Ecovyst, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

20. Income Taxes:

Income (loss) before income taxes and noncontrolling interest within or outside the United States are shown below:



	Years ended December 31,
	2019		2018		2017
Domestic	$	53,169	$	3,935	$	(137,147	)
Foreign	67,840		84,681		76,513
Total	$	121,009	$	88,616	$	(60,634	)

The provision (benefit) for income taxes as shown in the accompanying consolidated statements of income consists of the following:



	Years ended December 31,
	2019			2018			2017
Current:
Federal	$	(3	)	$	—		$	—
State	1,422			2,470			806
Foreign	20,972			23,080			20,209
	22,391			25,550			21,015

Deferred:
Federal	14,179			12,854			(135,970		)
State	3,165			(784		)	(1,817		)
Foreign	964			(8,625		)	(2,425		)
	18,308			3,445			(140,212		)

Provision (benefit) for income taxes	$	40,699		$	28,995		$	(119,197	)

A reconciliation of income tax expense (benefit) at the U.S. federal statutory income tax rate to actual income tax expense is as follows:



	Years ended December 31,
	2019			2018			2017
Tax at statutory rate	$	25,412		$	18,610		$	(21,222	)
State income taxes, net of federal income tax benefit	4,779			1,203			(7,754		)
Tax on global intangible low-taxed income	8,517			15,445			—
Impact of US Tax Reform	—			—			(132,158		)
Non-US earnings transition tax	—			—			42,903
Changes in uncertain tax positions	(1,288		)	(996		)	974
Change in valuation allowances	2,032			5,075			6,771
Rate changes	2,322			(3,325		)	(151		)
Foreign withholding taxes	(5,869		)	570			978
Foreign tax rate differential	217			3,329			(12,798		)
Non-deductible transaction costs	22			84			1,679
Permanent difference created by foreign exchange gain or loss	1,880			(7,550		)	3,502
Research and development tax credits	(32		)	(1,173		)	—
Other, net	2,707			(2,277		)	(1,921		)
Provision (benefit) for income taxes	$	40,699		$	28,995		$	(119,197	)

The total tax provision of $40,699 and $28,995 for the years ended December 31, 2019 and 2018, respectively, and tax benefit of $119,197 for the year ended December 31, 2017 on the Company’s consolidated pre-tax income (loss) for the period differs from the U.S. statutory tax rate of 21%. This difference is principally due to the GILTI impacts of U.S. tax reform, foreign withholding taxes, changes in valuation allowances, statutory tax rate changes and state taxes.

Deferred tax assets (liabilities) are comprised of the following:



	December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	106,763		$	116,607
Section 163(j) interest disallowance carryforward	16,535			13,387
Pension	15,946			16,397
Post retirement health	859			1,385
Transaction costs	1,272			708
Natural gas contracts and interest rate swaps	1,216			335
Unrealized translation losses	1,865			3,737
US research and development credits	1,205			1,173
Operating lease liability	14,480			—
Other	41,670			38,855
Valuation allowance	(51,296		)	(48,711		)
	$	150,515		$	143,873

Deferred tax liabilities:
Depreciation	$	(108,242	)	$	(92,911	)
Undistributed earnings of non-US subsidiaries	—			(6,648		)
Inventory	(11,481		)	(10,432		)
Intangible assets	(159,765		)	(174,327		)
Cross currency swaps	(7,354		)	(4,654		)
Operating lease right-of-use assets	(14,324		)	—
Other	(48,333		)	(32,230		)
	$	(349,499	)	$	(321,202	)

Net deferred tax liabilities	$	(198,984	)	$	(177,329	)

Included in the 2019 and 2018 deferred tax asset and liability amounts for depreciation, intangible assets, inventory, natural gas contracts, unrealized translation losses, and other above is $42,621 and $45,251, respectively, of a net deferred tax liability related to the Company’s investment in Potters, which is a partnership for federal income tax purposes. The Company and one of its subsidiaries own in aggregate 100% of Potters and the assets and liabilities of Potters are included in the consolidated financial statements of the Company.

The change in net deferred tax liabilities for the years ended December 31, 2019 and 2018 was primarily related to the usage of U.S. federal and state net operating losses reducing those deferred tax assets, activity related to book amortization of intangible assets with no corresponding tax basis reducing those deferred tax liabilities, activity with respect to tax deductible goodwill at Eco Services LLC, as well as the election for full expensing on certain assets creating additional deferred tax liabilities for depreciable property.

The following are changes in the deferred tax valuation allowance during the years ended December 31, 2019 and 2018:



	Years ended December 31,
	2019			2018
Beginning balance	$	48,711		$	64,945
Additions	3,343			5,314
Reductions	(758		)	(21,548		)
Ending balance	$	51,296		$	48,711

Included in the reductions line above is $20,038 related to fair value adjustments recorded to goodwill as part of the finalization of the Acquisition purchase accounting for the year ended December 31, 2018.

The net change in the total valuation allowance was a decrease of $2,585 in 2019. The valuation allowance at December 31, 2019 was primarily related to foreign net operating losses as well as state net operating loss carryforwards and tax credits that, in the judgment of management, are not more likely than not to be realized. In assessing the ability to realize deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies that are prudent in making this assessment. In order to fully realize deferred tax assets, the Company will need to generate future taxable income prior to the expiration of the net operating loss and credit carryforwards. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Management considered certain earnings in non-U.S. subsidiaries to be available for repatriation in the future. The tax cost associated with non-U.S. subsidiary earnings and distributions for the year ended December 31, 2019 has been recorded as a deferred tax benefit for the period. The unremitted earnings of non-U.S. subsidiaries and affiliates that have not been permanently reinvested amount to $255,000 and $168,304 as of December 31, 2019 and 2018, respectively. The deferred foreign withholding tax liability on these undistributed earnings is estimated to be $0 and $6,648 as of December 31, 2019 and 2018, respectively.

The cumulative unremitted earnings of foreign subsidiaries outside the United States in excess of the $255,000 are considered permanently reinvested, for which no withholding taxes have been provided. Such earnings are expected to be reinvested indefinitely and, as a result, no deferred tax liability has been recognized with regard to such earnings. Determination of the deferred withholding tax liability on these unremitted earnings is not practicable.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits:



	Years ended December 31,
	2019			2018
Balance at beginning of period	$	10,175		$	11,431
Increases related to prior year tax positions	46			—
Decreases related to prior year tax positions	(1,046		)	(1,538		)
Increases related to current year tax positions	—			282
Decreases related to settlements with taxing authorities	(100		)	—
Balance at end of period	$	9,075		$	10,175

The total unrecognized tax benefits of $9,075 and $10,175 as of December 31, 2019 and 2018, respectively. If these amounts are recognized in future periods, it would affect the effective tax rate on income from continuing operations for the years in which they are recognized.

Interest and penalties released related to uncertain tax positions amounted to $701 and $42 for the years ended December 31, 2019 and 2018, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period for which the event occurs requiring the adjustment. The $381 and $1,088 in accrued interest and penalties as of December 31, 2019 and 2018, respectively, is recorded in other long-term liabilities on the consolidated balance sheets.

The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The following describes the open tax years, by significant tax jurisdiction, as of December 31, 2019:



Jurisdiction		Period
United States-Federal		2007-Present
United States-State		2007-Present
Canada⁽¹⁾		2011-Present
Germany		2015-Present
Netherlands		2013-Present
Mexico		2015-Present
United Kingdom		2013-Present
Brazil		2015-Present


⁽¹⁾	Includes federal as well as local jurisdictions

Given that certain subsidiaries have U.S. and state net operating loss carryforwards, the statute for examination by the U.S. and state taxing authorities will typically remain open for a period following the use of such net operating loss carryforwards, extending the period for examination beyond the years indicated above.

The Company has subsidiaries in various states, provinces and countries that are currently under audit for years ranging from 2014 through 2018. To date, no material adjustments have been proposed as a result of these audits. As of December 31, 2019, the Company does not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

The Company has an NOL available of $245,138 to reduce future U.S. federal taxes payable. The current federal carry-forward period for those NOL’s is 20 years because they were generated prior to U.S. tax reform being enacted. In light of tax reform, any net operating losses incurred after December 31, 2017 will be allowed to carry forward indefinitely. As a result of the 2014 change in control, $105,158 of the $245,138 are subject to the limitations of Section 382 of the Internal Revenue Code (“IRC”). Although subject to the limitations of IRC §382, management believes it is more likely than not that the Company will realize the entire $105,158 in pre-transaction NOLs in future years. The remaining $139,880 relates to periods after the 2014 change in control and would not be subject to limitation under IRC §382.

For state income tax purposes, the Company incurred net operating losses of $8,077 for 2019 that may be carried forward at a minimum period of 5 years, and in certain circumstances indefinitely, among the states in which the Company is subject to tax to reduce future state income taxes payable. The Company also utilized net operating losses of $42,163 for 2019. Cumulative state net operating losses carrying forward into 2020 are $627,221. A valuation allowance of $15,553 has been applied against the total $30,170 of state net operating loss deferred tax assets, leaving losses of $14,617 that have been recognized for financial accounting purposes for the portion of those losses that the Company believes, on a more likely than not basis, will be realized.

Foreign net operating losses of $137,134, of which $644 will begin to expire in 2019, $1,588 will begin to expire in 2026, $154 will begin to expire in 2028, $11,292 will begin to expire in 2029 with the remaining $123,456 carrying forward indefinitely, are available to reduce future foreign income taxes payable. A valuation allowance of $13,954 has been applied to $32,827 of deferred tax assets related to foreign net operating loss carry-forwards, leaving a net deferred tax asset relating to foreign net operating losses of $18,873 that has been recognized for financial accounting purposes.

Cash payments for income taxes, net of refunds, are as follows:



	Years ended December 31,
	2019		2018		2017
Domestic	$	1,917	$	2,160	$	1,647
Foreign	15,489		21,682		27,552
	$	17,406	$	23,842	$	29,199