Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.1
Income Taxes
 12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

United States and foreign income (loss) from operations before income taxes was as follows (in thousands):
 
Year Ended December 31,
 
2019
 
2018
United States
$
(166,326
)
 
$
(239,989
)
Foreign
22,409

 
6,458

Loss before income taxes
$
(143,917
)
 
$
(233,531
)


The income tax provision based on the income (loss) from operations was as follows (in thousands):
 
Year Ended December 31,
 
2019
 
2018
Current provision (benefit):
 
 
 
Federal
$
(2,046
)
 
$
289

State
(174
)
 
211

Foreign
15,679

 
10,473

Total current provision
13,459

 
10,973

Deferred benefit:
 
 
 
Federal
9

 
(6,924
)
State
10

 
(331
)
Foreign
(3,952
)
 
(650
)
Total deferred benefit
(3,933
)
 
(7,905
)
Total income tax provision (benefit)
$
9,526

 
$
3,068



Income taxes differ from the amounts computed by applying the federal income tax rate of 21% for 2019 and 2018. A reconciliation of this difference is as follows (in thousands):
 
Year Ended December 31,
 
2019
 
2018
Income tax benefit at federal statutory rate
$
(30,223
)
 
$
(49,042
)
State income tax, net of federal benefit
(164
)
 
(185
)
Permanent items
766

 
633

Change in fair value of financial instruments
(224
)
 
(4
)
Forfeited foreign net operating losses
42,541

 
—

Stock-based compensation
1,551

 
2,700

Tax credits
(124
)
 
(106
)
Other
535

 
(12,636
)
Uncertain tax positions
396

 
107

Withholding taxes
6,456

 
9,137

Rate differential
(350
)
 
6,657

Change in enacted tax rate
(132
)
 
54

Change in valuation allowance
(11,502
)
 
69,508

Income tax provision (benefit)
$
9,526

 
$
3,068



Significant factors impacting the 2019 effective tax rate include foreign withholding taxes, forfeited foreign net operating losses due to liquidations and valuation allowance on deferred tax assets.

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. Significant components of the deferred income taxes are as follows (in thousands):
 
 December 31,
 
2019
 
2018
Deferred tax assets:
 
 
 
Goodwill
$
5,134

 
$
6,734

Allowances and reserves
2,016

 
1,469

Accrued liabilities
2,063

 
3,908

Inventories
2,120

 
1,839

Stock-based compensation
3,596

 
4,363

Interest expense carryover
38,615

 
23,877

Tax credits
2,860

 
2,225

Net operating losses
116,290

 
144,010

Right of use liability
13,519

 
—

Other
1,074

 
448

Total deferred tax assets
187,287

 
188,873

Less: valuation allowance
(152,987
)
 
(161,511
)
Net deferred tax assets
$
34,300

 
$
27,362

 
 
 
 
Deferred tax liabilities:
 
 
 
Property, plant and equipment
$
(9,387
)
 
$
(8,737
)
Right of use assets
(10,733
)
 
—

Intangible assets
(1,315
)
 
(7,149
)
Investments in affiliates
(15,675
)
 
(17,253
)
Debt costs
(1,589
)
 
(2,550
)
Total deferred tax liabilities
(38,699
)
 
(35,689
)
Net deferred tax liabilities
$
(4,399
)
 
$
(8,327
)


The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company is currently under audit in certain foreign tax authorities. The audits are in varying stages of completion. With certain exceptions, as of December 31, 2019, the Company’s tax years from 2014 through 2019 are subject to examination by the tax authorities. The use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
As of December 31, 2019, the Company has recorded a valuation allowance of $136.6 million and $16.4 million against its domestic and certain foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of December 31, 2018, the valuation allowance on domestic and foreign deferred tax assets were $104.1 million and $57.4 million, respectively.

As of December 31, 2019, and 2018, the Company had federal NOL carry-forwards of $427.2 million and $374.5 million, respectively, and in addition, the Company had state NOL carry-forwards of $235.9 million and $161.2 million, respectively. In addition, the Company had foreign NOL carry-forward from various jurisdictions of $54.6 million and $220.1 million as of December 31, 2019 and 2018, respectively. The Company’s federal, state and foreign NOLs will begin to expire during the fiscal years ending in December 31, 2027, 2023, and 2022 respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable.

The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be materially limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382.

Prior to the Tax Act, U.S. taxes were not provided for on cumulative earnings of the Company’s foreign subsidiaries as the Company had intended to invest the undistributed earnings indefinitely. However, as a result of the Tax Act, all of the accumulated earnings of its foreign subsidiaries were taxed for U.S. federal purposes. The Company has provisionally asserted that the $32.5 million earnings of its foreign subsidiaries will continue to be indefinitely reinvested. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional provisions for U.S. states not conforming to the federal Tax Act and foreign withholding taxes may be required. It is not practical to calculate the deferred taxes associated with these earnings because of the variability of multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax credits may be available to reduce federal income taxes in the event of distribution.

As of December 31, 2019, and 2018, the liability for income taxes associated with uncertain tax positions was $7.7 million and $7.9 million, respectively.

The net decrease in the liabilities during the year is primarily attributable to activity related to ongoing examinations by the Canada Revenue Agency regarding the taxability and presence of the subsidiary’s locations in Dubai and whether income derived from Dubai would have constituted taxable earnings subject to Canadian income tax. The net amounts of $7.2 million and $7.8 million as of December 31, 2019 and 2018, respectively, if recognized, would favorably affect the Company’s effective tax rate.

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2019 and 2018 (in thousands):
 
2019
 
2018
Balance at beginning of year
$
7,942

 
$
8,728

Reversal of prior tax positions
(86
)
 
(786
)
Settlements
(196
)
 
—

Balance at end of year
$
7,660

 
$
7,942



The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2019 and 2018, the Company had accrued $6.4 million and $6.3 million, respectively, of interest and penalties related to uncertain tax positions, which are not included in the table above.
 
The following table summarizes the changes in the valuation allowance balance for the years ended December 31, 2019 and 2018 (in thousands):
 
Amount
Balance at December 31, 2017
$
85,393

Increase in valuation allowance
76,118

Balance at December 31, 2018
161,511

Decrease in valuation allowance
(8,524
)
Balance at December 31, 2019
$
152,987