Income Taxes
The provision for income taxes consists of the following components (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 196,825 |
| | $ | 159,547 |
| | $ | 138,432 |
|
State | 27,149 |
| | 27,120 |
| | 25,952 |
|
Foreign | 58,123 |
| | 45,545 |
| | 32,931 |
|
| $ | 282,097 |
| | $ | 232,212 |
| | $ | 197,315 |
|
Deferred: | | | | | |
Federal | $ | (37,486 | ) | | $ | 1,169 |
| | $ | 22,233 |
|
State | 4,044 |
| | 2,131 |
| | 1,212 |
|
Foreign | (13,095 | ) | | (14,946 | ) | | (1,057 | ) |
| $ | (46,537 | ) | | $ | (11,646 | ) | | $ | 22,388 |
|
Provision for income taxes | $ | 235,560 |
| | $ | 220,566 |
| | $ | 219,703 |
|
Income taxes have been based on the following components of income from continuing operations before provision for income taxes (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 575,148 |
| | $ | 513,844 |
| | $ | 478,819 |
|
Foreign | 191,479 |
| | 163,437 |
| | 170,211 |
|
| $ | 766,627 |
| | $ | 677,281 |
| | $ | 649,030 |
|
The U.S. federal statutory rate is reconciled to the effective tax rate as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
U.S. federal tax reform - federal deferred tax rate change | (9.5 | )% | | — | % | | — | % |
U.S. federal tax reform - transition tax on foreign earnings | 6.6 | % | | — | % | | — | % |
State income taxes, net of state credits and federal tax impact | 2.8 | % | | 2.7 | % | | 2.9 | % |
Impact of rates on international operations | (3.2 | )% | | (3.2 | )% | | (4.1 | )% |
Notional interest deductions | (0.9 | )% | | (2.5 | )% | | — | % |
Excess tax benefits from stock-based compensation (1) | (1.0 | )% | | (1.6 | )% | | — | % |
Non-deductible expenses | 1.1 | % | | 1.3 | % | | 0.8 | % |
Other, net | (0.2 | )% | | 0.9 | % | | (0.7 | )% |
Effective tax rate | 30.7 | % | | 32.6 | % | | 33.9 | % |
(1) Represents an $8 million and $11 million discrete item in 2017 and 2016, respectively, for excess tax benefits from stock-based payments.
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act introduced broad and complex changes to U.S. income tax laws that impact us, most notably a reduction of the U.S. statutory corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Additionally, beginning in 2018 the Tax Act imposes a regime of taxation on foreign subsidiary earnings (Global Intangible Low-Taxed Income, “GILTI”) and on certain related party payments (Base Erosion Anti-abuse Tax, “BEAT”). Other important changes potentially material to the Company’s operations include the full expensing of certain assets placed into service after September 27, 2017, the repeal of the domestic manufacturing deduction, and additional limitations on the deductibility of executive compensation. Finally, as part of the transition of U.S. international taxation from a worldwide tax system to a territorial tax system, the Tax Act imposes a one-time transition tax on the deemed repatriation of historical earnings of foreign subsidiaries as of December 31, 2017.
On December 22, 2017 the U.S. Securities and Exchange Commission Staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting required under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
Accordingly, we recorded the following provisional estimates of the tax accounting impact of the Tax Act in the consolidated financial statements as of and for the year ended December 31, 2017:
Transition Tax on Foreign Earnings: We recognized a provisional income tax expense of $51 million for the year ended December 31, 2017 related to the one-time transition tax on foreign earnings. The charge is provisional due to the complexity of calculating and supporting such U.S. tax attributes as accumulated foreign earnings and profits, foreign taxes paid, and other components involved in foreign tax credit calculations for a substantial number of prior tax years. Potential adjustments to the provisional amount could be material due to the issuance of regulatory guidance or further legislative action regarding the transition tax, further changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to the estimates we have utilized to calculate the provisional estimate.
Revaluation of Deferred Tax Assets and Liabilities: As a result of the Tax Act reduction in the U.S. federal statutory rate from 35% to 21%, we recorded a provisional decrease to net deferred tax liabilities and a corresponding provisional U.S. federal deferred tax benefit of $73 million. We anticipate that the completion of our 2017 tax returns, as well as anticipated further regulatory guidance and interpretations with respect to the Tax Act, will cause us to further adjust the provisional amounts recorded as of December 31, 2017.
Our accounting for the following elements of the Tax Act is incomplete, and we have not yet been able to make reasonable estimates of the effects of the items described below. Therefore, no provisional amounts have been recorded.
GILTI: Due to the complexity of the new GILTI tax rules, and the absence to date of comprehensive regulatory guidance, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740 to the GILTI regime. We are permitted to make an accounting policy election to treat taxes due on future inclusions in U.S. taxable income related to GILTI either as a current-period expense when incurred or to factor such amounts into our measurement of deferred taxes. We have not yet completed our analysis of the GILTI tax rules and we are not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the ASC 740 treatment of the GILTI tax. Therefore, we have not recorded any amounts related to potential GILTI tax in our financial statements and have not yet made a policy decision regarding whether to record deferred taxes on GILTI.
Indefinite Reinvestment Assertion: Undistributed earnings of our foreign subsidiaries amounted to approximately $687 million at December 31, 2017. In general, it has been our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and that position has not changed following the enactment of the Tax Act and the related imposition of the transition tax. Beginning in 2018, the Tax Act generally provides a 100% participation exemption from further U.S. taxation of dividends received from 10-percent or more owned foreign corporations held by U.S. corporate shareholders. Although future dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, either as a result of the new participation exemption, or due to the previous taxation of such earnings under the transition tax, companies must still apply the guidance of ASC 740 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. While we have now accrued the provisional transition tax on the deemed repatriated earnings that are indefinitely reinvested, it remains impracticable to determine whether there is any further tax liability under the Tax Act for the remaining outside basis differences or to evaluate how the Tax Act will affect our existing accounting position to indefinitely reinvest unremitted foreign earnings. Therefore, we have not included a provisional amount for this item in our financial statements for the year ended December 31, 2017.
We will complete our analysis of the tax accounting impact of the Tax Act within the one-year measurement period. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period in which such adjustments are determined.
The significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred Tax Assets: | | | |
Accrued expenses and reserves | $ | 40,317 |
| | $ | 62,059 |
|
Qualified and nonqualified retirement plans | 19,074 |
| | 36,626 |
|
Inventory | 17,886 |
| | 35,565 |
|
Accounts receivable | 16,036 |
| | 19,046 |
|
Interest deduction carryforwards | 13,845 |
| | 9,806 |
|
Stock-based compensation | 4,963 |
| | 9,687 |
|
Net operating loss carryforwards | 11,734 |
| | 7,858 |
|
Other | 8,971 |
| | 7,699 |
|
| 132,826 |
| | 188,346 |
|
Less: valuation allowance | (21,527 | ) | | (11,252 | ) |
Total deferred tax assets | $ | 111,299 |
| | $ | 177,094 |
|
Deferred Tax Liabilities: | | | |
Goodwill and other intangible assets | $ | 192,688 |
| | $ | 222,476 |
|
Property, plant and equipment | 67,467 |
| | 72,231 |
|
Trade name | 72,233 |
| | 59,002 |
|
Other | 16,165 |
| | 19,439 |
|
Total deferred tax liabilities | $ | 348,553 |
| | $ | 373,148 |
|
Net deferred tax liability | $ | (237,254 | ) | | $ | (196,054 | ) |
Deferred tax assets and liabilities are reflected on our Consolidated Balance Sheets as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Noncurrent deferred tax assets | $ | 15,105 |
| | $ | 3,603 |
|
Noncurrent deferred tax liabilities | 252,359 |
| | 199,657 |
|
The change in our deferred tax balances as compared to December 31, 2016, was materially impacted by a $73 million reduction in the net U.S. deferred tax liabilities attributable to the U.S. Federal tax rate reduction from 35% to 21% enacted December 22, 2017. Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in Other Assets and Deferred Income Taxes, respectively, on our Consolidated Balance Sheets.
We had net operating loss carryforwards for federal and certain state tax jurisdictions, the tax benefits of which total approximately $12 million and $8 million at December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, we had foreign, state and local tax credit carryforwards, the tax benefits of which total approximately $2 million. At December 31, 2017 and 2016, we had interest deduction carryforwards in Italy of $14 million and $10 million, respectively. As of December 31, 2017 and 2016, valuation allowances of $22 million and $11 million, respectively, were recorded for a portion of the deferred tax assets related to net operating loss, tax credit carryforwards and interest deduction carryforwards. The $10 million net increase in valuation allowances was primarily due to a $7 million valuation allowance provided on certain interest deduction carryforwards suspended due to Italy's thin capitalization constraints, and a $3 million increase attributable to acquired foreign net operating loss carryforwards.
The net operating loss carryforwards expire over an indefinite period. Foreign tax credit carryforwards expire over the period from 2018 through 2027, while the state and local tax credits generally have no expiration. The interest deduction carryforwards do not expire. Realization of these deferred tax assets is dependent on the generation of sufficient taxable income prior to the expiration dates, where applicable, or in the case of the interest carryforwards, the compliance with limitations under thin capitalization constraints. Based on historical and projected operating results, we believe that it is more likely than not that earnings will be sufficient to realize the deferred tax assets for which valuation allowances have not been provided. While we expect to realize the deferred tax assets, net of valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | 2,146 |
| | $ | 2,273 |
| | $ | 2,630 |
|
Additions for acquired tax positions | 73 |
| | — |
| | 80 |
|
Additions based on tax positions related to the current year | 5 |
| | 5 |
| | 302 |
|
Reductions for tax positions of prior years | — |
| | — |
| | (743 | ) |
Lapse of statutes of limitations | (534 | ) | | (132 | ) | | (119 | ) |
Currency exchange rate fluctuations | — |
| | — |
| | 123 |
|
Balance at December 31 | $ | 1,690 |
| | $ | 2,146 |
| | $ | 2,273 |
|
Included in the balance of unrecognized tax benefits above as of December 31, 2017, 2016 and 2015 are $1 million of tax benefits that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2017, 2016 and 2015 include less than $1 million of tax benefits that, if recognized, would result in adjustments to deferred taxes.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. Attributable to the unrecognized tax benefits noted above, the Company had accumulated interest and penalties of approximately $1 million at December 31, 2017, 2016 and 2015. During each of the years ended December 31, 2017, 2016, and 2015, an immaterial amount of interest and penalties were recorded through the income tax provision, prior to any reversals for lapses in the statutes of limitations.
During the twelve months beginning January 1, 2018, it is reasonably possible that we will reduce unrecognized tax benefits by up to approximately $1 million, all of which would impact our effective tax rate, primarily as a result of the expiration of certain statutes of limitations.
The company and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and non-U.S. jurisdictions. With few exceptions, the company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014. Adjustments from examinations, if any, are not expected to have a material effect on our consolidated financial statements.