– PROVISION FOR INCOME TAXES
We are subject to federal income tax in the United States and income tax of multiple state and international jurisdictions. We provide for income taxes based on the tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to both nominal rates and the basis on which these rates are applied. Our consolidated effective income tax rate can vary significantly from period to period due to these variations, changes in jurisdictional mix of our income and valuation allowances in certain jurisdictions that can offset income tax expense or benefit.
We are currently under audit by various domestic and international authorities. With few exceptions, we do not have any returns under examination for years prior to 2013. The United States Internal Revenue Service has completed examinations of the federal tax returns of BWC through 2014, and all matters arising from such examinations have been resolved.
We recognize the effect of income tax positions only if it is more-likely-than-not that those positions will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Unrecognized tax benefits are as follows:
|
| | | | | | | | | |
(in thousands) | 2017 | 2016 | 2015 |
Balance at beginning of period | $ | 884 |
| $ | 1,141 |
| $ | 3,321 |
|
Increases based on tax positions taken in the current year | 277 |
| 178 |
| 88 |
|
Increases based on tax positions taken in the prior years | 56 |
| 230 |
| 248 |
|
Decreases based on tax positions taken in the prior years | (13 | ) | — |
| (1,161 | ) |
Decreases due to settlements with tax authorities | — |
| (665 | ) | (1,355 | ) |
Decreases due to lapse of applicable statute of limitation | — |
| — |
| — |
|
Balance at end of period | $ | 1,204 |
| $ | 884 |
| $ | 1,141 |
|
The $1.2 million balance of unrecognized tax benefits at December 31, 2017 would decrease expense if recognized. We do not expect any of our unrecognized income tax benefits to be resolved in the next twelve months. We recognize interest and penalties related to unrecognized tax benefits in our provision for income taxes; however, such amounts are not significant to any period presented.
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
| | | | | | |
| December 31, |
(in thousands) | 2017 | 2016 |
Deferred tax assets: | | |
Pension liability | $ | 58,810 |
| $ | 105,426 |
|
Accrued warranty expense | 5,262 |
| 11,628 |
|
Accrued vacation pay | 996 |
| 4,792 |
|
Accrued liabilities for self-insurance (including postretirement health care benefits) | 3,910 |
| 6,596 |
|
Accrued liabilities for executive and employee incentive compensation | 4,950 |
| 8,334 |
|
Investments in joint ventures and affiliated companies | 10,422 |
| 10,742 |
|
Long-term contracts | 6,801 |
| 10,318 |
|
Accrued Legal Fees | 1,579 |
| 2,110 |
|
Inventory Reserve | 1,842 |
| 2,445 |
|
Property, plant and equipment | — |
| 1,587 |
|
Net operating loss carryforward | 95,715 |
| 33,187 |
|
State tax net operating loss carryforward | 21,658 |
| 15,372 |
|
Foreign tax credit carryforward | 7,150 |
| 3,870 |
|
Other tax credits | 5,678 |
| 737 |
|
Other | 4,980 |
| 7,852 |
|
Total deferred tax assets | 229,753 |
| 224,996 |
|
Valuation allowance for deferred tax assets | (108,105 | ) | (40,484 | ) |
Net, total deferred tax assets | 121,648 |
| 184,512 |
|
| | |
Deferred tax liabilities: | | |
Long-term contracts | 569 |
| 3,601 |
|
Intangibles | 21,215 |
| 21,892 |
|
Property, plant and equipment | 2,835 |
| — |
|
Undistributed foreign earnings | 1,314 |
| 500 |
|
Goodwill | — |
| 1,125 |
|
Other | 2,445 |
| 2,885 |
|
Total deferred tax liabilities | 28,378 |
| 30,003 |
|
Net deferred tax assets | $ | 93,270 |
| $ | 154,509 |
|
At December 31, 2017, we had a valuation allowance of $108.1 million for deferred tax assets, which we expect may not be realized through carrybacks, future reversals of existing taxable temporary differences and estimates of future taxable income. We believe that our remaining deferred tax assets are more likely than not realizable through carrybacks, future reversals of existing taxable temporary differences and estimates of future taxable income. Should we conclude in the future that any or all of our deferred tax assets are not more likely than not to be realized, we would establish additional valuation allowances and any changes to our estimated valuation allowance could be material to our consolidated financial statements. The following is an analysis of our valuation allowance for deferred tax assets:
|
| | | | | | | | | | | | |
(in thousands) | Beginning balance | Charges to costs and expenses | Charged to other accounts | Ending balance |
Year Ended December 31, 2017 | $ | (40,484 | ) | $ | (61,021 | ) | $ | (6,600 | ) | $ | (108,105 | ) |
Year Ended December 31, 2016 | (10,077 | ) | (29,307 | ) | (1,100 | ) | (40,484 | ) |
Year Ended December 31, 2015 | (9,216 | ) | (861 | ) | — |
| (10,077 | ) |
We operate in numerous countries that have statutory tax rates below that of the 35% federal statutory rate that has been applicable to the United States through December 31, 2017. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden and the United Kingdom with effective tax rates ranging between 20% and approximately 30%. Income before the provision for income taxes was as follows: |
| | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | 2016 | 2015 |
United States | $ | (44,835 | ) | $ | 1,280 |
| $ | (20,748 | ) |
Other than the United States | (269,364 | ) | (109,419 | ) | 40,953 |
|
Income before provision for income taxes | $ | (314,199 | ) | $ | (108,139 | ) | $ | 20,205 |
|
The provision for income taxes consisted of:
|
| | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | 2016 | 2015 |
Current: | | | |
United States – federal | $ | 100 |
| $ | 284 |
| $ | 24,084 |
|
United States – state and local | 397 |
| (415 | ) | 3,458 |
|
Other than in the United States | 8,612 |
| 4,504 |
| 8,250 |
|
Total current | 9,109 |
| 4,373 |
| 35,792 |
|
Deferred: | | | |
United States – Federal | 58,203 |
| 11,512 |
| (35,888 | ) |
United States – state and local | 2,546 |
| 6,365 |
| (111 | ) |
Other than in the United States | (5,042 | ) | (15,307 | ) | 3,878 |
|
Total deferred (benefit) provision | 55,707 |
| 2,570 |
| (32,121 | ) |
Provision for income taxes | $ | 64,816 |
| $ | 6,943 |
| $ | 3,671 |
|
The following is a reconciliation of the United States statutory federal tax rate (35%) to the consolidated effective tax rate:
|
| | | | | | |
| Year Ended December 31, |
| 2017 | 2016 | 2015 |
United States federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % |
State and local income taxes | 0.2 |
| (3.5 | ) | 13.8 |
|
Foreign rate differential | (9.5 | ) | (12.8 | ) | (13.1 | ) |
Deferred Taxes - Change in Tax Rate | (19.9 | ) | — |
| — |
|
Tax credits | 0.9 |
| 3.0 |
| (14.7 | ) |
Dividends and deemed dividends from affiliates | (1.8 | ) | (0.2 | ) | 1.7 |
|
Valuation allowances | (17.9 | ) | (28.1 | ) | 4.3 |
|
Goodwill impairment | (7.0 | ) | — |
| — |
|
Uncertain tax positions | — |
| 0.3 |
| (6.6 | ) |
Non-deductible expenses | 0.2 |
| (1.8 | ) | 2.4 |
|
Manufacturing deduction | — |
| — |
| (2.5 | ) |
Other | (0.8 | ) | 1.7 |
| (2.1 | ) |
Effective tax rate | (20.6 | )% | (6.4 | )% | 18.2 | % |
We have foreign net operating loss benefits after tax of $75.0 million available to offset future taxable income in certain foreign jurisdictions. Of the foreign net operating loss benefits, $1.7 million is scheduled to expire in 2019 to 2026. The remaining net operating loss benefits have unlimited lives. We are carrying a valuation allowance of $66.0 million against the deferred tax asset related to the foreign loss carryforwards.
At December 31, 2017, we have a tax effected United States federal net operating loss of $20.7 million. The United States federal operating loss will begin to expire in 2037, and we expect to fully utilize this net operating loss in future periods. At December 31, 2017, we have foreign tax credit carryovers of $7.2 million, against which we have a full valuation allowance. At December 31, 2017, we have state net operating loss benefits after tax of $21.7 million available to offset future taxable income in various states, against which we have $21.6 million of valuation allowance. Our state net operating loss carryforwards begin to expire in the year 2018.
It has been our practice to reinvest indefinitely, the earnings of our foreign subsidiaries and that position has not changed as a result of the enactment of the U.S. Tax Cuts and Jobs Act. If we were to distribute earnings from certain foreign subsidiaries, we would be subject to withholding taxes of approximately $4.4 million but U.S. income taxes would generally not be imposed upon such distributions.
New Tax Act
The United States Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduces significant changes to the United States income tax law. Beginning in 2018, the Tax Act reduces the United States statutory corporate income tax rate from 35% to 21% and creates a modified territorial system that will generally allow United States companies a full dividend received deduction for any future dividends from non-U.S. subsidiaries. In connection with the transition to a modified territorial system, the Tax Act also establishes a mandatory one-time deemed repatriation transition tax on currently deferred foreign earnings.
The SEC staff issued Staff Accounting Bulletin ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 ("ASC 740"). In accordance with SAB 118, we have made reasonable estimates of the effects of the Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We will finalize our estimates in 2018 as we collect and analyze necessary data, and interpret additional guidance that becomes available.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017:
Deferred tax effects
We remeasured our deferred taxes and recorded a deferred tax expense of $62.4 million. This amount consists of an expense for the corporate rate reduction of $54.4 million, expense of $0.8 million based on a change in our deferred taxes related to executive compensation and an expense of $7.2 million to record a valuation allowance on foreign tax credit carryforwards that are now expected to expire unused. While we are able to make a reasonable estimate of the deferred tax effects, our continued analysis of other aspects of the Tax Act could impact our estimate.
One-time transition tax
The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-United States income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and because we have estimated an E&P deficit, we have not recorded a Transition Tax. We are continuing to gather additional information to more precisely compute final E&P, including the computation of 2017 current year E&P which we will finalize with the 2017 tax return.