|FORTERRA, INC. filed this Form 10-Q on 08/09/2018|
Notes to Unaudited Condensed Consolidated Financial Statements
The income tax expense for the three months ended June 30, 2018 is higher than the expense computed at the statutory rate primarily as a result of changes in the Company's valuation allowance. The Company evaluates the recoverability of its deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. The Company assesses whether valuation allowances should be established against deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. The analysis used in determining the valuation allowance involves considerable judgment and assumptions. After consideration of all evidence, the Company increased the valuation allowance by $3.5 million.
The Company's history of pretax losses limits its ability to rely on projections of future pretax income, and the TCJA limits the ability to carryback losses to recover taxes paid in prior periods; therefore, realization of deferred tax assets is based primarily on reversal of taxable temporary differences. The sale-leaseback transaction that closed during the three months ended June 30, 2018 affected the timing and recognition of temporary differences, and the Company concluded that a portion of its deferred tax assets no longer meets the “more likely than not” standard for realization based on reversal of taxable temporary differences.
The income tax expense for the six months ended June 30, 2018 is higher than the benefit computed at the statutory rate primarily as a result of changes in the Company's valuation allowance described above and the unfavorable impact of the disposition of nondeductible goodwill in connection with the Foley exchange that occurred in the three months ended March 31, 2018.
The income tax benefit for the three and six months ended June 30, 2017 is lower than the benefit computed at the statutory rate primarily attributable to the effect of state income taxes, valuation allowance in certain states and foreign jurisdictions, and nondeductible expenses.
The Company's quarterly provision for income taxes has historically been calculated using the annual effective rate method, which applies an estimated annual effective tax rate to pre-tax income or loss. However, when the result of the expected annual effective tax rate is not deemed reliable and distorts the income tax provision for an interim period, the Company calculates the income tax provision or benefit using the actual year-to-date effective tax rate (the "discrete method"), which results in an income tax provision or benefit based solely on the year-to-date pre-tax income or loss as adjusted for permanent differences on a pro rata basis. The Company has recorded its interim income tax provision using the discrete method, as allowed under ASC 740-270, Accounting for Income Taxes - Interim Reporting for the three and six months ended June 30, 2018.
18. Segment reporting
Segment information is presented in accordance with ASC 280, Segment Reporting, which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about products and geographic areas. Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by the Company’s chief operating decision maker (“CODM”) in order to allocate resources and assess performance. The Company's Chief Executive Officer is its CODM. The Corporate and Other segment includes expenses related to certain executive salaries, interest costs related to the Company's credit agreements, acquisition related costs, and other corporate costs that are not directly attributable to the Company's operating segments. The Company's segments follow the same accounting policies as the Company.
Net sales from the major products sold to external customers include drainage pipe and precast products and concrete and steel water transmission pipe.
The Company’s three geographic areas consist of the United States, Canada and Mexico for which it reports net sales, fixed assets and total assets. For purposes of evaluating segment profit, the CODM reviews EBITDA as a basis for making the decisions to allocate resources and assess performance.