INCOME TAXES
Earnings before income taxes consisted of the following:
|
| | | | | | | | | | | |
| December 31, |
(DOLLARS IN THOUSANDS) | 2017 | | 2016 | | 2015 |
U.S. income before taxes | $ | (24 | ) | | $ | 9,078 |
| | $ | 29,792 |
|
Foreign income before taxes | 537,069 |
| | 514,639 |
| | 509,309 |
|
Total income before taxes | $ | 537,045 |
| | $ | 523,717 |
| | $ | 539,101 |
|
The income tax provision consisted of the following:
|
| | | | | | | | | | | |
| December 31, |
(DOLLARS IN THOUSANDS) | 2017 | | 2016 | | 2015 |
Current tax provision | | | | | |
Federal | $ | 68,886 |
| | $ | (2,920 | ) | | $ | 7,648 |
|
State and local | 137 |
| | 1,383 |
| | 199 |
|
Foreign | 113,468 |
| | 105,873 |
| | 98,964 |
|
| 182,491 |
| | 104,336 |
| | 106,811 |
|
Deferred tax provision | | | | | |
Federal | 74,446 |
| | 8,838 |
| | 14,379 |
|
State and local | (11,537 | ) | | (631 | ) | | 399 |
|
Foreign | (4,020 | ) | | 6,143 |
| | (1,735 | ) |
| 58,889 |
| | 14,350 |
| | 13,043 |
|
Total income taxes | $ | 241,380 |
| | $ | 118,686 |
| | $ | 119,854 |
|
Effective Tax Rate Reconciliation
Reconciliation between the U.S. federal statutory income tax rate to the actual effective tax rate was as follows: |
| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Difference in effective tax rate on foreign earnings and remittances | (11.8 | ) | | (11.5 | ) | | (10.7 | ) |
Tax benefit from supply chain optimization | (2.3 | ) | | (0.7 | ) | | — |
|
Unrecognized tax benefit, net of reversals | 2.3 |
| | 0.6 |
| | (0.8 | ) |
U.S. tax reform | 26.0 |
| | — |
| | — |
|
Spanish tax charges | — |
| | — |
| | (0.4 | ) |
State and local taxes | (2.1 | ) | | 0.1 |
| | 0.1 |
|
Other, net | (2.2 | ) | | (0.8 | ) | | (1.0 | ) |
Effective tax rate | 44.9 | % | | 22.7 | % | | 22.2 | % |
The effective tax rate reflects the impact of U.S. tax reform as discussed below, partially offset by the benefit from having significant operations outside the U.S. that are taxed at rates that are lower than the U.S. federal rate of 35% and the reversal of a valuation allowance on certain state deferred tax assets. Included in the 2015 effective tax rate was a $10.5 million benefit related to favorable tax rulings in Spain and another jurisdiction for which reserves were previously recorded. The 2017, 2016 and 2015 effective tax rates were also favorably impacted by the reversals of liabilities for uncertain tax positions of $9.5 million, $7.5 million and $2.8 million, respectively, principally due to statutory expiry and effective settlement.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revised the U.S. tax code effective January 1, 2018 by, among other things, lowering the corporate income tax rate from a top marginal rate of 35% to a flat 21% and establishing a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries. Beginning in 2018, the Act also requires a minimum tax on certain future earnings generated by foreign subsidiaries while providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.
The Tax Act impacted the Company's consolidated results of operations during the 2017 fourth quarter and is expected to continue to impact its consolidated results of operations in future periods. In particular, the transition to the new territorial tax system required the Company to record a one-time tax or “toll charge” which resulted in a provisional incremental tax expense of $100.6 million principally related to previously unremitted earnings on non-U.S. subsidiaries. The cash portion of the "toll charge" will be payable in installments over 8 years beginning in 2018. In addition, the reduction of the U.S. corporate tax rate resulted in a provisional net deferred tax expense of $38.6 million related to the remeasurement of net deferred tax assets as a result of the reduction in the corporate income tax rate. Given the significant complexity of the Tax Act, anticipated guidance from the U.S. Treasury about implementing the Tax Act and the potential for additional guidance from the SEC or the FASB, the Company’s provisional charge may be adjusted during 2018 and is expected to be finalized no later than the fourth quarter of 2018. Other provisions of the Tax Act that impact future tax years are still being assessed. Any material revisions in the Company's computations could adversely affect its cash flows and results of operations.
The U.S. consolidated group has historically generated taxable income after the inclusion of foreign dividends which has allowed the Company to realize its federal deferred tax assets. In the future foreign dividends will be subject to a 100% dividends received deduction under the Tax Act and will not serve as a source of taxable income. However, as of December 31, 2017 the U.S. consolidated group is in a cumulative income position and expects to continue to generate future taxable income to realize tax benefits for the reversal of temporary differences. The corresponding U.S. federal taxable income is sufficient to realize $60.3 million in deferred tax assets as of December 31, 2017. The Company’s assessment is provisional as the Company analyzes other provisions of the Tax Act that may impact its U.S. tax profile.
Further, as of December 31, 2017 the Company recorded a benefit for $9.2 million related to a valuation allowance release previously recorded against state deferred tax assets. This was due to improved performance of the North American business in 2016 and 2017 and cumulative income from a state perspective. The majority of the Company’s state deferred tax assets relate to net operating loss and tax credit carryforwards that have a specified carryforward period. Therefore, the Company has maintained a valuation allowance of $10.6 million on certain state tax attributes based on a state taxable income forecast. The main input into the forecast is the 2017 taxable income projection. Changes in the performance of the North American business, the Company’s transfer pricing policies and adjustments to the Company’s U.S. tax profile due to the Tax Act could impact the estimate.
Deferred Taxes
The deferred tax assets consisted of the following amounts:
|
| | | | | | | |
| December 31, |
(DOLLARS IN THOUSANDS) | 2017 | | 2016 |
Employee and retiree benefits | $ | 87,400 |
| | $ | 132,638 |
|
Credit and net operating loss carryforwards(a) | 218,933 |
| | 186,062 |
|
Trademarks and other | 11,469 |
| | 1,406 |
|
Amortizable R&D expenses | 1,502 |
| | 4,040 |
|
Gain (loss) on foreign currency translation | 10,885 |
| | (8,799 | ) |
Other, net | 11,692 |
| | 6,016 |
|
Gross deferred tax assets | 341,881 |
| | 321,363 |
|
| | | |
Property, plant and equipment, net | (11,745 | ) | | (17,000 | ) |
Trademarks and other | (73,979 | ) | | (55,899 | ) |
Gross deferred tax liabilities | (85,724 | ) | | (72,899 | ) |
Valuation allowance(a) | (207,483 | ) | | (152,752 | ) |
Total net deferred tax assets | $ | 48,674 |
| | $ | 95,712 |
|
_______________________
| |
(a) | During 2017 and 2016, the Company increased its deferred tax assets by $58.8 million and by $7.6 million, respectively, relating to an adjustment to the 2016 and 2015 foreign net operating loss carryforwards, respectively. The entire adjustments of $58.8 million and $7.6 million were offset by corresponding adjustments in valuation allowances. These adjustments are not considered material to the previously issued financial statements. |
Effective January 1, 2017, the Company prospectively applied new accounting guidance which required all excess tax benefits/deficiencies be recognized as income tax expense/benefit in the Consolidated Statement of Comprehensive Income. This change resulted in a $3.3 million benefit to income tax expense for the year ended December 31, 2017. For 2016, benefits of $5.3 million were recognized in equity.
Net operating loss carryforwards were $212.5 million and $149.1 million at December 31, 2017 and 2016, respectively. If unused, $6.6 million will expire between 2018 and 2037. The remainder, totaling $205.9 million, may be carried forward indefinitely. Tax credit carryforwards were $12.5 million and $42.8 million at December 31, 2017 and 2016, respectively. If unused, the $12.2 million will expire between 2018 and 2037. The remaining $0.3 million may be carried forward indefinitely.
Of the $225.0 million deferred tax asset for net operating loss carryforwards and credits at December 31, 2017, the Company considers it unlikely that a portion of the tax benefit will be realized. Accordingly, a valuation allowance of $198.1 million of net operating loss carryforwards and $8.6 million of tax credits has been established against these deferred tax assets, respectively. In addition, due to realizability concerns, the Company established a valuation allowance against certain other net deferred tax assets of $3.2 million.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| December 31, |
(DOLLARS IN THOUSANDS) | 2017 | | 2016 | | 2015 |
Balance of unrecognized tax benefits at beginning of year | $ | 26,428 |
| | $ | 24,198 |
| | $ | 23,055 |
|
Gross amount of increases in unrecognized tax benefits as a result of positions taken during a prior year | 1,169 |
| | 1,254 |
| | 18 |
|
Gross amount of decreases in unrecognized tax benefits as a result of positions taken during a prior year | (268 | ) | | (3 | ) | | (43 | ) |
Gross amount of increases in unrecognized tax benefits as a result of positions taken during the current year | 13,191 |
| | 8,131 |
| | 12,011 |
|
The amounts of decreases in unrecognized benefits relating to settlements with taxing authorities | — |
| | (6,075 | ) | | (10,221 | ) |
Reduction in unrecognized tax benefits due to the lapse of applicable statute of limitation | (2,358 | ) | | (1,077 | ) | | (622 | ) |
Balance of unrecognized tax benefits at end of year | $ | 38,162 |
| | $ | 26,428 |
| | $ | 24,198 |
|
At December 31, 2017, 2016 and 2015, there were $28.5 million, $19.1 million, and $24.2 million, respectively, of unrecognized tax benefits recorded to Other liabilities and $9.7 million and $7.3 million recorded to Other current liabilities for 2017 and 2016, respectively. If these unrecognized tax benefits were recognized, all the benefits and related interest would be recorded as a benefit to income tax expense.
For the year ended December 31, 2017, the Company increased its liabilities for interest and penalties by $3.0 million, net, and increased its liabilities for interest and penalties by $0.3 million, net, and reduced its liabilities by $1.4 million, net for the years ended 2016 and 2015, respectively. At December 31, 2017, 2016 and 2015, the Company had accrued $2.8 million, $0.8 million and $0.8 million, respectively, of interest and penalties classified as Other liabilities and $1.3 million and $0.3 million in 2017 and 2016, respectively, recorded to Other current liabilities. No such liabilities were accrued for the year ended December 31, 2015.
As of December 31, 2017, the Company’s aggregate provision for uncertain tax positions, including interest and penalties, was $42.3 million, associated with various tax positions asserted in foreign jurisdictions, none of which is individually material.
Other
Tax benefits credited to Shareholders’ equity totaled $0.1 million for the year ended December 31, 2017, and $0.2 million in each of the years ended December 31, 2016 and 2015 associated with stock option exercises and PRSU dividends.
The Tax Act requires a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax and will not be subject to additional U.S. tax when repatriated. Foreign withholding taxes, however, may still apply in certain jurisdictions. The Company has not provided for the foreign withholding taxes with respect to the $1.9 billion of accumulated unremitted earnings of non-U.S. subsidiaries, as management still has the intention and ability to permanently reinvest those earning, but its assessment is provisional under SAB 118. The unrecognized deferred tax liability on these unremitted earnings approximates $72.0 million.
The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review, of which the material items are discussed below. In addition, the Company has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, capital tax, sales and use and property taxes, which are discussed in Note 18.
The Company also has several other tax audits in process and has open tax years with various taxing jurisdictions that range primarily from 2007 to 2016. Based on currently available information, the Company does not believe the ultimate outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on its financial position.