Income Taxes
The components of income (loss) before income taxes for the years ended December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
United States | $ | 70,338 |
| | $ | (44,078 | ) |
Foreign | 9,540 |
| | 975 |
|
Income (loss) before taxes | $ | 79,878 |
| | $ | (43,103 | ) |
The following table shows the benefit for income taxes (in thousands):
|
| | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
Current: | | | |
Federal | $ | 1,065 |
| | $ | (121 | ) |
State | 1,110 |
| | 80 |
|
Foreign | 2,065 |
| | 2,621 |
|
| 4,240 |
| | 2,580 |
|
| | | |
Deferred: |
| |
|
Federal | (8,627 | ) | | (12,376 | ) |
State | 1,182 |
| | (2,608 | ) |
Foreign | 603 |
| | (2,329 | ) |
| (6,842 | ) | | (17,313 | ) |
Income tax benefit | $ | (2,602 | ) | | $ | (14,733 | ) |
The differences between income taxes expected at the U.S. federal statutory rate of 35 percent and the reported income tax benefit are summarized as follows (in thousands):
|
| | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
Tax computed at federal statutory rate | $ | 27,932 |
| | $ | (15,086 | ) |
State income tax, net of federal benefit | 2,245 |
| | (1,410 | ) |
Permanent items | 793 |
| | 623 |
|
Transaction costs | 517 |
| | 1,466 |
|
Foreign rate differential | (791 | ) | | (77 | ) |
Gain on tax receivable agreement | (23,812 | ) | | — |
|
Rate change | (9,100 | ) | | (126 | ) |
Other | (386 | ) | | (123 | ) |
Income tax benefit | $ | (2,602 | ) | | $ | (14,733 | ) |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table shows significant components of the Company’s deferred tax assets and liabilities (in thousands):
|
| | | | | | | |
| Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
Deferred tax assets (liabilities): | | | |
Definite-lived intangible assets | $ | (16,806 | ) | | $ | (41,087 | ) |
Indefinite-lived intangible assets | (11,074 | ) | | (7,535 | ) |
Property, plant and equipment | (13,862 | ) | | (19,108 | ) |
Inventories and related reserves | 4,625 |
| | 5,372 |
|
Accrued compensation | 547 |
| | 2,532 |
|
Allowance for doubtful accounts | 1,458 |
| | 3,054 |
|
Capital lease obligations | 2,964 |
| | 5,632 |
|
Derivative on foreign currency | (1,585 | ) | | 2,719 |
|
Net operating loss carryforwards | 14,801 |
| | 19,963 |
|
Other, net | 1,977 |
| | 1,591 |
|
Total deferred tax assets (liabilities) | (16,955 | ) | | (26,867 | ) |
Valuation allowance | (864 | ) | | — |
|
Total deferred tax assets (liabilities), net | $ | (17,819 | ) | | $ | (26,867 | ) |
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative federal tax loss incurred over the three-year period ended December 31, 2017 (Successor) of $40.5 million. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth.
The Company has sufficient taxable temporary differences, excluding those associated with indefinite lived assets and goodwill, to enable the use of the tax benefits of most operating loss carryforwards and deductible temporary differences, irrespective of future taxable income. More specifically, the Company is in a net deferred tax liability position (after excluding those associated with indefinite-lived assets and goodwill) in the United States and Canada because of substantial deferred tax liabilities for depreciable property and equipment, and amortizable intangible assets that will offset the reversal of the deferred tax assets in the future before the expiration of most deferred tax assets. Consolidated deferred tax liabilities associated with indefinite lived assets and goodwill were $11.1 million and $7.5 million at December 31, 2017 and 2016, respectively.
As of December 31, 2017 (Successor), the Company had federal and state income tax net operating loss carryforwards of $54.0 million and $66.7 million, respectively. These carryforwards will expire on various dates in the next 20 years as follows (in millions):
|
| | | | | | | |
| Federal | | State |
2020-2025 | $ | — |
| | $ | 2.8 |
|
2026-2031 | — |
| | 19.3 |
|
2032-2037 | 54.0 |
| | 44.6 |
|
| $ | 54.0 |
| | $ | 66.7 |
|
At December 31, 2017 (Successor), the Company had federal tax credit carryforwards of $0.2 million. These carryforwards become refundable and will be refunded by 2022.
Based on the positive and negative evidence reviewed, the Company believes that it is more likely than not that the benefit from certain state net operating loss ("NOL") carryforwards related to single filing states of a liquidated subsidiary will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $0.9 million on the deferred tax assets related to these state NOL carryforwards. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets as of December 31, 2017 (Successor), will be accounted for as a reduction of income tax expense.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. The Company had no material uncertain tax positions for which it recognized a benefit at December 31, 2017 (Successor) and December 31, 2016 (Successor).
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2017 (Successor) and December 31, 2016 (Successor). The Company does not anticipate a significant change in its unrecognized tax benefits over the next 12 months.
On December 22, 2017, the United States government enacted the Tax Act resulting in significant modifications to existing law. The Company follows the guidance in SAB 118, which provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Tax Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.
The Company has completed the accounting for the effects of the Tax Act during the year ended December 31, 2017 (Successor), except for the repricing of ending deferred taxes due to the reduction in the corporate tax rate and the impact of the one-time deemed repatriation transition tax on unrepatriated foreign earnings. As a result, the Company's financial statements for the year ended December 31, 2017 (Successor) reflect these effects of the Tax Act as provisional based on a reasonable estimate of the income tax effects. The Company has included a provisional reduction in deferred tax liability and corresponding provisional reduction in tax provision expense of $9.1 million in relation to the repricing of its ending deferred tax balance. The provisional amount is based on information currently available, including estimated book to tax adjustments. The Company continues to gather and analyze information, including any future legislative tax developments at the federal or state jurisdictions, in order to complete the accounting for the repricing of the ending deferred balances as of December 31, 2017 (Successor).
The Company has also included a provisional income tax payable in the amount of $0.5 million related to the one-time deemed repatriation transition tax on unrepatriated foreign earnings. The provisional amount is based on information currently available, including estimated tax earnings and profits and tax pools from foreign investments. In addition, the income tax payable has been calculated by electing out of the use of net operating losses in order to maximize the use of foreign tax credits. The Company has also estimated the state tax impact of the Tax Act. The Company continues to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries and the available elections, in order to complete the accounting for the effects of the estimated transition tax. Any future legislative tax developments at the federal or state jurisdictions will need to be examined for potential application. It is the intention of the Company to complete the necessary analysis within the measurement period.
The Company considers the earnings of non-U.S. subsidiaries to be indefinitely invested outside the United States based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. As required by the Tax Act, the Company has recorded a provisional tax liability related to the U.S. federal income taxes on approximately $10.2 million of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. However, the Company has not recorded a deferred tax liability for state and foreign withholding taxes associated with the repatriation of those foreign earnings. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States.
Tax Receivable Agreement
In connection with the IPO, the Company entered into a tax receivable agreement ("TRA") with Parent 2 that provides for the payment by the Company to Parent 2 of 90% of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that the Company realizes (or in some circumstances are deemed to realize) as a result of the utilization of the Company and the Company’s subsidiaries’ (i) depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis the Company has in its assets at the consummation of the IPO, (ii) net operating losses, (iii) tax credits and (iv) certain other tax attributes. In the first quarter of 2017, the Company recorded a liability of $203.8 million, with a corresponding offset to additional paid-in capital for the TRA. At the end of each reporting period, any changes in the Company's estimate of the liability will be recorded in the consolidated statement of operations as a component of other income (expense). The timing and amount of future tax benefits associated with the TRA are subject to change, and future payments may be required which could be materially different from the current estimated liability. The TRA will remain in effect until all tax benefits have been used or expired, unless the agreement is terminated early.
At December 31, 2017, the TRA liability balance was $135.8 million. The initial amount recorded was $203.8 million, and the reduction of $68.0 million was recorded as a gain in the other income (expense) section of the consolidated statement of operations during the fourth quarter of 2017. The reduction in the TRA liability was due primarily to the federal income tax rate being reduced from 35.0% to 21.0% as part of the Tax Cut and Jobs Act of 2017. There have been no payments related to the TRA from inception to December 31, 2017. The first payment related to the TRA is anticipated to be made during the fourth quarter of 2018 and is estimated to be $15.9 million