Hillman Solutions Corp. 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, 2015

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes:

Below are the components of the Company's income tax provision for the periods indicated:



	Successor						Predecessor
	Year Ended 12/31/2015			Period from 06/30/2014 through 12/31/2014			Six months Ended 06/29/2014			Year Ended 12/31/2013
	Year Ended 12/31/2015			Period from 06/30/2014 through 12/31/2014			Six months Ended 06/29/2014			Year Ended 12/31/2013
Current:
Federal & State	$	330		$	102		$	105		$	552
Foreign	235			800			212			795
Total current	565			902			317			1,347
Deferred:
Federal & State	(10,892		)	(7,081		)	(23,056		)	(2,857		)
Foreign	(2,492		)	(98		)	328			(890		)
Total deferred	(13,384		)	(7,179		)	(22,728		)	(3,747		)
Valuation allowance	485			89			(1,717		)	(381		)
Income tax benefit	$	(12,334	)	$	(6,188	)	$	(24,128	)	$	(2,781	)

The Company has U.S. federal net operating loss (“NOL”) carryforwards for tax purposes, totaling $105,256 as of December 31, 2015, that are available to offset future taxable income. These carry forwards expire from 2028 to 2034. 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 $13,260. A portion of these carryforwards expire from 2033 to 2034. Approximately $7.6 million of the US 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 $916 against the deferred tax assets recorded for a foreign subsidiary.

The Company has state NOL carryforwards with an aggregate tax benefit of $4,029 which expire from 2016 to 2034. 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 $496 has been recorded for these deferred tax assets. In 2015, the valuation allowance for state NOL carryforwards increased by $210. The increase 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 $74.

The Company has $273 of general business tax credit carryforwards which expire from 2016 to 2033. A valuation allowance of $98 has been established for a portion of these tax credits. The Company has $740 of foreign tax credit carryforwards which expire from 2019 to 2024.

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.

6. Income Taxes: (continued)

The table below reflects the significant components of the Company's net deferred tax assets and liabilities at December 31, 2015 and 2014:



	As of December 31, 2015						As of December 31, 2014
	Current			Non-current			Current			Non-current
Deferred Tax Asset:
Inventory	$	10,254		$	—		$	9,905		$	—
Bad debt reserve	955			—			956			—
Casualty loss reserve	233			314			363			502
Accrued bonus / deferred compensation	950			1,193			1,013			907
Deferred rent	—			213			—			68
Derivative security value	1,112			—			276			—
Deferred distribution of foreign subsidiary	—			—			—			312
Deferred financing fees	—			848			—			5,190
Deferred revenue - shipping terms	501			—			421			—
Medical insurance reserve	354			—			373			—
Original issue discount amortization	—			272			—			513
Transaction costs	—			4,629			—			1,389
Federal / foreign net operating loss	—			40,335			—			37,552
State net operating loss	—			4,029			—			4,089
Tax credit carryforwards	—			3,811			—			3,619
All other	73			655			31			473
Gross deferred tax assets	14,432			56,299			13,338			54,614
Valuation allowance for deferred tax assets	(168		)	(1,451		)	(99		)	(1,124		)
Net deferred tax assets	$	14,264		$	54,848		$	13,239		$	53,490
Deferred Tax Liability:
Intangible asset amortization	$	—		$	290,090		$	—		$	303,124
Property and equipment	—			23,068			—			24,147
All other items	383			903			—			—
Deferred tax liabilities	$	383		$	314,061		$	—		$	327,271
Net deferred tax liability				$	245,332					$	260,542
Long term net deferred tax liability				$	259,213					$	273,781
Current net deferred tax asset				13,881						13,239
Long term net deferred tax asset				—						—
Net deferred tax liability				$	245,332					$	260,542

6. Income Taxes: (continued)

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 DTA. Due to the availability of a foreign tax credit which can offset the US tax on future distributions from this subsidiary, an overall deferred tax asset of $22 has been recorded as of December 31, 2015.

As of December 31, 2015, 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 $22 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
	Year Ended 12/31/2015		Period from 06/30/2014 through 12/31/2014		Six months Ended 06/29/2014		Year Ended 12/31/2013
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	(0.8	)%	(11.0	)%	1.5	%	(19.6	)%
State and local income taxes, net of U.S. federal income tax benefit	2.6	%	2.5	%	3.0	%	(0.1	)%
Adjustment of reserve for change in valuation allowance and other items	(0.7	)%	0.5	%	(0.3	)%	15.0	%
Adjustment for change in tax law	—	%	3.1	%	0.5	%	8.9	%
Adjustment of unrecognized tax benefits	—	%	—	%	—	%	36.6	%
Permanent differences:
Acquisition and related transaction costs	(0.2	)%	(8.2	)%	(4.0	)%	(4.0	)%
Meals and entertainment expense	(0.4	)%	(0.2	)%	(0.1	)%	(3.5	)%
Foreign tax credit	—	%	2.4	%	—	%	1.3	%
Reconciliation of tax provision to return	(0.7	)%	—	%	—	%	2.0	%
Reconciliation of other adjustments	—	%	0.5	%	(0.5	)%	(0.8	)%
Effective income tax rate	34.8	%	24.6	%	35.1	%	70.8	%

6. Income Taxes: (continued)

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 $1,558 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 Company has recorded a $1,538 decrease in the reserve for unrecognized tax benefits in the twelve month period ended December 31, 2013 related to the expiration of the statute of limitations for an earlier year. The unrecognized tax benefits are shown in the financial statements as a reduction of the deferred tax asset for the Company's NOL carryforwards. The Company has increased its reserve for unrecognized tax benefits $560 in the twelve month period ended December 31, 2013 related to items previously recognized by the acquired company in its financial statements.

The following is a summary of the changes for the periods indicated below:



	Successor						Predecessor
	Year Ended 12/31/2015			Period from 06/30/2014 through 12/31/2014			Six months Ended 06/29/2014			Year Ended 12/31/2013
Unrecognized tax benefits - beginning balance	$	435		$	465		$	2,024		$	3,002
Gross increases - tax positions in current period	—			—			—			—
Gross increases - tax positions in prior period							—			560
Gross decreases - tax positions in prior period	(61		)	(30		)	(1,559		)	(1,538		)
Unrecognized tax benefits - ending balance	$	374		$	435		$	465		$	2,024
Amount of unrecognized tax benefit that, if recognized would affect the Company's effective tax rate	$	374		$	435		$	465		$	2,024

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, 2016.

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, 2015, 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.