Parker Wellbore 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, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 10 - Income Taxes

Income (loss) before income taxes is summarized below:



	Successor			Predecessor
	Nine Months Ended December 31,			Three Months Ended March 31,			Year Ended December 31,
Dollars in thousands	2019			2019			2018
United States	$	(3,342	)	$	16,785		$	(145,954	)
Foreign	20,946			(106,377		)	(11,947		)
Income (loss) before income taxes	$	17,604		$	(89,592	)	$	(157,901	)

Income tax expense

Income tax expense (benefit) is summarized as follows:



	Successor			Predecessor
	Nine Months Ended December 31,			Three Months Ended March 31,			Year Ended December 31,
Dollars in thousands	2019			2019			2018
Federal	$	(2,503	)	$	(364	)	$	(14	)
State	136			50			229
Foreign	7,557			2,655			8,010
Total current tax expense	5,190			2,341			8,225
Federal	5,163			—			—
State	635			—			—
Foreign	107			(1,685		)	(429		)
Total deferred tax expense (benefit)	5,905			(1,685		)	(429		)
Total income tax expense	$	11,095		$	656		$	7,796

Effective tax rate	63.0		%	(0.7		)%	(4.9		)%

Effective tax rate

The Company’s effective tax rate differs from the amount that would be computed by applying the U.S federal income tax rate of 21% to pre-tax income as a result of the following:



	Successor					Predecessor
	Nine Months Ended December 31,					Three Months Ended March 31,					Year Ended December 31,
	2019					2019					2018
Dollars in thousands	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Income tax expense (benefit) at U.S. statutory rate	$	3,696		21.0	%	$	(18,814	)	21.0	%	$	(33,160	)	21.0	%
Foreign taxes	565			3.2	%	1,809			(2.0	)%	7,321			(4.6	)%
Tax effect different from statutory rates	472			2.7	%	11,125			(12.4	)%	(68		)	—	%
State taxes, net of federal benefit	305			1.7	%	5,036			(5.6	)%	(2,552		)	1.6	%
Change in valuation allowance	3,706			21.1	%	(98,856		)	110.3	%	28,353			(18.0	)%
Uncertain tax positions	(2,056		)	(11.7	)%	(940		)	1.1	%	(221		)	0.1	%
Permanent differences	421			2.4	%	20,543			(22.9	)%	8,008			(5.1	)%
Prior year adjustments	(331		)	(1.9	)%	4,535			(5.1	)%	50			—	%
Expiration/write-off of deferred tax assets	4,217			23.9	%	76,034			(84.9	)%	—			—	%
Other	100			0.6	%	184			(0.2	)%	65			0.1	%
Income tax expense	$	11,095		63.0	%	$	656		(0.7	)%	$	7,796		(4.9	)%

Supplemental cash flow information related to income taxes paid (net of refunds) are as follow:



	Successor		Predecessor
	Nine Months Ended December 31,		Three Months Ended March 31,		Year Ended December 31,
Dollars in thousands	2019		2019		2018
Income taxes paid (net of refunds)	$	8,161	$	1,421	$	7,373

Deferred tax assets and deferred tax liabilities consisted of:



	Successor			Predecessor
	Year Ended December 31,			Year Ended December 31,
Dollars in thousands	2019			2018
Federal net operating loss (“NOL”) carryforwards	$	39,636		$	109,002
State NOL carryforwards	5,165			13,168
Property, plant, and equipment	8,458			—
Excess interest	—			6,230
Other state deferred tax asset, net	1,149			1,201
Foreign tax credits	—			46,913
FIN 48	126			887
Foreign tax	45,026			40,190
Accruals not currently deductible for tax purposes	1,990			3,119
Deferred compensation	1,107			816
Other	377			1,297
Total deferred tax assets	103,034			222,823
Valuation allowance	(91,117		)	(186,267		)
Total deferred tax assets, net of valuation allowance	11,917			36,556
Property, plant, and equipment	(9,353		)	(28,440		)
Foreign taxes	(942		)	(510		)
Other state deferred tax liability, net	(2,236		)	(5,096		)
Intangibles	(1,972		)	(877		)
Total deferred tax liabilities	(14,503		)	(34,923		)
Net deferred tax asset (liability)	$	(2,586	)	$	1,633

As part of the process of preparing the consolidated financial statements, the Company is required to determine its provision for income taxes. This process involves measuring temporary and permanent differences resulting from differing treatment of items for tax and accounting purposes. These differences and the NOL and tax credit carryforwards result in deferred tax assets and liabilities. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of appropriate character in each taxing jurisdiction during the periods in which those temporary differences become deductible. Management considers the weight of available evidence, both positive and negative, including the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. To the extent the Company believes that it does not meet the test that recovery is more likely than not, it establishes a valuation allowance. To the extent that the Company establishes a valuation allowance or changes this allowance in a period, it adjusts the tax provision or tax benefit in the consolidated statement of operations. We use our judgment in determining provisions or benefits for income taxes, and any valuation allowance recorded against previously established deferred tax assets. We have measured the value of our deferred tax assets for the year ended December 31, 2019 based on the cumulative weight of positive and negative evidence that exists as of the date of the consolidated financial statements. Should the cumulative weight of all available positive and negative evidence change in the forecast period, the expectation of realization of deferred tax assets existing as of December 31, 2019 and prospectively may change.

The Company has evaluated the impact of the reorganization, described in Note 2 - Chapter 11 Emergence, including the change in control, resulting from its emergence from bankruptcy. The Company estimates that the Successor Company will fully absorb the cancellation of debt income (“COD”) income, approximately $191.8 million, realized by the Predecessor in connection with the reorganization with its net operating losses and capital losses. The remaining NOL carryforward is limited under Internal Revenue Code (“IRC”) section 382 due to the change in control annual limitation, estimated to be $6.9 million for U.S. tax purposes. The deferred tax assets associated with foreign tax credits, NOL and capital loss carryforwards (federal and state) expected to expire due to section 382 annual limitations was written off as of December 31, 2019, and the remaining federal NOL balance at December 31, 2019 is $170.6 million. It is more likely than not that the Successor will not realize future income tax benefits related to its remaining U.S. net deferred tax asset based on historical results and expected market conditions known on the date of

measurement, and the Company has therefore maintained a full valuation allowance against the remaining U.S. net deferred tax asset. This is periodically reassessed and could change in the future.

In our valuation allowance, there was an increase of $3.7 million for the nine months ended December 31, 2019, primarily related to incremental U.S. and certain foreign net operating losses and other deferred tax assets. There was a decrease of $98.9 million for the three months ended March 31, 2019, primarily related to the utilization of NOL carryforwards to absorb COD income and the write-off of NOLs due to the Section 382 annual limitation (which required a corresponding reduction to the valuation allowance). In our valuation allowance there was an increase of $28.4 million for the year ended December 31, 2018 primarily related to U.S. and certain foreign net operating losses and other deferred tax assets.

As of December 31, 2019, the Company has permanently reinvested accumulated undistributed earnings of foreign subsidiaries and, therefore, has not recorded a deferred tax liability related to subject earnings. Upon distribution of additional earnings in the form of dividends or otherwise, we could be subject to income taxes and withholding taxes. It is not practicable to determine precisely the amount of taxes that may be payable on the eventual remittance of these earnings due to many factors, including application of foreign tax credits, levels of accumulated earnings and profits at the time of remittance, and the sources of earnings remitted. The Company generally does not provide for taxes related to its undistributed earnings because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. Taxes that would be incurred if the undistributed earnings of other subsidiaries were distributed to their ultimate parent company would not be material.

Uncertain tax positions

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



Dollars in thousands
Balance at January 1, 2019 (Predecessor)	$	(5,728	)
Additions based on tax position taken during a prior period	(148		)
Additions based on tax positions taken during the current period	(158		)
Reductions related to a lapse of applicable statute of limitations	1,141
Balance at March 31, 2019 (Predecessor)	(4,893		)


Additions based on tax positions taken during a prior period	(252		)
Additions based on tax positions taken during the current period	(492		)
Reductions based on tax positions taken during a prior period	9
Reductions related to settlement of tax matters	310
Reductions related to a lapse of applicable statute of limitations	1,668
Balance at December 31, 2019 (Successor)	$	(3,650	)

In many cases, our uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2019:



Canada	2016-present
Kazakhstan	2008-present
Mexico	2015-present
Russia	2015-present
United States — Federal	2008-present
United Kingdom	2017-present

We apply the accounting guidance related to accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Our liability for unrecognized tax benefits is primarily related to foreign operations, (all of which, if recognized, would favorably impact our effective tax rate). Unrecognized tax benefits and accrued interest and penalties related to uncertain tax positions was as follows:



	Successor		Predecessor
Dollars in thousands	December 31, 2019		December 31, 2018
Liability for unrecognized tax benefits⁽¹⁾	$	3,650	$	5,728
Accrued interest related to uncertain tax positions	$	600	$	833
Penalties related to uncertain tax positions	$	791	$	1,273

(1)

Our effective tax rate would be favorably impacted if the liability for unrecognized tax benefits is recognized.