INCOME TAXES
The components of income before income taxes from operations are as follows:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
United States | | $ | (145.0 | ) | | $ | 28.9 |
| | $ | 26.8 |
|
Foreign | | (1,458.5 | ) | | 412.0 |
| | 302.9 |
|
| | $ | (1,603.5 | ) | | $ | 440.9 |
| | $ | 329.7 |
|
The components of the provision for income taxes from operations are as follows: |
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Current: | | | | | | |
U.S. federal | | $ | 1.7 |
| | $ | 2.3 |
| | $ | (3.0 | ) |
U.S. state | | 5.9 |
| | 5.6 |
| | 1.7 |
|
Foreign | | 83.0 |
| | 111.7 |
| | 50.9 |
|
Total | | $ | 90.6 |
| | $ | 119.6 |
| | $ | 49.6 |
|
| | | | | | |
Deferred: | | |
| | |
| | |
|
U.S. federal | | $ | 2.8 |
| | $ | 27.6 |
| | $ | 44.3 |
|
U.S. state | | 11.4 |
| | 1.3 |
| | 0.3 |
|
Foreign | | (158.0 | ) | | (139.0 | ) | | (17.2 | ) |
Total | | $ | (143.8 | ) | | $ | (110.1 | ) | | $ | 27.4 |
|
| | | | | | |
| | $ | (53.2 | ) | | $ | 9.5 |
| | $ | 77.0 |
|
The reconciliation of the U.S. federal statutory tax rate to the effective rate for the years ended is as follows:
|
| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Statutory U. S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Effect of: | |
| | |
| | |
|
State income taxes, net of federal benefit | (0.1 | ) | | 1.1 |
| | 0.4 |
|
Federal benefit of R&D and foreign tax credits | 2.8 |
| | (12.6 | ) | | (11.2 | ) |
Tax effect of international operations | 3.6 |
| | (3.9 | ) | | (6.4 | ) |
Net effect of tax audit activity | (0.6 | ) | | (0.6 | ) | | (0.4 | ) |
Tax effect of enacted statutory rate changes on Non-US Jurisdictions | (0.2 | ) | | (0.2 | ) | | 0.2 |
|
Federal tax on unremitted earnings of certain foreign subsidiaries | — |
| | 0.1 |
| | 2.5 |
|
Valuation allowance adjustments | (0.7 | ) | | (16.3 | ) | | 0.2 |
|
U.S. tax reform - net impacts | (1.2 | ) | | — |
| | — |
|
Tax effect of Impairment of Goodwill and Intangibles | (37.4 | ) | | — |
| | — |
|
Other | 2.1 |
| | (0.4 | ) | | 3.1 |
|
| | | | | |
Effective income tax rate on operations | 3.3 | % | | 2.2 | % | | 23.4 | % |
The tax effect of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
(in millions) | | Deferred Tax Asset | | Deferred Tax Liability | | Deferred Tax Asset | | Deferred Tax Liability |
| | | | | | | | |
Commission and bonus accrual | | $ | 5.4 |
| | $ | — |
| | $ | 8.4 |
| | $ | — |
|
Employee benefit accruals | | 62.7 |
| | — |
| | 71.5 |
| | — |
|
Inventory | | 11.6 |
| | — |
| | 9.0 |
| | — |
|
Identifiable intangible assets | | — |
| | 880.1 |
| | — |
| | 1,011.8 |
|
Insurance premium accruals | | 3.7 |
| | — |
| | 5.5 |
| | — |
|
Miscellaneous accruals | | 17.4 |
| | — |
| | 16.0 |
| | — |
|
Other | | 10.7 |
| | — |
| | 19.6 |
| | — |
|
Unrealized losses included in AOCI | | 46.3 |
| | — |
| | 17.5 |
| | — |
|
Property, plant and equipment | | — |
| | 55.0 |
| | — |
| | 54.8 |
|
Product warranty accruals | | 1.1 |
| | — |
| | 1.6 |
| | — |
|
Foreign tax credit and R&D carryforward | | 69.0 |
| | — |
| | 137.9 |
| | — |
|
Restructuring and other cost accruals | | 6.2 |
| | — |
| | — |
| | 8.1 |
|
Sales and marketing accrual | | 5.9 |
| | — |
| | 8.0 |
| | — |
|
Taxes on unremitted earnings of foreign subsidiaries | | — |
| | 2.7 |
| | — |
| | 2.1 |
|
Tax loss carryforwards and other tax attributes | | 3,038.4 |
| | — |
| | 274.5 |
| | — |
|
Valuation allowance | | (3,014.8 | ) | | — |
| | (182.7 | ) | | — |
|
| | $ | 263.6 |
| | $ | 937.8 |
| | $ | 386.8 |
| | $ | 1,076.8 |
|
Deferred tax assets and liabilities are included in the following Consolidated Balance Sheet line items:
|
| | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 |
| | | | |
Assets | | | | |
Other noncurrent assets, net | | 43.8 |
| | 61.7 |
|
Liabilities | | | | |
Deferred income taxes | | 718.0 |
| | 751.7 |
|
The Company has $69.0 million of foreign tax credit carryforwards at December 31, 2017, of which $69.0 million will expire in 2025.
The Company has tax loss carryforwards related to certain foreign and domestic subsidiaries of approximately $12.0 billion at December 31, 2017, of which $11.8 billion expires at various times through 2037 and $171.6 million may be carried forward indefinitely. This is a significant increase from the Company’s accumulated losses at December 31, 2016. The increase of these losses primarily relate to the impact of the US GAAP impairment on various Denstsply Sirona’s holding companies recorded in 2017. These losses are subject to recapture for statutory purposes should the overall investment value of these company’s increase in the future. Included in deferred income tax assets at December 31, 2017 are tax benefits totaling $3.0 billion, before valuation allowances, for the tax loss carryforwards.
The Company has recorded $3.0 billion of valuation allowance to offset the tax benefit of net operating losses and $10.8 million of valuation allowance for other deferred tax assets. The Company has recorded these valuation allowances due to the uncertainty that these assets can be realized in the future.
As of December 31, 2017, a deferred tax asset of $24.2 million, related to a non-US tax attribute, has been recognized. This benefit is a result of an agreement that has been filed to combine the profits and losses of certain entities, effective January 1, 2019.
The Company has provided $2.7 million of withholding taxes on certain undistributed earnings of its foreign subsidiaries that the Company anticipates will be repatriated.
Tax Contingencies
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
The total amount of gross unrecognized tax benefits at December 31, 2017 is approximately $24.7 million, of this total, approximately $23.5 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date of the Company’s consolidated financial statements. Final settlement and resolution of outstanding tax matters in various jurisdictions during the next twelve months are not expected to be significant.
The total amount of accrued interest and penalties were $3.5 million and $2.8 million at December 31, 2017 and 2016, respectively. The Company has consistently classified interest and penalties recognized in its consolidated financial statements as income taxes based on the accounting policy election of the Company. During the year ended December 31, 2017, the Company recognized income tax expense of $0.5 million , related to interest and penalties. During the years ended December 31, 2016 and 2015, the Company recognized income tax benefit of $3.4 million and $2.0 million respectively, related to interest and penalties.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The significant jurisdictions include the U.S., Germany, Sweden and Switzerland. The Company has substantially concluded all U.S. federal income tax matters for years through 2011. The Company is currently under audit for the tax years 2012 and 2013. The tax years 2014 through 2016 are subject to future potential tax audit adjustments. The Company has concluded audits in Germany through the tax year 2011 and is currently under audit for the years 2012 through 2014. The taxable years that remain open for Sweden are 2012 through 2016. The taxable years that remain open for Switzerland are 2007 through 2016.
The Company had the following activity recorded for unrecognized tax benefits:
|
| | | | | | | | | | | | |
| | December 31, |
(in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Unrecognized tax benefits at beginning of period | | $ | 10.8 |
| | $ | 12.1 |
| | $ | 21.9 |
|
Gross change for prior period positions | | 8.6 |
| | (2.0 | ) | | (7.6 | ) |
Gross change for current year positions | | 0.3 |
| | 2.2 |
| | 0.2 |
|
Decrease due to settlements and payments | | — |
| | (1.3 | ) | | (0.5 | ) |
Decrease due to statute expirations | | — |
| | — |
| | (0.2 | ) |
Increase due to effect of foreign currency translation | | 1.3 |
| | — |
| | — |
|
Decrease due to effect from foreign currency translation | | — |
| | (0.2 | ) | | (1.7 | ) |
| | | | | | |
Unrecognized tax benefits at end of period | | $ | 21.0 |
| | $ | 10.8 |
| | $ | 12.1 |
|
U.S. Federal Legislative Changes
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act" or "U.S. tax reform") was enacted. U.S. tax reform, among other things, reduces the U.S. federal income tax rate to 21% in 2018 from 35%, institutes a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and creates a new U.S. minimum tax on earnings of foreign subsidiaries. In addition, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for enactment effects of SAB 118 provides a measurement period of up to one year from the Act’s enactment date for companies to complete their accounting under Accounting Standards Codification No. 740 “Income Taxes”, (“ASC 740”). In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act. The Company’s accounting for certain income tax effects is incomplete, but the Company has determined reasonable estimates for those effects. Accordingly, the Company has recognized a net provisional income tax charge of $20.1 million, which is included as a component of the income tax provision on the consolidated statement of income.
Based on information available, the Company estimated the cumulative undistributed foreign earnings to be approximately $1.1 billion and recorded a provisional estimate of $62.2 million of income tax expense related to the one-time deemed repatriation toll charge. There is still uncertainty as to the application of the Act, in particular as it relates to state income taxes. Further, the Company has not yet completed the analysis of the components of the computation, including the amount of the foreign earnings subject to U.S. income tax, and the portion of the foreign earnings held in cash or other specified assets. As of December 31, 2017, primarily due to the utilization of foreign tax credit carryforwards and certain other tax attributes the estimated cash liability for the deemed repatriation of foreign earnings is approximately $1.0 million. However, as the Company completes its analysis an additional liability could be recorded and the Company would elect to make installment payments as allowed under the Act.
As a result of the Act, the Company can repatriate the cumulative undistributed foreign earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation toll charge. The Company is still evaluating whether to change its indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under SAB 118.
The remaining provisional amount is a benefit of $42.1 million relating to the remeasurement of the Company’s U.S. net deferred tax liabilities. For the Global Intangible Low Tax Income (“GILTI”) provision of the Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred.
In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after January 19, 2018, by the U.S. Department of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional amounts, as well as any element of the 2017 Tax Act that a provisional estimate could not be made, and such changes could be material.