Mammoth Energy Services, 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, 2018

As discussed in Note 1, the Partnership was converted into a limited liability company on October 12, 2016 and the membership interests in the limited liability company were contributed to the Company. As a result, the Company filed a consolidated return for the period October 12, 2016 through December 31, 2016. Prior to the conversion, the Partnership, other than Sand Tiger, was not subject to corporate income taxes.

The components of income tax expense (benefit) attributable to the Company for the year ended December 31, 2018, 2017 and 2016, respectively, are as follows (in thousands):



	Year Ended December 31,
	2018		2017			2016
U.S. current income tax expense	$	25,656	$	804		$	2,307
U.S. deferred income tax expense (benefit)	25,372		(27,764		)	47,957
Foreign current income tax expense	75,381		36,565			3,594
Foreign deferred income tax expense (benefit)	26,854		(6,773		)	27
Total	$	153,263	$	2,832		$	53,885

A reconciliation of the statutory federal income tax amount to the recorded expense is as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Income (loss) before income taxes, as reported	$	389,228		$	61,796		$	(38,568	)
Bargain purchase gain, net of tax	—			(4,012		)	—
Income (loss) before income taxes, as taxed	389,228			57,784			(38,568		)
Statutory income tax rate	21		%	35		%	35		%
Expected income tax expense (benefit)	81,738			20,224			(13,499		)
Income earned as non-taxable entity (See Note 2)	—			—			15,167
Effect due to change to C corporation (See Note 2)	—			—			53,089
Change in tax rate	(103		)	(21,309		)	(25		)
Tax reform - unrepatriated foreign earnings	—			(9,727		)	—
Foreign income tax rate differential	39,080			6,286			(1,078		)
Foreign earnings not in reported income	46,834			22,054			—
Foreign tax credits	(89,677		)	(29,551		)	—
Withholding taxes	13,930			—			—
Other permanent differences	13,045			503			210
State tax expenses	5,394			39			21
Return to provision	6,071			—			—
Other	680			(1,192		)	—
Change in valuation allowance	36,271			15,505			—
Total	$	153,263		$	2,832		$	53,885

The Company's effective tax rate was 39.4% for the year ended December 31, 2018 compared to 4.9% for the year ended December 31, 2017. The Company's effective tax rate was 34.6%, excluding the conversion to a C Corporation, for the year ended December 31, 2016. The increase in effective tax rate from 2017 to 2018 is primarily the result of a tax rate change recorded in 2017 related to the Tax Act as discussed below. Additionally, the Company's tax rate was affected by the mix of earnings between the US and Puerto Rico, increased foreign tax credits resulting from increased profitability in foreign jurisdictions, changes in valuation allowance on excess foreign tax credit carryforwards and withholding taxes on foreign source income, as well as other items, such as equity compensation expense and certain non-deductible expenses. The difference in effective tax rate from 2016 to 2017 is primarily due to income earned as a non-taxable entity and the effect of the Company’s change in tax status to a C corporation, as discussed in further detail in Note 2.

On December 22, 2017, the United States enacted the Tax Act. The Tax Act significantly changed US corporate income tax laws by, among other things, reducing the US corporate income tax rate from 35% to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of US subsidiaries. Under the accounting rules, companies were required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in 2017, the period in which the new legislation was enacted. The effects of the Tax Act on the Company included (i) remeasurement of deferred taxes and (ii) recognition of liabilities for taxes on mandatory deemed repatriation. As a result of the Tax Act, the Company recorded a credit of $31.0 million during the fourth quarter of 2017. This amount, which is included in provision (benefit) for income taxes in the Consolidated Statements of Comprehensive Income (Loss), consists of two components: (i) a $21.3 million credit resulting from the remeasurement of the Company's net deferred tax liabilities in the US based on the new lower corporate income tax rate, and (ii) a $9.7 million credit related to a reversal of deferred liabilities for unrepatriated foreign earnings. The SEC staff issued Staff Accounting Bulletin No. 118 in December 2017, which allowed registrants to record provisional amounts for effects of the Tax Act during a one-year measurement period. The Company completed its analysis of the Tax Act during the fourth quarter of 2018 and recorded a nominal adjustment to its provisional estimates.

Deferred tax liabilities attributable to the Company consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017
Deferred tax assets:
Allowance for doubtful accounts	$	1,180		$	11,973
Deferred compensation	1,032			1,032
Accrued liabilities	3,428			1,442
Foreign tax credits	51,776			15,505
Other	2,094			1,448
Valuation allowance	(51,776		)	(15,505		)
Deferred tax assets	7,734			15,895

Deferred tax liabilities:
Property and equipment	$	(63,181	)	$	(40,390	)
Intangible assets	(4,936		)	(2,839		)
Withholding taxes	(17,419		)	—
Other	(1,507		)	(74		)
Deferred tax liabilities	(87,043		)	(43,303		)
Net deferred tax liability	$	(79,309	)	$	(27,408	)

Reflected in accompanying balance sheet as:
Deferred income tax asset	$	—		$	6,739
Deferred income tax liability	(79,309		)	(34,147		)
Total	$	(79,309	)	$	(27,408	)

At December 31, 2018, the Company maintains a full valuation allowance related to US foreign tax credit carryforwards, as it cannot objectively assert that these deferred tax assets are more likely than not to be realized. All available positive and negative evidence was weighed to determine whether a valuation allowance was necessary. The more significant evidential matter is the higher foreign tax rate applied to foreign source income in comparison to the US Federal tax rate of 21%. As such, excess foreign tax credits are generated each year through payment of foreign taxes over the amount that can be credited against the US income tax due on the corresponding foreign source income. As such, while the Company has utilized and is expected to continue utilizing a portion of foreign tax credits generated in each period, the difference in tax rates between the US and foreign jurisdiction is expected to continue generating excess foreign tax credits that are not expected to be utilized in the future.

During the years ended December 31, 2018 and 2017, the Company recorded changes in its valuation allowance of $36.3 million and $15.5 million, respectively, related to excess foreign tax credits that are not expected to be utilized. The Company has foreign tax credits carryforwards of $51.8 million as of December 31, 2018. These credits have a 10 year carryforward period and begin to expire in 2027.

At December 31, 2018, the Company had foreign subsidiaries with undistributed earnings, primarily in Puerto Rico. Due to the tax status of these entities as passthrough entities for US tax purposes, all taxable earnings have been considered in the tax provision for the US Federal and state jurisdictions. As it is expected these earnings will be eventually subject to distribution to the US, the Company has accrued for associated withholdings taxes resulting from such eventual distribution.

The Company does not have any material uncertain tax positions for either 2018 or 2017.

The Company’s U.S. and state tax returns for tax years 2015 through 2018, Puerto Rico tax returns for tax years 2017 and 2018 and Canada tax returns for the tax years 2014 through 2018 remain open to examination by the respective tax authorities.