Provision for Income Taxes The components of income from continuing operations before income taxes and the related provision for income taxes for 2017, 2016, and 2015 are as follows:
|
| | | | | | | | | | | |
(In millions) | 2017 | | 2016 | | 2015 |
Income from continuing operations before income taxes: | | | | | |
Domestic | $ | 28.3 |
| | $ | 72.7 |
| | $ | 97.1 |
|
Foreign | 182.6 |
| | 93.3 |
| | 96.6 |
|
Total | $ | 210.9 |
| | $ | 166.0 |
| | $ | 193.7 |
|
Benefit from (provision for) income taxes: | | | | | |
Federal—deferred | $ | (144.6 | ) | | $ | (11.8 | ) | | $ | (35.4 | ) |
State and local—current | 0.2 |
| | (0.7 | ) | | 4.1 |
|
State and local—deferred | (1.7 | ) | | (17.7 | ) | | (6.4 | ) |
Foreign—current | (50.8 | ) | | (36.6 | ) | | (23.5 | ) |
Foreign—deferred | (3.6 | ) | | 7.8 |
| | (8.6 | ) |
Total | $ | (200.5 | ) | | $ | (59.0 | ) | | $ | (69.8 | ) |
The difference between the benefit from (provision for) income taxes on continuing operations at the U.S. federal income tax rate of 35% and Grace's overall income tax provision is summarized as follows:
|
| | | | | | | | | | | |
(In millions) | 2017 | | 2016 | | 2015 |
Tax provision at U.S. federal income tax rate | $ | (73.8 | ) | | $ | (58.1 | ) | | $ | (67.8 | ) |
Change in benefit (provision) resulting from: | | | | | |
Provisional charge related to U.S. tax reform | (143.0 | ) | | — |
| | — |
|
Effect of tax rates in foreign jurisdictions | 13.3 |
| | 6.8 |
| | 3.0 |
|
Research and development credit | 5.1 |
| | — |
| | — |
|
Stock option exercises | 2.8 |
| | 6.7 |
| | — |
|
Nontaxable income/non-deductible expenses | (2.6 | ) | | (2.5 | ) | | (0.9 | ) |
State and local income taxes, net | (1.8 | ) | | (4.7 | ) | | (2.9 | ) |
U.S. tax on foreign earnings | (1.2 | ) | | (0.9 | ) | | (1.7 | ) |
Decrease (increase) in valuation allowance | (0.3 | ) | | (2.5 | ) | | 1.6 |
|
Other | 1.0 |
| | (3.8 | ) | | (1.1 | ) |
Benefit from (provision for) income taxes | $ | (200.5 | ) | | $ | (59.0 | ) | | $ | (69.8 | ) |
Grace has estimated its provision for income taxes in accordance with the Tax Cuts and Jobs Act of 2017 (the "Act") and guidance available as of the date of this filing and as a result has recorded a provisional income tax expense of $143.0 million in the 2017 fourth quarter, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $120.1 million. The provisional amounts related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings and the state and foreign taxes on the unremitted earnings were $37.4 million and $4.9 million, respectively. Grace is no longer indefinitely reinvested with respect to its historical unremitted earnings of its foreign subsidiaries. Additionally, Grace provisionally released valuation allowances on a portion of its state net operating losses and federal tax credits of $2.0 million and $17.4 million, respectively.
The Act significantly changes how the U.S. taxes corporations. The Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from Grace's interpretation as of the date of this filing. As Grace completes its analysis of the Act, collects and prepares necessary data including finalizing total post-1986 earnings and profits of its foreign subsidiaries, and interprets any additional guidance, Grace may make adjustments to the provisional amounts that have been recorded that may materially impact its provision for income taxes in the period in which the adjustments are made. Grace expects to complete its analysis of the provisional items during the second half of 2018.
Deferred Tax Assets and Liabilities As of December 31, 2017 and 2016, the tax attributes giving rise to deferred tax assets and liabilities consisted of the following items.
|
| | | | | | | |
| December 31, |
(In millions) | 2017 | | 2016 |
Deferred tax assets: | | | |
Federal tax credit carryforwards | $ | 269.6 |
| | $ | 183.2 |
|
Pension liabilities | 104.8 |
| | 120.1 |
|
U.S. net operating loss carryforwards | 89.5 |
| | 293.6 |
|
State net operating loss carryforwards | 58.2 |
| | 50.9 |
|
Research and development | 22.8 |
| | 35.4 |
|
Prepaid royalties | 21.4 |
| | 20.8 |
|
Liability for environmental remediation | 16.4 |
| | 24.6 |
|
Reserves and allowances | 15.2 |
| | 31.1 |
|
Foreign net operating loss carryforwards | 6.6 |
| | 5.9 |
|
Liability for asbestos-related litigation | — |
| | 11.1 |
|
Other | 14.5 |
| | 29.0 |
|
Total deferred tax assets | $ | 619.0 |
| | $ | 805.7 |
|
Deferred tax liabilities: | | | |
Properties and equipment | $ | (32.0 | ) | | $ | (38.5 | ) |
Intangible assets | (15.1 | ) | | (18.4 | ) |
Pension assets | — |
| | (6.1 | ) |
Other | (11.3 | ) | | (4.7 | ) |
Total deferred tax liabilities | $ | (58.4 | ) | | $ | (67.7 | ) |
Valuation allowance: | | | |
Federal tax credit carryforwards | $ | (0.3 | ) | | $ | (17.7 | ) |
State net operating loss carryforwards | (9.2 | ) | | (11.2 | ) |
Foreign net operating loss carryforwards | (2.8 | ) | | (2.5 | ) |
Total valuation allowance | (12.3 | ) | | (31.4 | ) |
Net deferred tax assets | $ | 548.3 |
| | $ | 706.6 |
|
Grace's deferred tax assets decreased by $158.3 million from December 31, 2016, to December 31, 2017, largely as a result of the Act.
Grace reduces the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. See Note 1. The valuation allowance decreased by $19.1 million from December 31, 2016, to December 31, 2017, due to a decrease of $19.4 million related to the impact of the Act offset by an increase of $0.3 million for foreign deferred tax assets.
U.S. Federal and State Net Operating Losses and Credit Carryforwards Grace has $269.6 million in federal tax credit carryforwards. In order to fully utilize the credits before they expire from 2021 to 2027 Grace will need to generate domestic and foreign source income of approximately $1.2 billion and approximately $200 million, respectively.
Grace has U.S. federal and state net operating losses. The deferred tax asset related to federal NOLs is $89.5 million. In order to fully utilize the NOLs before they expire in 2035, Grace will need to generate approximately $440 million in U.S. taxable income. The deferred tax asset, net of federal benefit, before valuation allowance related to state NOLs is $58.2 million. In order to fully utilize the state NOLs before they expire (from 2018 to 2035), Grace would need to generate approximately $1.5 billion in state taxable income.
Unrecognized Tax Benefits The balance of unrecognized tax benefits at December 31, 2017, was $17.7 million compared with $18.7 million at December 31, 2016. A rollforward of the unrecognized tax benefits for the three years ended December 31, 2017, follows.
|
| | | |
(In millions) | Unrecognized Tax Benefits |
Balance, December 31, 2014 | $ | 26.5 |
|
Additions for current year tax positions | 0.1 |
|
Additions for prior year tax positions | 0.8 |
|
Reductions for prior year tax positions and reclassifications | (1.6 | ) |
Reductions for expirations of statute of limitations | (1.5 | ) |
Settlements | (1.2 | ) |
Balance, December 31, 2015 | 23.1 |
|
Additions for current year tax positions | 6.8 |
|
Additions for prior year tax positions | 0.2 |
|
Reductions for prior year tax positions and reclassifications | (0.2 | ) |
Settlements | (3.3 | ) |
Transferred to GCP upon Separation | (7.9 | ) |
Balance, December 31, 2016 | 18.7 |
|
Additions for current year tax positions | 0.8 |
|
Additions for prior year tax positions | 0.7 |
|
Reductions for prior year tax positions and reclassifications | (2.5 | ) |
Balance, December 31, 2017 | $ | 17.7 |
|
The entire balance of unrecognized tax benefits as of December 31, 2017, of $17.7 million, if recognized, would reduce the effective tax rate. The balance of unrecognized tax benefits as of December 31, 2017, includes $17.7 million for tax positions with an indirect tax benefit that results in a corresponding deferred tax asset as of December 31, 2017. Grace accrues potential interest and any associated penalties related to unrecognized tax benefits in "benefit from (provision for) income taxes" in the Consolidated Statements of Operations. There were no interest and penalties accrued on unrecognized tax benefits as of December 31, 2017 and 2016.
Grace files U.S. federal income tax returns as well as income tax returns in various state and foreign jurisdictions. Grace's unrecognized tax benefits are related to income tax returns for tax years that remain subject to examination by the relevant taxing authorities. The following table summarizes these open tax years by major jurisdiction:
|
| | | | |
Tax Jurisdiction(1) | | Examination in Progress | | Examination Not Initiated |
United States—Federal | | 2007, 2009 | | 2010-2016 |
United States—States | | 2010-2014 | | 2015-2016 |
Germany | | 2014-2016 | | None |
Sweden | | None | | 2013-2016 |
___________________________________________________________________________________________________________________
| |
(1) | Includes federal, state, provincial or local jurisdictions, as applicable. |
Grace notes that there are attributes generated in prior years that are otherwise closed by statute and were carried forward into years that are open to examination. Those attributes may still be subject to adjustment to the extent utilized in open years.
As a multinational taxpayer, Grace is under continual audit by various tax authorities. Grace believes that the amount of the liability for unrecognized tax benefits will be unchanged in the next 12 months.