Income taxes
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation commonly known as the Tax Cuts and Jobs Act of 2017 (“TCJA”). Effective January 2018, the TCJA, among other things, reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deductibility of interest expenses, limits the deduction for net operating losses and eliminates net operating loss carrybacks, and modifies or eliminates many business deductions and credits. There are also provisions that may partially offset the benefit of the rate reduction, such as the repeal of the deduction for domestic production activities. The TCJA also includes international provisions, which generally establish a territorial-style system for taxing foreign source income of domestic multinational corporations and imposes a mandatory one-time transition tax on undistributed international earnings.
Financial statement impacts include adjustments for, among other things, the remeasurement of deferred tax assets and liabilities. U.S. GAAP accounting for income taxes requires that Forterra record the impacts of any tax law change on our deferred income taxes in the quarter that the tax law change is enacted. Due to the complexities involved in accounting for the enactment of TCJA, SEC Staff Accounting Bulletin 118 allows the Company to provide a provisional estimate of the impacts of the TCJA in our earnings for the fourth quarter and year ended December 31, 2017. Accordingly, based on currently available information, the Company was able to reasonably estimate the impact of the TCJA and has recorded a provisional income tax benefit for the reduction in net deferred income tax liabilities of approximately $28.7 million, due to the remeasurement of net U.S. deferred tax liabilities at the lower 21% U.S. federal corporate income tax rate, offset by the recognition of a one-time transition tax on foreign earnings of $1.7 million. In addition, the Company recorded the pretax income effect of the change related to the Company's estimated tax receivable agreement obligation primarily due to the lower U.S. federal corporate income tax rate. See Note 15 for further discussion on the tax receivable agreement.
The Company has assessed valuation allowance, uncertain tax positions and the indefinite reinvestment assertion implications of the TCJA. Since the Company has recorded provisional amounts related to the TCJA, any corresponding determination of the change required in such items is also provisional.
Successor
As of the date of the Acquisition, the consolidated Successor financial statements reflect a new tax basis of accounting as the Company includes taxable entities independent of the Predecessor. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts, using currently enacted tax rates. All tax consequences associated with the Predecessor period were retained by HC.
Predecessor
The Company’s U.S. and non-U.S. operations have been historically included in certain HC consolidated tax returns. The tax provisions have been prepared on a stand-alone basis, as if the business was a separate group of companies under common ownership although the Company was included in the HC entities’ tax returns. The operations have been combined as if they were filing on a consolidated basis for U.S. and state income tax purposes as they were historically included in the consolidated U.S. Income tax returns and certain consolidated or unitary group state returns of the prior parent entity. The non-U.S. tax provision was determined on a stand-alone basis for each non-U.S. affiliate as these entities historically filed stand-alone returns as required by the jurisdiction in which they operate.
The Company’s income (loss) from continuing operations before income taxes was as follows (in thousands):
|
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year ended December 31, | Year ended December 31, | For the period from March 14 to December 31, | | | For the period from January 1 to March 13, |
| 2017 | 2016 | 2015 | | | 2015 |
U.S. companies | $ | (54,690 | ) | $ | (80,425 | ) | $ | (85,674 | ) | | | $ | (2,424 | ) |
Foreign companies | 11,958 |
| 17,643 |
| 16,888 |
| | | (90 | ) |
Income (loss) from continuing operations before income taxes | $ | (42,732 | ) | $ | (62,782 | ) | $ | (68,786 | ) | | | $ | (2,514 | ) |
The income tax benefit (expense) from continuing operations was as follows (in thousands):
|
| | | | | | | | | | | | | | |
| | Successor | | | | Predecessor |
| Year ended December 31, | Year ended December 31, | For the period from March 14 to December 31, | | | For the period from January 1 to March 13, |
| 2017 | 2016 | 2015 | | | 2015 |
Current income tax | | | | | | |
U.S. companies | $ | 21,539 |
| $ | (5,265 | ) | $ | — |
| | | — |
|
State | (1,479 | ) | (6,370 | ) | (765 | ) | | | — |
|
Foreign companies | (4,884 | ) | (7,599 | ) | (6,633 | ) | | | 3,491 |
|
Total current tax (expense) benefit | 15,176 |
| (19,234 | ) | (7,398 | ) | | | 3,491 |
|
| | | | | | |
Deferred income tax | | | | | | |
U.S. companies | 26,866 |
| 59,084 |
| — |
| | | — |
|
State | (1,658 | ) | 9,326 |
| 470 |
| | | — |
|
Foreign companies | 288 |
| 2,516 |
| 1,536 |
| | | (2,749 | ) |
Total deferred tax (expense) benefit | 25,496 |
| 70,926 |
| 2,006 |
| | | (2,749 | ) |
| | | | | | |
Income tax (expense) benefit - continuing operations | $ | 40,672 |
| $ | 51,692 |
| $ | (5,392 | ) | | | $ | 742 |
|
The rate reconciliation for continuing operations presented below is based on the U.S. federal statutory tax rate of 35% for the years and periods prior to 2017 because the predominant business activity is in the U.S. (in thousands):
|
| | | | | | | | | | | | | | |
| | Successor | | | | Predecessor |
| Year ended December 31, | Year ended December 31, | For the period from March 14 to December 31, | | | For the period from January 1 to March 13, |
| 2017 | 2016 | 2015 | | | 2015 |
Loss from continuing operations | $ | (42,732 | ) | $ | (62,782 | ) | $ | (68,786 | ) | | | $ | (2,514 | ) |
| | | | | | |
Income tax benefit at statutory rate of 35% | $ | 14,956 |
| $ | 21,974 |
| $ | 24,075 |
| | | $ | 880 |
|
State income taxes, net of federal benefit | 1,470 |
| 2,725 |
| 1,726 |
| | | — |
|
Foreign rate differential | 1,586 |
| 1,746 |
| 1,635 |
| | | (226 | ) |
Non-deductible expenses | (1,233 | ) | (3,428 | ) | (949 | ) | | | — |
|
Change in valuation allowance | (4,141 | ) | 28,597 |
| (31,418 | ) | | | (2,223 | ) |
Goodwill impairment | (1,147 | ) | — |
| — |
| | | — |
|
Effect of TCJA | 26,932 |
| — |
| — |
| | | — |
|
Tax credits | 497 |
| — |
| — |
| | | — |
|
Other | 1,752 |
| 78 |
| (461 | ) | | | 2,311 |
|
Total income tax benefit (expense) | $ | 40,672 |
| $ | 51,692 |
| $ | (5,392 | ) | | | $ | 742 |
|
The income tax benefit for the year ended December 31, 2017 is primarily attributable to provisional amounts recognized related to the enactment of the TCJA and losses from operations. The income tax benefit for the year ended December 31, 2016 is primarily attributable to the release of the Company’s U.S. federal and unitary state valuation allowance. In the year ended December 31, 2016, the Company recorded deferred income tax liabilities of $173.0 million through acquisition accounting for the acquisition of Sherman-Dixie Concrete Industries, Inc. and USP Holdings, Inc. These deferred tax liabilities are a source of future taxable income that makes realization of certain deferred tax assets more likely than not. The Company continues to maintain valuation allowance for certain separate company net state's deferred tax assets as well as for certain foreign jurisdictions. The income tax expense for the period from March 14, 2015 to December 31, 2015 is primarily attributable to the profitability of foreign operations.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years. The net deferred tax asset (liability) balances were comprised of the following components as of December 31, 2017 and 2016 (in thousands):
|
| | | | | | |
| December 31, 2017 | December 31, 2016 |
Deferred tax assets: | | |
Inventory | $ | 5,833 |
| $ | 10,785 |
|
Reserves | 3,326 |
| 3,498 |
|
Accrued liabilities | 4,316 |
| 6,560 |
|
Net operating losses | 4,580 |
| 1,874 |
|
Capitalized transaction costs | 3,292 |
| 5,018 |
|
Deferred gain on sale leaseback | 19,593 |
| 28,058 |
|
Derivatives | 1,402 |
| — |
|
Tax receivable agreement | 1,220 |
| 18,431 |
|
Other assets | 3,871 |
| 484 |
|
Total deferred tax assets | 47,433 |
| 74,708 |
|
Valuation allowance | (8,818 | ) | (3,751 | ) |
Total deferred tax assets, net | $ | 38,615 |
| $ | 70,957 |
|
Deferred tax liabilities: | | |
Fixed assets | $ | (58,300 | ) | $ | (87,704 | ) |
Deferred financing costs | (10,440 | ) | (13,837 | ) |
Intangible assets | (37,356 | ) | (67,822 | ) |
Other liabilities | — |
| (2,144 | ) |
Total deferred tax liabilities | $ | (106,096 | ) | $ | (171,507 | ) |
| | |
Net deferred tax asset (liability) | $ | (67,481 | ) | $ | (100,550 | ) |
As of December 31, 2017, the Company has tax loss carryforwards as follows (in thousands):
|
| | | | |
| Amount | Expiration Date |
Federal net operating losses | $ | — |
| — |
State net operating losses | $ | 66,526 |
| 2031-2037 |
Foreign net operating losses | $ | 4,065 |
| 2035-2037 |
As described in Note 1, the Company’s consolidated financial statements include certain assets and liabilities historically held at LSF9. Forterra was obligated to pay debt and interest related to the 2015 Senior Term Loan, Junior Term Loan, and 2015 Revolving line of credit; therefore, the Company’s historical income tax expense, taxes payable and deferred tax assets and liabilities include the tax consequences of these obligations. In connection with the Reorganization, the Company recognized reductions of additional paid-in capital of $11.3 million related to deferred tax liabilities and $25.2 million related to income tax payable associated with these obligations that will be realized by an LSF9 affiliate which is not included in the consolidated financial statements of the Company.
Also as described in Note 1, LSF9 distributed its brick operations in the United States and Eastern Canada to an affiliate of Lone Star. Forterra incurred $31.1 million in taxes payable related to the distribution and $2.1 million reduction of deferred tax assets, and recognized corresponding reductions to additional paid-in capital.
As described in Note 15, in connection with the IPO, the Company recorded an $18.4 million deferred tax asset with a corresponding increase to additional paid-in capital. Following the enactment of the TCJA, the value of the TRA was remeasured, also described in Note 15. As a result, the deferred tax asset associated with the TRA was remeasured to $1.2 million as of December 31, 2017.
U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. Prior to the Reorganization, the foreign subsidiaries were not considered subsidiaries for U.S. income tax purposes. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary, however at this time the Company does not anticipate triggering taxable recognition with respect to the outside basis differences of its foreign subsidiaries.
Uncertain tax positions
The Company is subject to audit examinations at federal, state, local, and foreign levels by tax authorities in those jurisdictions who may challenge the treatment or reporting of any tax return item. The tax matters challenged by the tax authorities are typically complex; therefore, the ultimate outcomes of these challenges are subject to uncertainty. Taxable years after 2014 are still open for examination for the U.S. Federal jurisdiction and for tax years after 2013 for Canada. State income tax return are generally subject to examination for a period of 3 to 5 years after filing of the respective return.
Each period the Company assesses uncertain tax positions for recognition, measurement and effective settlement. Based on our assessment, we determined that no liabilities for uncertain tax positions should be recorded as of December 31, 2017 and 2016.