Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

v3.21.2
INCOME TAXES
9 Months Ended
Sep. 30, 2021
INCOME TAXES  
INCOME TAXES

NOTE 7—INCOME TAXES

The effective income tax expense rate for continuing operations for the three and nine months ended September 30, 2021 and 2020 was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

    

2021

2020

2021

    

2020

Income tax (benefit) expenses

($6)

$321

$256

$565

Effective income tax rate for continuing operations

-0.8%

22.3%

12.1%

17.3%

The effective income tax rate differs from the statutory federal income tax rate of 21% primarily because of the partial valuation allowances recorded on the Company’s deferred tax assets and the Canadian income tax provision.  

For the three months ended September 30, 2021, the Company recorded income tax benefit from continuing operations of $0.01 million, or (0.8)% of pretax income from continuing operations, compared with income tax expense from continuing operations of $0.3 million, or 22.3% of pretax income from continuing operations, in the corresponding period of 2020. For the nine months ended September 30, 2021, the Company recorded income tax expense from continuing operations of $0.3 million, or 12.1% of pretax income from continuing operations, compared with income tax expense from continuing operations of $0.6 million, or 17.3% of pretax income from continuing operations, in the corresponding period of 2020.

The decrease in income tax provision from continuing operations for the three months ended September 30, 2021, compared with the corresponding period in 2020 was primarily the result of the $0.3 million increase in U.S. deferred tax assets net of a partial valuation allowance, and the $0.05 million decrease in the income tax provision as a result of the year-over-year fluctuation in Canadian pre-tax book income. The $0.3 million U.S. deferred tax asset increase is attributable to the increase in

indefinite lived assets, both the net operating loss and the Section 163(j) interest addback. The increase was primarily driven by a $0.8 million favorable tax adjustment related to the Koontz-Wagner bankruptcy estate distribution in the third quarter of 2021, and a $0.6 million favorable tax adjustment as the Company is expecting to pay off half of the payroll tax deferred, under the CARES Act (as defined below), by the end of December 31, 2021.

The Company’s net deferred balance was primarily composed of indefinite lived deferred tax liabilities attributable to goodwill and trade names, and indefinite lived deferred tax assets related to the post 2017 net operating losses and the Section 163(j) interest addback. A full valuation allowance was applied to most of the remaining deferred balances. The indefinite lived deferred tax assets enabled the release of the valuation allowance to the extent that it can offset the indefinite lived deferred tax liabilities. Because all indefinite lived deferred tax liabilities are part of continued operations, and the release of valuation allowance is attributable to the future taxable income related to these deferred tax liabilities, the entire valuation allowance released was recorded in continuing operations according to ASC 740-20-45-3. As a result, the favorable tax adjustment related to the Koontz-Wagner bankruptcy estate distribution (arising from the discontinued operation), has been reported as continuing operations. As of September 30, 2021, the Company had $2.1 million net deferred tax liabilities, mainly composed of $12.3 million indefinite lived deferred tax liabilities attributable to goodwill and trade names, partially offset by $6.9 million indefinite lived deferred tax assets attributable to post 2017 net operating losses and $3.1 million indefinite lived deferred tax assets attributable to Section 163(j) interest addback.

The decrease in income tax provision from continuing operations for the nine months ended September 30, 2021 compared with the corresponding period in 2020 was primarily the result of a $0.4 million increase in the U.S. deferred tax assets net of partial valuation allowance, as the Company’s indefinite lived intangible assets have been fully amortized for tax purposes as of year-end 2020, partially offset by a $0.1 million increase in the Canadian tax provision.

As of September 30, 2021 and 2020, the Company would have needed to generate approximately $270.4 million and $268.5 million, respectively, of future taxable income in order to realize its deferred tax assets.

The Company’s foreign subsidiaries may generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in its operations outside of the U.S. pursuant to ASC 740-30. Undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes.

As of September 30, 2021, the Company’s Canadian subsidiary had approximately $8.3 million in Canadian currency in undistributed earnings. The Company’s management asserts that all of the undistributed earnings will be reinvested in the Canadian subsidiary based on the following facts presented at the time of preparing the financial statements: (1) the Company’s domestic operations are not in need of working capital from the foreign subsidiary, and any temporary intercompany payable with the Canadian subsidiary will be repaid within one year from the end of the corporation’s tax year in which the indebtedness arises; (2) the Canadian subsidiary has not declared dividends since its inception in 2018, and management is not expecting the Canadian subsidiary to declare dividends in the foreseeable future; and (3) the Company’s management has developed a strategic growth initiative to pursue nuclear plant maintenance, modifications, and construction in Canada for the long-term. Therefore, the accrual of deferred tax liability with respect to the Company’s outside basis difference in its investment in Canada is not needed pursuant to the APB 23 exception.

As of September 30, 2021 and 2020, the Company provided for a total liability of $3.0 million and $2.8 million, respectively, of which $1.9 million for the period ended September 30, 2021, compared to $1.7 million for the corresponding period in 2020, related to discontinued operations, for unrecognized tax benefits related to various federal, foreign and state income tax matters, which were included in long-term liabilities of discontinued operations and other long-term liabilities. If recognized, the entire amount of the liability would affect the effective tax rate. As of September 30, 2021, the Company accrued approximately $1.4 million, of which $0.8 million related to discontinued operations, in both other long-term liabilities of discontinued operations and other long-term liabilities for potential payment of interest and penalties related to uncertain income tax positions.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The Company has incorporated the impact of the CARES Act to the tax provision. In addition, the Company deferred payments of federal employer payroll taxes of approximately $4.9 million (recorded within accrued compensation and benefits on the consolidated balance sheet), as permitted by the CARES Act. The first half of the deferred amounts will be paid by December 2021, and the second half by December 2022.