INCOME TAXES
On December 22, 2017, President Donald Trump signed into law “H.R. 1”, formerly known as the “Tax Cuts and Jobs Act” (the “Tax Legislation”). The Tax Legislation, which was effective on January 1, 2018, significantly revises the U.S. tax code by, among other things, lowering the corporate income tax rate from 35% to 21%, limiting deductibility of interest expense, implementing a hybrid-territorial tax system imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries (the “transition tax”), and enacted additional international tax provisions, including a minimum tax on global intangible low-taxed income (“GILTI”) and a new base erosion anti-abuse tax (“BEAT”). The Company has recorded the impact of the Tax Legislation in the financial statements as a non-cash net tax benefit of $13,712 in the fourth quarter of 2017, which includes a write-down of $123,289 related to the re-measurement of U.S. deferred tax assets and $137,001 release of U.S. valuation allowances, both due to the lower enacted corporate tax rate. The non-cash tax benefit recorded is a provisional amount, and the Company continues to evaluate the impact the Tax Legislation will have on its financial condition and results of operations.
Income tax benefit (expense) for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current income tax benefit (expense) | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | (45 | ) | | 94 |
| | — |
|
Foreign | 421 |
| | (1,036 | ) | | (225 | ) |
| 376 |
| | (942 | ) | | (225 | ) |
Deferred income tax benefit (expense) | | | | | |
Federal | 22,619 |
| | 2,113 |
| | 24,151 |
|
State | 10,282 |
| | 6,936 |
| | 9,736 |
|
Foreign | 2,674 |
| | (2,560 | ) | | 1,035 |
|
Change in enacted tax rates | (123,289 | ) | | — |
| | — |
|
Net operating loss carryforwards created | 17,466 |
| | 105,165 |
| | 88,110 |
|
| (70,248 | ) | | 111,654 |
| | 123,032 |
|
Income tax benefit (expense) before valuation allowances | (69,872 | ) | | 110,712 |
| | 122,807 |
|
Deferred tax valuation allowances | 100,362 |
| | (114,980 | ) | | (114,106 | ) |
Income tax benefit (expense) | $ | 30,490 |
| | $ | (4,268 | ) | | $ | 8,701 |
|
A reconciliation of the reported amount of income tax expense to the amount computed by applying the statutory federal income tax rate to earnings from continuing operations before income taxes is as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.S. Federal income tax expense at a statutory rate of 35 percent | $ | 38,349 |
| | $ | (17,143 | ) | | $ | 56,144 |
|
State taxes, net of federal income tax benefit | 8,160 |
| | 11,442 |
| | 12,777 |
|
Tax position on government incentives | 9,402 |
| | 117,630 |
| | 85,423 |
|
Change in enacted tax rates | (123,289 | ) | | — |
| | — |
|
Goodwill impairment tax impact | — |
| | 2,876 |
| | (35,062 | ) |
Bargain purchase gain | — |
| | — |
| | 1,875 |
|
Foreign net operating loss expiration | — |
| | (2,383 | ) | | — |
|
Other | (2,494 | ) | | (1,710 | ) | | 1,650 |
|
Total (expense) benefits for income taxes before valuation allowances | (69,872 | ) | | 110,712 |
| | 122,807 |
|
Valuation allowances | 100,362 |
| | (114,980 | ) | | (114,106 | ) |
Total benefit (expense) for income taxes | $ | 30,490 |
| | $ | (4,268 | ) | | $ | 8,701 |
|
The Company receives government incentive payments and excludes this revenue from federal and state taxable income. This tax position of excluding government incentives from taxable income has been accepted by the Internal Revenue Service under audit for 2010 and 2011 and has been approved by the Joint Committee on Taxation. As a result of excluding these government incentive payments, the Company currently has cumulative losses in recent years and initially established a valuation allowance in 2013 to reduce its total deferred tax assets to the amount more-likely-than-not to be realized.
In 2015, the Company had a non-cash impairment charge for goodwill of $175,028, of which $91,961 was not deductible for tax purposes. A $32,186 tax impact related to the non-deductible portion of the goodwill impairment charge was reflected in the tax reconciliation above for 2015 in the amount of $35,062, offset with $2,876 in 2016.
The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities at December 31 are as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred Tax Assets: | | | |
Net operating loss carryforwards | $ | 249,371 |
| | $ | 346,768 |
|
Goodwill | 26,448 |
| | 42,082 |
|
Capitalized research and development | 9,788 |
| | 11,394 |
|
Stock-based compensation | 3,924 |
| | 5,853 |
|
Risk management unrealized gain (loss) | 1,879 |
| | 874 |
|
Tax credit carryforwards | 1,597 |
| | 1,597 |
|
Accrued compensation | 1,062 |
| | 4,419 |
|
Inventory capitalization | 1,491 |
| | 3,227 |
|
Other | 2,945 |
| | 6,623 |
|
Deferred tax assets | 298,505 |
| | 422,837 |
|
Deferred Tax Liabilities: | | | |
Property, plant and equipment | (27,314 | ) | | (61,431 | ) |
Convertible debt | (9,889 | ) | | (5,797 | ) |
Intangibles | (2,195 | ) | | (3,591 | ) |
Prepaid expenses | (1,393 | ) | | (1,724 | ) |
Deferred revenue | — |
| | (3,454 | ) |
Other | (544 | ) | | (2,084 | ) |
Deferred tax liabilities | (41,335 | ) | | (78,081 | ) |
Net deferred tax assets (liabilities) | 257,170 |
| | 344,756 |
|
Valuation allowance | (265,362 | ) | | (365,035 | ) |
Net deferred tax liabilities | $ | (8,192 | ) | | $ | (20,279 | ) |
At December 31, 2017, the Company has recorded a deferred tax asset before valuation allowance of $249,371 reflecting the benefit of federal, state and foreign net operating loss carry-forwards. Federal net operating loss carry-forward totals $934,137 and will begin to expire in 2028, while the amount and expiration dates of state net operating losses vary by jurisdiction. Changes in ownership of the Company, as defined by Section 382 of the Internal Revenue Code of 1986, as amended, in any one year may limit the utilization of federal and state net operating losses and credit carry-forwards. The Company has performed an ownership change analysis in 2017 to determine the impact of changes in ownership on utilization of carry-forward attributes, the results of which have been incorporated into our financial statements.
In evaluating available evidence around the recoverability of net deferred tax assets, the Company considers, among other factors, historical financial performance, expectation of future earnings, length of statutory carry-forward periods and ability to carry back losses to prior periods, experience with operating loss and tax credit carry-forwards expiring unused, tax planning strategies and timing for the of reversals of temporary differences. In evaluating losses, management considers the nature, frequency and severity of losses in light of the conditions giving rise to those losses. As a result of the above described tax position of excluding government incentive payments from taxable income, the Company currently has cumulative losses in recent years and has established a valuation allowance to reduce its total deferred tax assets to the amount more-likely-than-not to be realized. Activity regarding the valuation allowance for deferred tax assets was as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Beginning of year balance | $ | 365,035 |
| | $ | 250,164 |
| | $ | 136,547 |
|
Changes in valuation allowance charged to income | 36,639 |
| | 114,980 |
| | 114,106 |
|
Change in enacted tax rates | (137,001 | ) | | — |
| | — |
|
Foreign currency translation | 689 |
| | (109 | ) | | (773 | ) |
Acquisition | — |
| | — |
| | 284 |
|
End of year balance | $ | 265,362 |
| | $ | 365,035 |
| | $ | 250,164 |
|
The Company analyzes filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, and all open tax years in these jurisdictions to determine if it has any uncertain tax positions on any of its income tax returns. An uncertain tax position represents a tax position taken in a filed tax return, or planned to be taken in a tax return not yet filed, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company does not recognize income tax benefits associated with uncertain tax positions where it is determined that it is not more-likely-than-not, based on the technical merits, that the position will be sustained upon examination.
A reconciliation of the total amounts of unrecognized tax benefits at December 31 is as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Beginning of year balance | $ | 1,900 |
| | $ | 1,900 |
| | $ | 1,900 |
|
Decreases to tax positions taken during prior years | (129 | ) | | — |
| | — |
|
End of year balance | $ | 1,771 |
| | $ | 1,900 |
| | $ | 1,900 |
|
The amount of unrecognized tax benefits that would affect the effective tax rate if the tax benefits were recognized was $0 at December 31, 2017, 2016 and 2015. The remaining liability for unrecognized tax benefits is related to tax positions for which there is a related deferred tax asset. The Company does not believe it is reasonably possible that the amounts of unrecognized tax benefits existing as of December 31, 2017 will significantly increase or decrease over the next twelve months. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. The Company has not recorded any such amounts in the periods presented.
The Company is subject to tax in the U.S. and various state and foreign jurisdictions. The U.S. Internal Revenue Service has examined the Company's federal income tax returns through 2008, as well as 2010 and 2011, while the tax authorities in Germany have examined the Company's corporate income tax returns through 2014. All other years in the U.S. and Germany are subject to examination, while various state and other foreign income tax returns also remain subject to examination by taxing authorities.
As a result of the enactment of the Tax Legislation, management’s judgment is that the Company provisionally no longer considers its foreign earnings of non-U.S. subsidiaries to be indefinitely reinvested. The change in judgment does not have a material impact on the Company’s consolidated financial statements. Although not considered indefinitely reinvested, the Company has not made a provision for U.S. or additional foreign withholding taxes due to provisional accumulated tax deficits outside the U.S. The Company has not recorded a deferred tax asset for the outside basis difference related to investments in its foreign subsidiaries as the investment is essentially permanent in duration.