Income Taxes
On December 22, 2017, the 2017 Act was signed into law. The 2017 Act contains several key provisions that have significant effects to our financial statements, such as a permanent reduction of the U.S. federal corporate income tax rate to 21%, imposing a one-time mandatory tax (“Toll Charge”) on deemed repatriation related to accumulated undistributed foreign earnings through December 31, 2017 and expensing of capital investments. In accordance with ASC 740, the tax effect associated with the enactment of the 2017 Act is required to be reflected in the financial statements in the period in which the law was enacted. The SEC also issued Staff Accounting Bulletin No. 118 to provide guidance to account for the income tax effects resulting from the enactment of the 2017 Act.
In connection with the 2017 Act, we were able to determine the tax effect related to the remeasurement of deferred taxes, but we have not finalized the accounting for the Toll Charge. The Toll Charge is based on the estimated post-1986 foreign earnings and profits held in cash. We will continue to gather and analyze information related to the undistributed non-U.S. earnings and profits within the one-year measurement period and will record adjustments, if any, to the initial estimate.
Pursuant to the guidance, we recorded a total charge of $80.7 million in our consolidated financial statements for the year ended December 31, 2017, of which $55.4 million is primarily related to the estimated tax liability imposed by the 2017 Act on the undistributed earnings from non-U.S. subsidiaries and $25.3 million is related to the remeasurement of our deferred tax assets as a result of the reduction in the U.S. federal corporate income tax rate from 35% to 21%. In addition, we have adopted ASU No. 2018-02 at December 31, 2017. See Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K. Accordingly, we have elected to reclassify $150.5 million related to the income tax effect of the 2017 Act on our U.S. pension and retirement plans from AOCI to retained earnings.
Income before provision for income taxes consisted of:
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| | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. | | $ | 201.2 |
| | $ | 159.5 |
| | $ | 167.8 |
|
Non-U.S. | | 121.5 |
| | 44.1 |
| | 112.2 |
|
Income Before Provision for Income Taxes and Equity in Net Income of Affiliates | | $ | 322.7 |
| | $ | 203.6 |
| | $ | 280.0 |
|
The provision for income taxes consisted of:
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| | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current Tax Provision: | | | | | | |
U.S. Federal | | $ | 92.7 |
| | $ | 47.8 |
| | $ | 23.6 |
|
State and Local | | 8.3 |
| | 5.9 |
| | 6.7 |
|
Non-U.S. | | 33.8 |
| | 26.1 |
| | 18.2 |
|
Total Current Tax Provision | | $ | 134.8 |
| | $ | 79.8 |
| | $ | 48.5 |
|
Deferred Tax Position: | | | | | | |
U.S. Federal | | $ | 47.6 |
| | $ | 16.2 |
| | $ | 19.6 |
|
State and Local | | (0.3 | ) | | 1.4 |
| | 1.0 |
|
Non-U.S. | | (2.4 | ) | | 2.5 |
| | 5.1 |
|
Total Deferred Tax Provision | | $ | 44.9 |
| | $ | 20.1 |
| | $ | 25.7 |
|
Provision for Income Taxes | | $ | 179.7 |
| | $ | 99.9 |
| | $ | 74.2 |
|
The following table summarizes the significant differences between the U.S. Federal statutory tax rate and our effective tax rate for financial statement purposes:
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| | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Statutory Tax Rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and Local Taxes, net of U.S. Federal Tax Benefits | | 2.1 |
| | 2.2 |
| | 2.0 |
|
Nondeductible Charges (1) | | 1.7 |
| | 7.8 |
| | 3.4 |
|
Impact of Sale of Benelux and Latin America (2) | | — |
| | 15.1 |
| | — |
|
U.S. Taxes on Foreign Income | | 4.8 |
| | 1.7 |
| | 2.3 |
|
Non-U.S. Taxes | | (6.1 | ) | | (5.8 | ) | | (6.5 | ) |
Valuation Allowance | | 0.3 |
| | (0.2 | ) | | (1.0 | ) |
Interest | | 0.1 |
| | 1.0 |
| | (0.9 | ) |
Tax Credits and Deductions | | (7.5 | ) | | (5.4 | ) | | (1.1 | ) |
Tax Impact of Earnings Repatriation (3) | | 17.2 |
| | — |
| | (1.0 | ) |
Tax Contingencies Related to Uncertain Tax Positions | | 0.3 |
| | (0.4 | ) | | (1.0 | ) |
Impact of Legacy Tax Matters (4) | | — |
| | (1.6 | ) | | (4.6 | ) |
Deferred Tax - Tax Rate Change (5) | | 7.8 |
| | — |
| | — |
|
Other | | — |
| | (0.4 | ) | | (0.1 | ) |
Effective Tax Rate | | 55.7 | % | | 49.0 | % | | 26.5 | % |
(1) The impact for 2016 includes a non-deductible legal reserve associated with the SEC and DOJ investigation of our China operations.
(2) The impact for 2016 was primarily due to the non-deductible loss associated with the release of cumulative foreign currency translation adjustments as part of the divestiture of our Benelux and Latin American businesses in 2016.
| |
(3) | The impact for 2017 was due to the mandatory one-time tax on undistributed earnings from our non-U.S. subsidiaries as a result of the enactment of the 2017 Act. The impact for 2015 was due to a tax benefit on the repatriation of the 2015 and prior-year earnings in the amount of $132.5 million, from our subsidiaries in Canada and Japan (see further discussion below). |
(4) The impact for 2016 was due to the release of reserves for uncertain tax positions as a result of the expiration of the statute of limitations for the 2012 tax year. The impact for 2015 was due to the release of reserves for uncertain tax positions as a result of the expiration of the statute of limitations for the 2011 tax year.
(5) The impact for 2017 reflects the effect of the reduction of the statutory U.S. Federal Corporate income tax rate, from 35% to 21%, on our net U.S. deferred tax assets resulting from the 2017 Act.
Income taxes paid were $91.8 million, $71.7 million and $72.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Income taxes refunded were $0.7 million, $1.2 million and $1.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Deferred tax assets (liabilities) are comprised of the following:
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| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred Tax Assets: | | | | |
Operating Losses | | $ | 36.8 |
| | $ | 30.6 |
|
Restructuring Costs | | 3.8 |
| | 3.0 |
|
Bad Debts | | 3.8 |
| | 5.6 |
|
Accrued Expenses | | 10.4 |
| | 12.3 |
|
Capital Loss and Credit Carryforwards | | 13.3 |
| | 12.3 |
|
Pension and Postretirement Benefits | | 120.6 |
| | 211.6 |
|
Other | | 4.7 |
| | 3.8 |
|
Total Deferred Tax Assets | | 193.4 |
| | 279.2 |
|
Valuation Allowance | | (39.1 | ) | | (33.2 | ) |
Net Deferred Tax Assets | | $ | 154.3 |
| | $ | 246.0 |
|
Deferred Tax Liabilities: | | | | |
Intangibles | | $ | (97.0 | ) | | $ | (129.9 | ) |
Fixed Assets | | (1.0 | ) | | (4.1 | ) |
Foreign Exchange | | (2.7 | ) | | (4.1 | ) |
Other | | (0.5 | ) | | (0.6 | ) |
Total Deferred Tax Liabilities | | $ | (101.2 | ) | | $ | (138.7 | ) |
Net Deferred Tax Assets | | $ | 53.1 |
| | $ | 107.3 |
|
As a result of the enactment of the 2017 Act, we have provisionally recorded U.S. income taxes and foreign withholding taxes on the undistributed earnings from our non-U.S. subsidiaries as of December 31, 2017 subject to measurement period adjustments, if any, within the one-year measurement period. As of December 31, 2017, we no longer assert indefinite reinvestment for any historical unrepatriated earnings. Going forward we intend to reinvest indefinitely all earnings from our China and India subsidiaries.
During 2015, a tax benefit of $3.0 million was recorded related to a repatriation of 2015 and prior year earnings, in the amount of $132.5 million, from the Company’s subsidiaries in Canada and Japan. Of the $132.5 million, $123.0 million, $2.5 million and $4.5 million was distributed in 2015, 2016 and 2017, respectively. The remaining $2.5 million will be distributed in 2018. The tax benefit was due to the recognition of foreign tax credits in excess of the U.S. taxes due on the repatriation. This remittance was affected to partially offset the funding requirement associated with acquisitions in 2015.
We have federal, state and local, and foreign tax loss carryforwards, the tax effect of which was $36.8 million as of December 31, 2017. Of the $36.8 million, $23.7 million of these tax benefits have an indefinite carry-forward period with the remainder of $13.1 million expiring at various times between 2018 and 2036. Additionally, we have non-U.S. capital loss carryforwards. The associated tax effect was $12.1 million, $11.2 million and $17.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
We have established valuation allowances against certain U.S. state and non-U.S. net operating losses and capital loss carryforwards in the amounts of $37.7 million, $31.9 million and $37.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, because in our opinion, certain U.S. state and non-U.S. net operating losses and capital loss carryforwards are more likely than not to expire before we can utilize them.
For the year ended December 31, 2017, we increased our unrecognized tax benefits by $0.7 million (net of decreases). The increase primarily relates to an increase in our uncertain tax positions in the U.S. The total amount of gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015 were $7.7 million, $7.0 million and $9.1 million, respectively.
We or one of our subsidiaries file income tax returns in the U.S. federal, and various state, local and foreign jurisdictions. In the U.S. federal jurisdiction, we are no longer subject to examination by the Internal Revenue Service (“IRS”) for years prior to 2014. In state and local jurisdictions, with a few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2014. In foreign jurisdictions, with a few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2012.
The following is a reconciliation of the gross unrecognized tax benefits:
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| | | | |
Gross Unrecognized Tax Benefits as of January 1, 2015 | | $ | 26.1 |
|
Additions for Prior Years’ Tax Positions | | 0.5 |
|
Additions for Current Year’s Tax Positions | | 0.4 |
|
Settlements with Taxing Authority | | (0.3 | ) |
Reduction in Prior Years’ Tax Positions | | (0.2 | ) |
Reduction Due to Expired Statute of Limitations (1) | | (17.4 | ) |
Gross Unrecognized Tax Benefits as of December 31, 2015 | | 9.1 |
|
Additions for Prior Years’ Tax Positions | | 5.8 |
|
Additions for Current Year’s Tax Positions | | 0.4 |
|
Settlements with Taxing Authority | | (1.9 | ) |
Reduction in Prior Years’ Tax Positions | | (0.7 | ) |
Reduction Due to Expired Statute of Limitations (2) | | (5.7 | ) |
Gross Unrecognized Tax Benefits as of December 31, 2016 | | 7.0 |
|
Additions for Prior Years’ Tax Positions | | 1.1 |
|
Additions for Current Year’s Tax Positions | | 0.6 |
|
Settlements with Taxing Authority | | (0.1 | ) |
Reduction in Prior Years’ Tax Positions | | (0.2 | ) |
Reduction Due to Expired Statute of Limitations (3) | | (0.7 | ) |
Gross Unrecognized Tax Benefits as of December 31, 2017 | | $ | 7.7 |
|
| |
(1) | The decrease was primarily due to the release of reserves as a result of the expiration of the statute of limitations for the 2011 tax year. |
| |
(2) | The decrease was primarily due to the release of reserves as a result of the expiration of the statute of limitations for the 2012 tax year. |
| |
(3) | The decrease was primarily due to the release of reserves as a result of the expiration of the statute of limitations for the 2013 tax year. |
The amount of unrecognized tax benefits of the $7.7 million that, if recognized, would impact the effective tax rate is $7.2 million, net of tax benefits.
We recognize accrued interest expense related to unrecognized tax benefits in the Provision for Income Taxes line in the consolidated statement of operations and other comprehensive income. The total amount of interest expense, net of tax benefits, recognized for the years ended December 31, 2017, 2016 and 2015 was $0.2 million, $0.3 million and $0.5 million, respectively. The total amount of accrued interest as of December 31, 2017 and 2016 was $0.4 million in each year.