INCOME TAXES

9 Months Ended

Sep. 30, 2022

INCOME TAXES [Abstract]

INCOME TAXES

Note 3: Income Taxes

Our estimated annual effective tax rate (EAETR) is based on full-year expectations of pretax earnings, statutory tax rates and permanent differences between book and tax accounting such as percentage depletion. For interim financial reporting, we calculate our quarterly income tax provision in accordance with the EAETR. Each quarter, we update our EAETR based on our revised full-year expectation of pretax earnings and calculate the income tax provision so that the year-to-date income tax provision reflects the EAETR. Significant judgment is required in determining our EAETR.

In the third quarter of 2022, we recorded income tax expense from continuing operations of $82.3 million compared to $51.7 million in the third quarter of 2021. The increase in tax expense was primarily related to an increase in pretax earnings, the recording of a valuation allowance during the quarter against the net operating losses of one of our Mexican subsidiaries (discussed further below) and the impairment of non-tax deductible goodwill (see Note 15).

For the first nine months of 2022, we recorded income tax expense from continuing operations of $164.6 million compared to $169.7 million for the first nine months of 2021. The decrease in tax expense was primarily related to lower pretax earnings partially offset by the impairment of non-tax deductible goodwill.

In August 2022, the Inflation Reduction Act (IRA) was signed into law. The IRA introduces a corporate alternative minimum tax (CAMT) of 15% applicable to corporations with adjusted financial statement income in excess of $1 billion, as well as certain climate-related tax provisions. The CAMT provision is effective for tax years beginning on or after January 1, 2023. We do not anticipate that the provisions of the IRA will be material to our income taxes.

We recognize deferred tax assets and liabilities (which reflect our best assessment of the future taxes we will pay) based on the differences between the book basis and tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns while deferred tax liabilities represent items that will result in additional tax in future tax returns. A summary of our deferred tax assets and liabilities is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2021.

Each quarter, we analyze the likelihood that our deferred tax assets will be realized. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized.

As discussed in Note 8, in May 2022, Mexican government officials unexpectedly and arbitrarily shut down our Calica operations in Mexico. The impact of the shutdown, combined with recent increased costs (primarily due to underwater mining) has resulted in substantial losses. We project that Calica will generate a net operating loss (NOL) deferred tax asset of $13.6 million for 2022. Based on the weight of all available positive and negative evidence, we have concluded that it is more likely than not that Calica will be unable to realize the NOL deferred tax asset during the carryforward period. Therefore, in the third quarter of 2022, we recorded a valuation allowance against the current year NOL deferred tax asset as a component of the EAETR. Should the Mexican government lift the shutdown and/or we are successful in our NAFTA claim, we will reevaluate the need for a valuation allowance against the NOL deferred tax asset.

In February 2021, the Alabama Business Competitiveness Act (ABC Act) was signed into law. The ABC Act contained a provision requiring most taxpayers to change from a three-factor, double-weighted sales method to a single-sales factor method to apportion income to Alabama. This provision had the effect of significantly reducing our apportionment of income to Alabama, thereby further inhibiting our ability to utilize our Alabama NOL carryforward. As a result, we recorded a charge in the first quarter of 2021 to increase the valuation allowance by $13.7 million. No other material tax impacts resulted from the enactment of the ABC Act.

We project Alabama NOL carryforward deferred tax assets at December 31, 2022 of $61.6 million against which we have a valuation allowance of $42.9 million (after considering the ABC Act). Almost all of the Alabama NOL carryforward would expire between 2023 and 2029 if not utilized.

We recognize a tax benefit associated with a tax position when, in our judgment, it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more likely than not recognition threshold, we measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. A liability is established for the unrecognized portion of any tax benefit. Our liability for unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is appropriate.