Income Taxes
The net long-term deferred tax liabilities in the accompanying consolidated balance sheets include the following components (in thousands): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Deferred tax liabilities: | | | | | |
Fixed assets | $ | 323,548 |
| | $ | 490,221 |
| | $ | 472,817 |
|
Deferred charges and other liabilities | 6,266 |
| | 10,908 |
| | 11,317 |
|
Total deferred tax liabilities | 329,814 |
| | 501,129 |
| | 484,134 |
|
Deferred tax assets: | | | | | |
Net operating loss carryforwards | (122,682 | ) | | (111,147 | ) | | (52,374 | ) |
Allowance for doubtful accounts | (1,362 | ) | | (763 | ) | | (1,036 | ) |
Stock-based compensation expense | (1,823 | ) | | (4,033 | ) | | (4,830 | ) |
Convertible senior notes | (8,265 | ) | | — |
| | — |
|
Alternative minimum tax credit carryforward | (10,431 | ) | | (20,863 | ) | | (20,863 | ) |
Foreign tax credit carryforward | (18,711 | ) | | (17,554 | ) | | (17,972 | ) |
Other | (4,501 | ) | | (6,044 | ) | | (5,440 | ) |
Total deferred tax assets | (167,775 | ) | | (160,404 | ) | | (102,515 | ) |
Valuation allowance | 35,426 |
| | 2,295 |
| | — |
|
Total deferred tax liabilities, net | $ | 197,465 |
| | $ | 343,020 |
| | $ | 381,619 |
|
The components of the income tax expense follow (in thousands): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current tax expense (benefit): | | | | | |
U.S. and State | $ | (9,743 | ) | | $ | 709 |
| | $ | — |
|
Foreign | 1,024 |
| | (257 | ) | | 5,671 |
|
Total current tax expense | (8,719 | ) | | 452 |
| | 5,671 |
|
Deferred tax expense: | | | | | |
U.S. and State | (142,136 | ) | | (45,958 | ) | | 34,086 |
|
Foreign | 611 |
| | — |
| | — |
|
Total deferred tax expense | (141,525 | ) | | (45,958 | ) | | 34,086 |
|
Total tax expense (benefit) | $ | (150,244 | ) | | $ | (45,506 | ) | | $ | 39,757 |
|
Income from operations before income taxes, based on jurisdiction earned, was as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (105,692 | ) | | $ | (93,704 | ) | | $ | 65,894 |
|
Foreign | (17,131 | ) | | (15,648 | ) | | 40,684 |
|
Total income (loss) from operations before income taxes | $ | (122,823 | ) | | $ | (109,352 | ) | | $ | 106,578 |
|
At December 31, 2017, the Company has net operating loss carryforwards, or NOLs, in the U.S. of approximately $465.1 million, which if not utilized will expire in 2031 through 2037, and foreign tax credits of approximately $18.5 million, which if not utilized will expire in 2019 through 2027. It has state NOLs of approximately $132.2 million, which if not utilized will expire in 2030 through 2037. The Company also has NOLs in Brazil of approximately $37.8 million, which are not subject to expiration and can only be used to offset up to 30% of taxable income each year. Lastly, it has NOLs in Mexico of approximately $14.5 million, which if not utilized will expire in 2026 through 2027. All of the above NOLs can only be utilized if the Company generates taxable income in the respective tax jurisdiction.
In recording a valuation allowance with respect to such NOLs and foreign tax credits, management assessed the favorable and unfavorable evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of the unfavorable evidence evaluated during the fourth quarter of 2017 was the cumulative pre-tax loss that was incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections of future earnings. As of December 31, 2016 and 2017, the Company has established valuation allowances of $2.3 million and $35.4 million, respectively, based upon management's conclusion that it is more likely than not that the Brazil and Mexico NOLs and foreign tax credits described above may expire unused.
The Company is no longer subject to tax audits by federal, state or local taxing authorities for years prior to 2013. The Company has ongoing examinations by various foreign tax authorities but does not believe that the results of these examinations will have a material adverse effect on the Company’s financial position or results of operations.
The following table reconciles the difference between the Company’s income tax provision calculated at the federal statutory rate of 35% and the actual income tax provision (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. federal statutory rate | $ | (42,988 | ) | | $ | (38,274 | ) | | $ | 37,302 |
|
State taxes, net | (1,228 | ) | | (1,094 | ) | | 1,066 |
|
Non-deductible expense | 3,488 |
| | 1,070 |
| | 1,440 |
|
Change in valuation allowance | 15,118 |
| | 2,295 |
| | (1,011 | ) |
Income excluded from U.S. taxable income | — |
| | (9,478 | ) | | — |
|
Change in enacted U.S. tax rate | (125,225 | ) | | — |
| | — |
|
Foreign taxes and other | 591 |
| | (25 | ) | | 960 |
|
| $ | (150,244 | ) | | $ | (45,506 | ) | | $ | 39,757 |
|
Due to a favorable election included in the Company's 2015 tax return, which was filed during the fourth quarter of 2016, the results of one of the Company's vessels was excluded from U.S. taxable income and was taxed based on its daily notional shipping income, as defined. This resulted in a deferred tax benefit of $9.5 million during the year ended December 31, 2016. The Company does not anticipate having any vessels qualify for this election in the foreseeable future.
The Tax Cuts and Jobs Act, or the Act, was signed into law in the U.S. on December 22, 2017. The primary impact of this legislation was a reduction of the corporate income tax rate from 35% to 21% generally effective as of January 1, 2018. The impact of the deferred tax rate and tax law changes are required to be reflected in the period in which the law is enacted. As a result, the Company repriced its net deferred tax liabilities, which resulted in a favorable tax impact of $125.2 million and was recorded as a discrete item during the fourth quarter of 2017.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118, or SAB 118, to address the accounting and reporting of the Act. SAB 118 allows companies to take a reasonable period, which should not extend beyond one year from enactment of the Act, to measure and recognize the effects of the new tax law. As of December 31, 2017, the Company remeasured its deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future, which is generally a 22.5% blended federal and state tax rate. However, it is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The Company has included in its income tax rate a preliminary estimate related to executive compensation, Alternative Minimum Tax refundable credits, taxation in its foreign jurisdictions, and re-measurement of its deferred taxes. Once the accounting for income taxes on these items is complete, it will be reflected and reported in the applicable quarter during 2018. Additionally, because of the complexities of the new legislation, the Company has not elected an accounting policy at this time with respect to the newly enacted global intangible low-taxed income, or GILTI, provisions. An accounting election to either treat GILTI as part of deferred taxes or a period cost will be made once further analysis and interpretation of the tax legislation is complete.