Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2016

NOTE 17 – INCOME TAXES

The provision for income taxes consisted of the following:

	Year ended December 31,
	2016		2015		2014
	(thousands of dollars)
Current federal provision	$	1,691	$	4,062	$	8,756
Current state provision		18		285		296

Deferred federal provision (benefit)		8,645		5,367		(1,893	)
Deferred state provision (benefit)		150		50		(12	)

Income tax expense	$	10,504	$	9,764	$	7,147

The difference between the effective tax rate in income tax expense and the Federal statutory rate of 35% for the years ended December 31, 2016, 2015, and 2014, is as follows:

	2016			2015			2014
	(thousands of dollars)
Income taxes at U.S. statutory rate	$	10,476		$	9,927		$	7,952
State taxes, net of federal benefit		285			230			181
Permanent and other items		(257	)		(393	)		(915	)
Increase (decrease) in valuation allowance		-			-			(71	)
Total tax expense	$	10,504		$	9,764		$	7,147

The Texas margin tax rate was reduced in a legislative reduction effective January 1, 2015. Permanent differences are primarily due to the Federal manufacturer’s deduction, research and development credit, and stock options.

Tax effects of temporary differences that give rise to significant portions of federal and state deferred tax assets and deferred tax liabilities were as follows:

	December 31,
	2016			2015
	(thousands of dollars)
Deferred tax liabilities:
Plant, pipeline and equipment	$	(22,598	)	$	(14,996	)
Intangible assets		(786	)		(284	)
Other assets		(10	)		(14	)
Investment in AMAK		(3,109	)		( 2,522	)
Total deferred tax liabilities	$	(26,503	)	$	(17,816	)

Deferred tax assets:
Accounts receivable		322			283
Inventory		1,283			1,785
Mineral interests		376			376
Unrealized loss on swap agreements		20			62
Post-retirement benefits		423			330
Stock-based compensation		1,372			969
Intangible assets		-			-
Deferred revenue		-			-
Gross deferred tax assets		3,796			3,805
Valuation allowance		(376	)		(376	)
Total net deferred tax assets	$	3,420		$	3,429
Net deferred tax liabilities	$	(23,083	)	$	(14,387	)

The current and non-current classifications of the deferred tax balances are as follows:

	2016			2015
	(thousands of dollars)
Current:
Deferred tax asset	$	1,615		$	2,116
Non-current:
Deferred tax assets		6,124			4,637
Deferred tax liability		(30,446	)		(20,764	)
Valuation allowance		(376	)		(376	)
Non-current deferred tax liability, net		(24,698	)		(16,503	)

Total deferred liabilities, net	$	(23,083	)	$	(14,387	)

We have provided a valuation allowance in 2016 and 2015 against certain deferred tax assets because of uncertainties regarding their realization.

We had no Saudi Arabian income tax expense or liability in 2016, 2015, or 2014.

We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. We received notification from the Internal Revenue Service (“IRS”) in November 2016 on the selection of the December 31, 2014, tax return for audit. The audit is ongoing, and we do not expect any adjustment to the return. If any issues addressed in the audit are resolved in a manner not consistent with our expectations, provisions will be adjusted in the period the resolution occurs. Tax returns for various jurisdictions remain open for examination for the years 2013 through 2016.

During 2016 we performed analysis, documentation, and interview of relevant personnel relative to base period and qualifying expenditures with regard to potential research and development (“R&D”) credits for the years ending December 31, 2014 and 2015. We expect to file amended returns for the respective years generating net benefits of federal and state taxes of approximately $524,000, which have been recorded in this period decreasing the overall tax rate. The calculation is inherently complex and many factors influence the ultimate credit.