earnings of the Company’s non-majority owned joint venture holding that are no longer considered permanently reinvested. |
| |
(2) | During the years ended December 31, 2016 and 2015, the non-deductible impairment charges are related to the impairment of goodwill and other intangible assets. |
| |
(3) | During the year ended December 31, 2017, the change in U.S. tax rate represents the impact of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act. |
| |
(4) | During the year ended December 31, 2017, the transition tax on unremitted foreign earnings represents the impact of the deemed mandatory repatriation provisions under the Tax Reform Act. |
The Company’s temporary differences which gave rise to deferred tax assets and liabilities were as follows: |
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Deferred tax assets | | | |
Accrued expenses and reserves | $ | 2,685 |
| | $ | 3,832 |
|
Postretirement and postemployment benefits | 1,702 |
| | 2,662 |
|
Employee benefits | 3,476 |
| | 2,844 |
|
Inventories | 1,392 |
| | 2,710 |
|
Other assets | 1,868 |
| | 3,310 |
|
Operating loss and credit carryforwards | 15,257 |
| | 22,510 |
|
Gross deferred tax assets | 26,380 |
| | 37,868 |
|
Less valuation allowance | (4,220 | ) | | (4,879 | ) |
Deferred tax assets | 22,160 |
| | 32,989 |
|
| | | |
Deferred tax liabilities | | | |
Property, plant and equipment | (15,670 | ) | | (25,854 | ) |
Intangible assets and other liabilities | (28,912 | ) | | (46,376 | ) |
Foreign investments | (1,688 | ) | | (2,109 | ) |
Deferred tax liabilities | (46,270 | ) | | (74,339 | ) |
Net deferred tax liability | $ | (24,110 | ) | | $ | (41,350 | ) |
| | | |
Amounts recognized in the statement of financial position consist of: |
| |
|
Other assets - net | $ | 1,589 |
| | $ | 1,258 |
|
Deferred income taxes | (25,699 | ) | | (42,608 | ) |
Net amount recognized | $ | (24,110 | ) | | $ | (41,350 | ) |
At December 31, 2017, the Company has U.S. federal and state net operating loss carryforwards, which expire at various dates through 2036, approximating $27.6 million and $102.9 million, respectively. In addition, the Company has U.S. state tax credit carryforwards of $1.0 million which expire between 2017 and 2031. The Company’s foreign net operating loss carryforwards total approximately $16.9 million (at December 31, 2017 exchange rates). The majority of these foreign net operating loss carryforwards are available for an indefinite period.
Valuation allowances totaling $4.2 million and $4.9 million as of December 31, 2017 and 2016, respectively, have been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if future taxable income during the carryforward period fluctuates.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows for the years ended December 31, 2017, 2016 and 2015: |
| | | | | | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | |
Balance at beginning of period | $ | 1,881 |
| | $ | 2,928 |
| | $ | 2,743 |
|
Additions (reductions) based on tax positions related to current year | 267 |
| | 126 |
| | (28 | ) |
Additions based on tax positions related to prior years | — |
| | — |
| | 55 |
|
Additions recognized in acquisition accounting | — |
| | — |
| | 323 |
|
Reductions in tax positions - settlements | — |
| | — |
| | (111 | ) |
Reductions related to lapses of statute of limitations | (232 | ) | | (1,173 | ) | | (54 | ) |
Balance at end of period | $ | 1,916 |
| | $ | 1,881 |
| | $ | 2,928 |
|
Of the $1.9 million, $1.9 million, and $2.9 million of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, respectively, approximately $1.9 million, $1.6 million, and $1.9 million, respectively, would impact the effective income tax rate if recognized. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of its income tax provision. During the years ended December 31, 2017, 2016 and 2015, the Company had an immaterial amount of interest and penalties that were recognized as a component of the income tax provision.
At December 31, 2017 and 2016, the Company has an immaterial amount of accrued interest and penalties related to taxes included within the consolidated balance sheet. During the next twelve months, the Company believes it is reasonably possible the total amount of unrecognized tax benefits will stay the same.
The Company, along with its subsidiaries, files returns in the U.S. Federal and various state and foreign jurisdictions. With certain exceptions, the Company is subject to examination by U.S. Federal and state taxing authorities for the taxable years in the following table. The Company does not expect the results of these examinations to have a material impact on the Company. |
| | |
Tax Jurisdiction | | Open Tax Years |
Brazil | | 2013 - 2017 |
France | | 2013 - 2017 |
Germany | | 2012 - 2017 |
Mexico | | 2012 - 2017 |
Sweden | | 2012 - 2017 |
United Kingdom | | 2016 - 2017 |
United States (federal) | | 2014 - 2017 |
United States (state and local) | | 2013 - 2017 |
As a result of the deemed mandatory repatriation provisions in the Tax Reform Act, the Company included an estimated $54.5 million of undistributed earnings in income subject to U.S. tax at reduced tax rates. During the fourth quarter of 2017, the Company changed its assertion regarding the permanent reinvestment of earnings of its wholly-owned non U.S. subsidiaries. This change in assertion was triggered by the anticipated future impact of changes arising from the enactment of the Tax Reform Act, including the interest expense deduction limitation and significant reduction in the U.S. taxation of earnings repatriated from the Company’s foreign subsidiaries. As a result, during the year ended December 31, 2017, the Company has recognized a deferred tax liability of $1.7 million on the undistributed earnings of its wholly-owned foreign subsidiaries. The $1.7 million is considered a provisional amount pursuant to SAB 118.
During the second quarter of 2016, the Company changed its assertion regarding the permanent reinvestment of earnings of its non-majority owned joint venture holding. Such change in assertion was driven by several factors. Prior to the second quarter of 2016, the Company had the ability and intent to block the payment of distributions; the Company changed its stance in the second quarter of 2016 to be open to joint venture distributions. This change coincided with the a re-evaluation of the joint venture partners during that quarter of the willingness and ability of the entity to distribute excess cash balances given the maturity, stability and revised growth expectations of the joint venture operations. The impact of this change in assertion was to reduce the income tax benefit for the year ended December 31, 2016 by $2.9 million.