Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

Income (loss) from continuing operations before income taxes and income tax expense (benefit) for continuing operations are as follows:


(In thousands)	2020		2019		2018
Income (loss) from continuing operations before income taxes:
Domestic	$	(58,033)	$	52,536	$	67,806
Foreign	32,987		19,470		12,565
Total	$	(25,046)	$	72,006	$	80,371
Current income tax expense (benefit):
Federal	$	4,777	$	7,551	$	30
State	136		1,558		766
Foreign	2,374		579		771
Total	7,287		9,688		1,567
Deferred income tax expense (benefit):
Federal	(18,191)		15,298		16,264
State	(640)		187		948
Foreign	3,331		(11,628)		28
Total	(15,500)		3,857		17,240
Total income tax expense (benefit)	$	(8,213)	$	13,545	$	18,807

The significant differences between the U.S. federal statutory rate and the effective income tax rate related to continuing operations are as follows:


	2020			2019			2018
(In thousands, except percentages)	Amount		%	Amount		%	Amount		%
Foreign rate differences	$	3,753	(14.9)	$	1,533	1.9	$	1,576	2.1
U.S. tax on foreign branch income	1,409		(5.6)	16,029		22.3	2,229		2.8
Non-deductible expenses	219		(0.9)	285		0.4	99		0.1
Valuation allowance for capital loss carryforwards	52		(0.2)	60		0.1	553		0.7
Unremitted earnings from foreign operations	13		(0.1)	60		0.1	126		0.2
Foreign derived intangible income deduction	—		—	(319)		(0.4)	(695)		(0.9)
Valuation allowance due to foreign losses and impairments	—		—	(14,350)		(19.9)	(2,162)		(2.7)
Stock-based compensation	(24)		0.1	292		0.4	177		0.2
Dividend received deduction net of foreign withholding tax	(52)		0.2	(1,016)		(1.4)	—		—
Tax contingency accruals and tax settlements	(58)		0.2	(2,543)		(3.5)	673		0.8
State taxes, net of federal income tax benefit	(373)		1.5	1,050		1.5	1,203		1.5
Research and development tax credit	(633)		2.5	(523)		(0.7)	(130)		(0.2)
Changes in estimates related to prior year tax provision	(2,472)		9.9	(135)		(0.2)	(380)		(0.5)
Brazilian tax incentive	(4,787)		19.1	(1,999)		(2.8)	(1,340)		(1.7)
Income tax expense (benefit) at federal statutory rate	(5,260)		21.0	15,121		21.0	16,878		21.0
Income tax expense (benefit) at effective income tax rate	$	(8,213)	32.8	$	13,545	18.8	$	18,807	23.4

Income taxes in 2020 were primarily impacted by the tax impact of Terphane Ltda. being included in Tredegar’s U.S. consolidated tax return as a foreign branch, the tax impact of the local statutory tax rates of Tredegar’s foreign subsidiaries being higher than the current US tax rate of 21%, the benefit of tax incentives in Brazil, and by claims for prior years’ U.S. research and development tax credits.

During 2019, due to favorable earnings trends, the Company released a $12.4 million valuation allowance on the net deferred tax assets of its Brazilian subsidiary Terphane Ltda. Because Terphane Ltda. is taxed as a foreign branch for U.S. tax purposes, Tredegar also recorded a related deferred tax liability of $12.4 million for the reduction in foreign tax credits that would result from Terphane Ltda. realizing this net deferred tax asset.

Income taxes in 2018 were primarily impacted the additional tax impact of Terphane Ltda. being included in Tredegar’s U.S. consolidated tax return as a foreign branch as well as the tax impact of the local statutory tax rates of Tredegar’s foreign subsidiaries being higher than the current U.S. tax rate of 21%. These increases to income tax expense were offset by recording a tax benefit on a portion of foreign losses and impairments, by the tax benefit of the foreign derived intangible income deduction under the TCJA, and by the benefit of tax incentives in Brazil.

Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under TCJA, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries. Because of the accumulation of significant losses related to foreign currency translations at Terphane Ltda., there were no deferred income tax liabilities associated with the U.S. federal income taxes and foreign withholding taxes on Terphane Ltda.’s undistributed earnings as of and December 31, 2020 and 2019.

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate levied on the operating profit of its products. These incentives produce a current tax rate of 15.25% for Terphane (6.25% of income tax and 9.0% social contribution on income). The incentives were originally granted for a 10-year period commencing January 1, 2015 and expiring at the end of 2024. Terphane Brazil has been granted an additional three years of tax incentives through the end of 2027. The benefit from the tax incentives was $4.8 million, $2.0 million and $1.3 million in 2020, 2019 and 2018, respectively.

Deferred income tax liabilities and deferred income tax assets for continuing operations at December 31, 2020 and 2019, are as follows:


(In thousands)	2020		2019
Deferred income tax liabilities:
Amortization of goodwill and identifiable intangibles	$	9,520	$	12,080
Depreciation	10,844		7,395
Foregone tax credits on foreign branch income	5,714		12,361
Excess of carrying value over tax basis of investment in kaléo	4,905		17,504
Derivative financial instruments	659		—
Right-of-use leased assets	2,979		751
Other	285		488
Total deferred income tax liabilities	34,906		50,579
Deferred income tax assets:
Pensions	25,576		21,025
Employee benefits	9,757		7,963
Excess capital losses	7,462		1,551
Inventory	2,613		3,759
Asset write-offs, divestitures and environmental accruals	2,904		1,355
Tax benefit on U.S. federal, state and foreign NOL and credit carryforwards	18,305		17,992
Timing adjustment for unrecognized tax benefits on uncertain tax positions, including portion relating to interest and penalties	134		187
Allowance for doubtful accounts	141		383
Lease liabilities	3,144		967
Derivative financial instruments	—		345
Foreign currency translation gain adjustment	1,423		255
Deferred income tax assets before valuation allowance	71,459		55,782
Less: Valuation allowance	17,485		3,787
Total deferred income tax assets	53,974		51,995
Net deferred income tax (assets) liabilities	$	(19,068)	$	(1,416)
Amounts recognized in the consolidated balance sheets:
Deferred income tax assets (noncurrent)	$	19,068	$	12,435
Deferred income tax liabilities (noncurrent)	—		11,019
Net deferred income tax assets (liabilities)	$	19,068	$	1,416

Except as noted below, the Company believes that it is more likely than not that future taxable income will exceed future tax-deductible amounts thereby resulting in the realization of deferred income tax assets. The Company has estimated gross federal, state and foreign tax credits and net operating loss carryforwards of $18.3 million and $18.0 million at December 31, 2020 and 2019, respectively. The U.S. federal foreign tax credits will expire by 2027 and the U.S. federal research and development tax credits will expire by 2040. The U.S. state carryforwards expire at different points over the next 20 years.

Valuation allowances of $5.5 million, $2.5 million and $6.6 million at December 31, 2020, 2019 and 2018, respectively, are recorded against the tax benefit on U.S. federal, state and foreign tax credits and net operating loss carryforwards generated by certain foreign and domestic subsidiaries that may not be recoverable in the carryforward period. The valuation allowance for excess capital losses from investments and other related items was $7.1 million, $1.3 million and $1.2 million at December 31, 2020, 2019 and 2018, respectively. The 2020 balance increased primarily due to capital loss carryforwards created by the sale of Personal Care Films. The 2018 balance decreased primarily due to the expiration of a portion of prior year capital loss carryforwards. The amount of the deferred income tax asset considered realizable, however, could be adjusted in the near term if estimates of the fair value of certain investments during the carryforward period change. Tredegar continues to evaluate opportunities to utilize capital loss carryforwards prior to their expiration at various dates in the future. As circumstances and events warrant, allowances will be reversed when it is more likely than not that future taxable income will exceed deductible amounts, thereby resulting in the realization of deferred income tax assets. A valuation allowance of $4.9 million was recorded in 2020 related to various deferred state tax assets. The valuation allowance for asset impairments in foreign jurisdictions where the Company believes it is more likely than not that the deferred income tax asset will not be realized was zero at December 31, 2020 and 2019, and $15.8 million at December 31, 2018. In 2019, the Company reversed a $12.4 million valuation allowance on the net deferred tax assets of its Brazilian subsidiary Terphane Ltda due to favorable earnings trends. Since Terphane Ltda. is taxed as a foreign branch for US tax purposes, Tredegar also recorded a related deferred tax liability of $12.4 million for the reduction in foreign tax credits that would result from Terphane Ltda. realizing this net deferred tax asset.

A reconciliation of the Company’s unrecognized uncertain tax positions since January 1, 2018, is shown below:


	Years Ended December 31,
(In thousands)	2020		2019		2018
Balance at beginning of period	$	881	$	3,361	$	1,962
Increase (decrease) due to tax positions taken in:
Current period	12		12		13
Prior period	—		49		1,430
Increase (decrease) due to settlements with taxing authorities	(265)		(151)		—
Reductions due to lapse of statute of limitations	—		(2,390)		(44)
Balance at end of period	$	628	$	881	$	3,361

Additional information related to unrecognized uncertain tax positions since January 1, 2018 is summarized below:


	Years Ended December 31,
(In thousands)	2020		2019		2018
Gross unrecognized tax benefits on uncertain tax positions (reflected in current income tax, other noncurrent liability accounts, or deferred tax assets in the balance sheet)	$	628	$	881	$	3,361
Deferred income tax assets related to unrecognized tax benefits on uncertain tax positions (reflected in deferred income tax accounts in the balance sheet)	(110)		(163)		(211)
Net unrecognized tax benefits on uncertain tax positions, which would impact the effective tax rate if recognized	518		718		3,150
Interest and penalties accrued on deductions taken relating to uncertain tax positions (approximately $2, $(144) and $107 reflected in income tax expense in the income statement in 2020, 2019 and 2018, respectively, with the balance shown in current income tax and other noncurrent liability accounts in the balance sheet)	102		100		243
Related deferred income tax assets recognized on interest and penalties	(24)		(23)		(56)
Interest and penalties accrued on uncertain tax positions net of related deferred income tax benefits, which would impact the effective tax rate if recognized	78		77		187
Total net unrecognized tax benefits on uncertain tax positions reflected in the balance sheet, which would impact the effective tax rate if recognized	$	596	$	795	$	3,337

Tredegar, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various states and jurisdictions outside the U.S. With few exceptions, Tredegar is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2017. The Company anticipates that it is reasonably possible that Federal and state income tax audits or statutes may settle or close within the next 12 months, which could result in the recognition of up to approximately $0.5 million of the balance of unrecognized tax positions, including any payments that may be made.