Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.7.0.1
Income Taxes
12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
Income Taxes
before income taxes are comprised of the following components for the periods indicated:
 
 
Successor
 
 
Predecessor
 
 
Twelve Months Ended
December 31, 2016
 
Twelve Months Ended
December 31, 2015
 
Period from
06/30/2014
through
12/31/2014
 
 
Six Months
Ended
06/29/2014
 
 
United States based operations
(15,442
)
 
(23,366
)
 
(24,145
)
 
 
(69,749
)
 
Non-United States based operations
(6,454
)
 
(12,051
)
 
(980
)
 
 
1,095

 
Loss before income taxes
(21,896
)
 
(35,417
)
 
(25,125
)
 
 
(68,654
)

Below are the components of the Company's income tax provision for the periods indicated:
 
 
Successor
 
 
Predecessor
 
 
Twelve Months Ended
December 31, 2016
 
Twelve Months Ended
December 31, 2015
 
Period from
06/30/2014
through
12/31/2014
 
 
Six Months
Ended
06/29/2014
 
 
Current:
 
 
 
 
 
 
 
 
 
Federal & State
$
368

 
$
330

 
$
102

 
 
$
105

 
Foreign
18

 
235

 
800

 
 
212

 
Total current
386

 
565

 
902

 
 
317

 
Deferred:
 
 
 
 
 
 
 
 
 
Federal & State
(7,464
)
 
(10,892
)
 
(7,081
)
 
 
(23,056
)
 
Foreign
(847
)
 
(2,492
)
 
(98
)
 
 
328

 
Total deferred
(8,311
)
 
(13,384
)
 
(7,179
)
 
 
(22,728
)
 
Valuation allowance
235

 
485

 
89

 
 
(1,717
)
 
Income tax benefit
$
(7,690
)
 
$
(12,334
)
 
$
(6,188
)
 
 
$
(24,128
)

The Company has U.S. federal net operating loss (“NOL”) carryforwards for tax purposes, totaling $101,502 as of December 31, 2016, that are available to offset future taxable income. These carry forwards expire from 2028 to 2035. Management estimates that the Company will not be able to utilize some of the loss carryforwards before they expire due to limitations imposed by Internal Revenue Code Section 382. A valuation allowance with a year-end balance of $35 has been recorded for these deferred tax assets. In addition, the Company's foreign subsidiaries have NOL carryforwards aggregating $12,935. A portion of these carryforwards expire from 2025 to 2033. Approximately $13,400 of the U.S. NOL carryforward has an indefinite life carryforward provided the Company continues to meet certain obligations under Luxembourg's tax codes. Management has recorded a valuation allowance of $1,243 against the deferred tax assets recorded for a foreign subsidiary.
The Company has state NOL carryforwards with an aggregate tax benefit of $3,196 which expire from 2017 to 2035. Management estimates that the Company will not be able to utilize some of the loss carryforwards in certain states before they expire. A valuation allowance with a year-end balance of $384 has been recorded for these deferred tax assets. In 2016, the valuation allowance for state NOL carryforwards decreased by $113. The decrease was primarily a result of a change in the estimation of the utilization of the NOL in the carryforward years. In conjunction with the Paulin Acquisition, the Company recorded a deferred tax asset related to the carryforward of a foreign exchange loss. The total carryforward balance at year-end is $194. Management estimates that the Company will not be able to realize the benefit of this deferred tax asset and has recorded a valuation allowance of $75.
The Company has $353 of general business tax credit carryforwards which expire from 2017 to 2034. A valuation allowance of $98 has been established for a portion of these tax credits. The Company has $781 of foreign tax credit carryforwards which expire from 2019 to 2025.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The table below reflects the significant components of the Company's net deferred tax assets and liabilities at December 31, 2016 and 2015:
 
 
As of December 31, 2016
 
As of December 31, 2015
 
 
Non-current
 
Current
 
Non-current
Deferred Tax Asset:
 
 
 
 
 
 
Inventory
 
$
10,356

 
$
10,254

 
$

Bad debt reserve
 
1,048

 
955

 

Casualty loss reserve
 
649

 
233

 
314

Accrued bonus / deferred compensation
 
3,289

 
950

 
1,193

Deferred rent
 
488

 

 
213

Derivative security value
 
659

 
1,112

 

Deferred distribution of foreign subsidiary
 
256

 

 

Deferred financing fees
 
699

 

 
848

Deferred revenue - shipping terms
 
674

 
501

 

Medical insurance reserve
 
102

 
354

 

Original issue discount amortization
 

 

 
272

Transaction costs
 
4,200

 

 
4,629

Federal / foreign net operating loss
 
37,687

 

 
40,335

State net operating loss
 
3,195

 

 
4,029

Tax credit carryforwards
 
3,978

 

 
3,811

All other
 
770

 
73

 
655

Gross deferred tax assets
 
68,050

 
14,432

 
56,299

Valuation allowance for deferred tax assets
 
(1,835
)
 
(168
)
 
(1,451
)
Net deferred tax assets
 
$
66,215

 
$
14,264

 
$
54,848

Deferred Tax Liability:
 
 
 
 
 
 
Intangible asset amortization
 
$
279,776

 
$

 
$
290,090

Property and equipment
 
22,659

 

 
23,068

All other items
 
1,092

 
383

 
903

Deferred tax liabilities
 
$
303,527

 
$
383

 
$
314,061

Net deferred tax liability
 
$
237,312

 
 
 
$
245,332

Long term net deferred tax liability
 
$
237,312

 
 
 
$
259,213

Current net deferred tax asset
 

 
 
 
13,881

Long term net deferred tax asset
 

 
 
 

Net deferred tax liability
 
$
237,312

 
 
 
$
245,332


Realization of the net deferred tax assets is dependent on the reversal of deferred tax liabilities and generating sufficient taxable income prior to their expiration. Although realization is not assured, management estimates it is more likely than not that the net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.

Hillman is subject to income taxes in the United States and in certain foreign jurisdictions. In general, it is the practice and intention of the Company to reinvest the earnings of certain of its non-U.S. subsidiaries in those operations. Based on direction from the new management team, the Company's position with respect to permanent reinvestment of earnings in its foreign subsidiaries was revised in the fourth quarter of 2014. Only one of the foreign subsidiaries has accumulated E&P that warranted establishment of a deferred tax asset. Due to the availability of a foreign tax credit which can offset the U.S. tax on future distributions from this subsidiary, an overall deferred tax asset of $256 has been recorded as of December 31, 2016.
As of December 31, 2016, the Company does not have any excess amount for financial reporting over the tax basis in these certain foreign subsidiaries. The Company recorded a deferred tax asset of $256 based on undistributed earnings in one of its foreign subsidiaries that is not being indefinitely reinvested.
Below is a reconciliation of statutory income tax rates to the effective income tax rates for the periods indicated:
 
 
Successor
 
 
Predecessor
 
 
Twelve Months Ended
December 31, 2016
Twelve Months Ended
December 31, 2015
Period from
06/30/2014
through
12/31/2014
 
 
Six Months
Ended
06/29/2014
 
Statutory federal income tax rate
 
35.0
 %
35.0
 %
35.0
 %
 
 
35.0
 %
 
Non-U.S. taxes and the impact of non-U.S. losses for which a current tax benefit is not available
 
8.1
 %
(0.8
)%
(11.0
)%
 
 
1.5
 %
 
State and local income taxes, net of U.S. federal income tax benefit
 
2.8
 %
2.6
 %
2.5
 %
 
 
3.0
 %
 
Adjustment of reserve for change in valuation allowance and other items
 
0.5
 %
(0.7
)%
0.5
 %
 
 
(0.3
)%
 
Adjustment for change in tax law
 
(3.1
)%
 %
3.1
 %
 
 
0.5
 %
 
Adjustment of unrecognized tax benefits
 
(7.7
)%
 %
 %
 
 
 %
 
Permanent differences:
 
 
 
 
 
 
 
 
Acquisition and related transaction costs
 
(0.3
)%
(0.2
)%
(8.2
)%
 
 
(4.0
)%
 
Meals and entertainment expense
 
(0.9
)%
(0.4
)%
(0.2
)%
 
 
(0.1
)%
 
Foreign tax credit
 
0.3
 %
 %
2.4
 %
 
 
 %
 
Reconciliation of tax provision to return
 
(0.3
)%
(0.7
)%
 %
 
 
 %
 
Reconciliation of other adjustments
 
0.7
 %
 %
0.5
 %
 
 
(0.5
)%
 
Effective income tax rate
 
35.1
 %
34.8
 %
24.6
 %
 
 
35.1
 %
 

The Company has recorded a $1,686 increase in the reserve for unrecognized tax benefits for the year ended December 31, 2016 related to items previously recognized in its consolidated financial statements. A balance of $1,734 of the remaining unrecognized tax benefit is shown in the financial statements at December 31, 2016 as a reduction of the deferred tax asset for the Company's NOL carryforwards while $326 of the ending reserve is included in the balance of other long term liabilities.
The Company has recorded a $61 decrease in the reserve for unrecognized tax benefits for the year ended December 31, 2015 related to items previously recognized in its consolidated financial statements. The ending reserve of $374 is included in other long term liabilities.

The Company has recorded a $1,559 decrease in the reserve for unrecognized tax benefits in the six month Predecessor period ended June 29, 2014 due to the resolution of a recent IRS examination in 2014. The Company has decreased its reserve for unrecognized tax benefits in the six month Successor period June 30, 2014 through December 31, 2014 and the six month Predecessor period ended June 29, 2014 by $30 and $1, respectively, related to items previously recognized by the acquired company in its financial statements. A balance of $58 of the remaining unrecognized tax benefit is shown in the financial statements at December 31, 2014 as a reduction of the deferred tax asset for the Company's NOL carryforwards while $377 of the ending reserve is included in the balance of other long term liabilities.


The following is a summary of the changes for the periods indicated below:
 
 
 
Successor
 
 
Predecessor
 
Twelve Months Ended
December 31, 2016
 
Twelve Months Ended
December 31, 2015
 
Period from
06/30/2014
through
12/31/2014
 
 
Six Months
Ended
06/29/2014
 
Unrecognized tax benefits - beginning balance
$
374

 
$
435

 
$
465

 
 
$
2,024

 
Gross increases - tax positions in current period
1,676

 

 

 
 

 
Gross increases - tax positions in prior period
10

 

 

 
 

 
Gross decreases - tax positions in prior period

 
(61
)
 
(30
)
 
 
(1,559
)
 
Unrecognized tax benefits - ending balance
$
2,060

 
$
374

 
$
435

 
 
$
465

 
Amount of unrecognized tax benefit that, if recognized would affect the Company's effective tax rate
$
2,060

 
$
374

 
$
435

 
 
$
465

 

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. In conjunction with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB No. 109, “Accounting for Income Taxes”, which was codified in ASC 740-10, the Company has not recognized any adjustment of interest or penalties in its consolidated financial statements due to its NOL position. The Company does not anticipate a decrease in the unrecognized tax benefits for the tax year ending December 31, 2017.
The Company files a consolidated income tax return in the U.S. and numerous consolidated and separate income tax returns in various states and foreign jurisdictions. As of December 31, 2016, with a few exceptions, the Company is no longer subject to U.S. federal, state, and foreign tax examinations by tax authorities for the tax years prior to 2012. However, the IRS can make adjustments to losses carried forward by the Company from 2010 forward and utilized on its federal return.