Note 12 — INCOME TAXES
Income from continuing operations, before income taxes is summarized below based on the geographic location of the operation to which such earnings are attributable.
Income from continuing operations, before income taxes consists of the following:
|
| | | | | | | | | | | | |
(In millions) | | 2017 | | 2016 | | 2015 |
Domestic | | $ | 105.6 |
| | $ | 129.1 |
| | $ | 94.7 |
|
Foreign | | 106.7 |
| | 97.5 |
| | 79.3 |
|
Income from continuing operations, before income taxes | | $ | 212.3 |
| | $ | 226.6 |
| | $ | 174.0 |
|
A summary of income tax expense from continuing operations is as follows:
|
| | | | | | | | | | | | |
(In millions) | | 2017 | | 2016 | | 2015 |
Current income tax expense (benefit): | | | | | | |
Domestic - U.S. tax reform, transition tax | | $ | 24.0 |
| | $ | — |
| | $ | — |
|
Domestic - other | | (11.2 | ) | | 27.8 |
| | 24.5 |
|
Foreign | | 27.3 |
| | 22.5 |
| | 28.5 |
|
Total current income tax expense | | $ | 40.1 |
| | $ | 50.3 |
| | $ | 53.0 |
|
Deferred income tax (benefit) expense: | | | | | | |
Domestic - U.S. tax reform, tax effect on net deferred tax liabilities | | $ | (20.1 | ) | | $ | — |
| | $ | — |
|
Domestic - other | | 27.4 |
| | 6.0 |
| | (28.6 | ) |
Foreign | | (8.7 | ) | | 4.1 |
| | 1.1 |
|
Total deferred income tax (benefit) expense | | $ | (1.4 | ) | | $ | 10.1 |
| | $ | (27.5 | ) |
Total income tax expense | | $ | 38.7 |
| | $ | 60.4 |
| | $ | 25.5 |
|
The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017. Among other things, effective in the first taxable year after the enactment, the TCJA reduces the US federal corporate tax rate from 35% to 21%, exempts from U.S. federal income taxation dividends from certain foreign corporations to their U.S. shareholders, eliminates or reduces the effect of various federal tax deductions and creates new taxes on certain outbound payments and future foreign earnings generated after 2017. The TCJA also requires U.S. companies to pay a one-time transition tax on earnings of foreign corporate subsidiaries that are at least ten-percent owned by such U.S. companies and that were previously deferred from U.S. taxation.
At December 31, 2017, we have not completed our accounting for the tax effects of the enactment of the TCJA; however, in compliance with the SEC's Staff Accounting Bulletin (SAB) 118 (issued December 22, 2017), we have made a reasonable estimate of the effects on our existing deferred income tax balances and the one-time transition tax, which is included as a component of income tax expense from continuing operations in the following tabular reconciliation. Once we have finalized our 2017 tax returns, we will update our estimates based on our completed review, including the consideration of additional clarifications on the TCJA from the U.S. government. Any adjustments to our provisional amounts will be disclosed in our respective filings within the one-year measurement period provided by SAB 118.
At December 31, 2017, we have not completed our analysis with respect to the impact of the TCJA on our continuing assertion that our foreign earnings are indefinitely reinvested pursuant to Accounting Principles Board (APB) 23 of Accounting Standards Codification (ASC) 740-30. APB 23 provides guidance that US companies do not need to recognize tax effects on foreign earnings that are indefinitely reinvested. Upon completion of our analysis, if our assertion were to change in the future, that change could result in a recognition of tax liabilities.
A reconciliation of the applicable U.S. federal statutory tax rate to the consolidated effective income tax rate from continuing operations along with a description of significant or unusual reconciling items is included below. |
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Federal statutory income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| | | | | | |
Foreign tax rate differential: | | | | | | |
Asia | | (1.2 | ) | | (1.2 | ) | | (1.5 | ) |
Europe | | (8.6 | ) | | (2.7 | ) | | (2.8 | ) |
North America (Canada and Mexico) | | (1.3 | ) | | (1.7 | ) | | (1.0 | ) |
Total foreign tax rate differential: | | (11.1 | ) | | (5.6 | ) | | (5.3 | ) |
| | | | | | |
State and local tax, net | | 1.4 |
| | 2.1 |
| | 2.5 |
|
Tax benefits on certain foreign investments | | (6.8 | ) | | (1.9 | ) | | — |
|
Domestic production activities deduction | | (1.9 | ) | | (1.5 | ) | | (1.8 | ) |
Amended prior period tax returns and corresponding favorable audit adjustments | | (3.6 | ) | | (1.3 | ) | | (17.7 | ) |
Net impact of uncertain tax positions | | 2.2 |
| | (1.1 | ) | | 0.5 |
|
Permanent tax differences | | 1.2 |
| | 0.9 |
| | 1.7 |
|
U.S. credit for research activities | | (1.1 | ) | | (0.4 | ) | | (0.5 | ) |
Changes in valuation allowances | | 0.7 |
| | 0.4 |
| | 0.3 |
|
U.S. tax reform, transition tax | | 11.3 |
| | — |
| | — |
|
U.S. tax reform, tax effect on net deferred tax liabilities | | (9.5 | ) | | — |
| | — |
|
Other | | 0.4 |
| | 0.1 |
| | — |
|
Effective income tax rate | | 18.2 | % | | 26.7 | % | | 14.7 | % |
The effective tax rates for all periods differed from the applicable U.S. federal statutory tax rate as a result of permanent items, state and local income taxes, differences in foreign tax rates and certain unusual items. Permanent items primarily consist of income or expense not taxable or deductible. Significant or unusual items impacting the effective income tax rate are described below.
2017 Significant items
The increase in the Foreign tax rate differential line item in the table above, compared to 2016, primarily related to a European legal entity realignment.
Tax benefits on certain foreign investments decreased the effective tax rate by 6.8% ($14.4 million) related to distributions from foreign subsidiaries with net foreign tax credits.
2015 Significant items
Amending U.S. federal income tax returns for 2004 through 2012 to use foreign tax credits decreased the effective tax rate by 17.7% ($30.8 million). This is reflected in the Amended prior period tax returns and corresponding favorable audit adjustments line in the table above.
The Net impact of uncertain tax positions increased the effective tax rate by 0.5% ($0.9 million). The reversal of an uncertain tax position due to the expiration of the statute of limitations decreased the effective tax rate by 5.7% ($9.9 million). A foreign court ruling, which settled an uncertain position taken in a prior year, increased the effective tax rate by 4.6% ($8.0 million). Other unfavorable uncertain tax positions increased the effective tax rate by 1.6%, which offset the net decrease in the effective tax rate of the two items noted.
Components of our deferred tax assets (liabilities) as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
(In millions) | | 2017 | | 2016 |
Deferred tax assets: | | | | |
Pension and other post-retirement benefits | | $ | 7.3 |
| | $ | 12.5 |
|
Employment costs | | 22.0 |
| | 33.7 |
|
Environmental reserves | | 29.4 |
| | 45.1 |
|
Net operating loss carryforwards | | 42.3 |
| | 28.8 |
|
Foreign tax credit carryforwards | | — |
| | 23.0 |
|
Other, net | | 20.0 |
| | 30.9 |
|
Gross deferred tax assets | | $ | 121.0 |
| | $ | 174.0 |
|
Valuation allowances | | (21.4 | ) | | (19.8 | ) |
Total deferred tax assets, net of valuation allowances | | $ | 99.6 |
| | $ | 154.2 |
|
| | | | |
Deferred tax liabilities: | | | | |
Property, plant and equipment | | $ | (20.7 | ) | | $ | (16.5 | ) |
Goodwill and intangibles | | (98.7 | ) | | (121.1 | ) |
Other, net | | (1.0 | ) | | (1.8 | ) |
Total deferred tax liabilities | | $ | (120.4 | ) | | $ | (139.4 | ) |
| | | | |
Net deferred tax (liabilities) assets | | $ | (20.8 | ) | | $ | 14.8 |
|
| | | | |
Consolidated Balance Sheets: | | | | |
Non-current deferred income tax assets | | $ | 19.5 |
| | $ | 21.7 |
|
Non-current deferred income tax liabilities | | $ | (40.3 | ) | | $ | (6.9 | ) |
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future using the new federal statutory tax rate of 21%. However, we are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amount during the measurement period allowed by SAB 118. The provisional amount recorded associated with the reduction of the U.S. federal statutory rate resulted in a decrease of $20.1 million to our net deferred tax liabilities.
Prior to the enactment of the TCJA, the Company had $24.6 million of U.S. foreign tax credit carryforwards that would have otherwise expired between 2018 and 2025. Due to the TCJA, the Company utilized all U.S. foreign tax credits to offset taxes due for the one-time transition tax on foreign earnings prior to the period ended December 31, 2017. We do not anticipate the resulting cash tax payable for the one-time transition tax to be greater than $10.0 million.
As of December 31, 2017, we had gross state net operating loss carryforwards of $162.1 million that expire between 2018 and 2032. Various foreign subsidiaries have gross net operating loss carryforwards totaling $124.8 million that expire between 2018 and 2037 with limited exceptions that have indefinite carryforward periods. We have provided valuation allowances of $20.5 million against certain foreign and state net operating loss carryforwards that are expected to expire prior to utilization. In addition, we have valuation allowances of $0.9 million against other net deferred tax assets.
As disclosed above, we recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries, resulting in an increase in income tax expense of $24.0 million. We have not yet completed our calculation of the total post-1986 earnings for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post -1986 foreign earnings & profits previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested. No provision has been made for income taxes on undistributed earnings of those consolidated non-U.S. subsidiaries of $413.0 million as of December 31, 2017, because our intention is to reinvest indefinitely undistributed earnings of our foreign subsidiaries. It is not practicable to estimate the additional income taxes and applicable foreign withholding taxes that would be payable on the remittance of such undistributed earnings.
We made worldwide income tax payments of $56.5 million and received refunds of $6.7 million in 2017. We made worldwide income tax payments of $50.3 million and $57.7 million in 2016 and 2015, respectively, and received refunds of $2.4 million and $2.6 million in 2016 and 2015, respectively.
The Company records provisions for uncertain tax positions in accordance with ASC Topic 740, Income Taxes. A reconciliation of unrecognized tax benefits is as follows: |
| | | | | | | | | | | | |
| | Unrecognized Tax Benefits |
(In millions) | | 2017 | | 2016 | | 2015 |
Balance as of January 1, | | $ | 7.9 |
| | $ | 11.3 |
| | $ | 27.4 |
|
Increases as a result of positions taken during current year | | 9.2 |
| | 0.3 |
| | 3.9 |
|
Increases as a result of positions taken for prior years | | 1.8 |
| | 1.2 |
| | 9.2 |
|
Balance related to acquired businesses | | — |
| | — |
| | — |
|
Reductions for tax positions of prior years | | (0.3 | ) | | — |
| | — |
|
Decreases as a result of lapse of statute of limitations | | (0.2 | ) | | (4.2 | ) | | (13.1 | ) |
Decreases relating to settlements with taxing authorities | | — |
| | (0.3 | ) | | (15.3 | ) |
Other, net | | 0.2 |
| | (0.4 | ) | | (0.8 | ) |
Balance as of December 31, | | $ | 18.6 |
| | $ | 7.9 |
| | $ | 11.3 |
|
We recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2017 and 2016, we had $3.9 million and $3.3 million accrued for interest and penalties, respectively.
Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next twelve months a reduction in unrecognized tax benefits may occur up to $3.3 million based on the outcome of tax examinations and the expiration of statutes of limitations.
If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be a benefit of $10.6 million.
The Company is currently being audited by federal, state and foreign taxing jurisdictions. With the exception of amended tax returns for 2004 to 2012, which are limited in scope to foreign tax credits, we are no longer subject to U.S. federal income tax examinations for periods preceding 2013. With limited exceptions, we are no longer subject to state tax and foreign tax examinations for periods preceding 2013.
For the income tax benefit associated with the July 19, 2017 sale of DSS, refer to Note 3, Discontinued Operations.