|NEXEO SOLUTIONS, INC. filed this Form 10-Q on 05/10/2018|
Income tax expense for the three months ended March 31, 2018 was $4.6 million on pre-tax income of $5.0 million compared to the income tax expense of $0.8 million on pre-tax loss of $0.3 million for the three months ended March 31, 2017. The current and prior period tax expense was largely attributable to income in profitable foreign jurisdictions.
Income tax expense for the six months ended March 31, 2018 was $5.9 million on pre-tax income of $32.8 million compared to the income tax benefit of $1.9 million on pre-tax loss of $11.3 million for the six months ended March 31, 2017. The current period tax expense was largely attributable to current year income. The expense generated in the U.S. was offset by a current period benefit on deferred tax liabilities as a result of the impact of the Tax Act. The prior period tax benefit was largely attributed to U.S. operations related to deferred taxes driven by the net loss incurred during the period.
At March 31, 2018 and September 30, 2017, the valuation allowance was $2.6 million and $3.1 million, respectively, primarily related to operations in Asia. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all 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 during the periods in which those temporary differences become deductible. Based upon management’s expectations at March 31, 2018, management believes it is more likely than not that it will realize the majority of its deferred tax assets.
Uncertain Tax Positions
In connection with the Ultra Chem Acquisition, the Company recorded income tax-related uncertainties totaling $1.4 million, inclusive of interest and penalties. Additionally, the Company also recognized indemnification assets related to certain of these income tax-related uncertainties. The indemnification assets were included in Other current assets and Other non-current assets in the condensed consolidated balance sheets, representing the reimbursement the Company reasonably expected to receive from funds held in escrow pursuant to the purchase agreement. See Note 3.
The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of Income tax expense in the condensed consolidated statements of operations. There was an insignificant amount of interest and penalties recognized during all periods. The Company had $1.5 million and $1.8 million related to uncertain tax positions, including related accrued interest and penalties as of March 31, 2018 and September 30, 2017, respectively. Between the time of the initial recording of the uncertain tax provisions associated with the Ultra Chem Acquisition and the three months ended March 31, 2018, the Company reduced the reserve by approximately $0.4 million due to the lapse of the applicable statute of limitations.
16. Segment and Geographic Data
The Company operates through three lines of business, or operating segments: Chemicals, Plastics and Environmental Services, which market to different sets of customers operating in an array of industries, with various end markets and customer segments within those industries. For segment presentation and disclosure purposes, the Chemicals and Plastics lines of business constitute separate reportable segments, while the Environmental Services line of business, which does not meet the materiality threshold for separate disclosure, is included in an "Other" segment.
Each line of business represents unique products and suppliers, and each line of business focuses on specific end markets within its industry based on a variety of factors, including supplier or customer opportunities, expected growth and prevailing economic conditions. Across the Chemicals and Plastics lines of business there are numerous industry segments, end markets and sub markets that the Company may choose to focus on. These end markets may change from year to year depending on the underlying market economics, supplier focus, expected profitability and the Company’s strategic agenda.