Income (loss) before income taxes as shown in the Consolidated Statements of Operations consists of the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Domestic | $ | 524.1 |
| | $ | (96.4 | ) | | $ | (3.0 | ) |
Foreign | 53.4 |
| | 27.7 |
| | (15.6 | ) |
Total | $ | 577.5 |
| | $ | (68.7 | ) | | $ | (18.6 | ) |
A summary of income tax benefit (expense) in the Consolidated Statements of Operations is as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Current: | | | | | |
Federal | $ | (15.6 | ) | | $ | (8.7 | ) | | $ | (4.0 | ) |
Foreign | 17.6 |
| | 10.6 |
| | 9.8 |
|
State | (0.2 | ) | | (0.5 | ) | | (2.4 | ) |
| 1.8 |
| | 1.4 |
| | 3.4 |
|
Deferred: | | | | | |
Federal | 14.4 |
| | (25.5 | ) | | 3.6 |
|
Foreign | 17.0 |
| | 0.2 |
| | (6.0 | ) |
State | 4.5 |
| | (4.7 | ) | | 1.3 |
|
| 35.9 |
| | (30.0 | ) | | (1.1 | ) |
Total | $ | 37.7 |
| | $ | (28.6 | ) | | $ | 2.3 |
|
On December 22, 2017, the Tax Act was enacted and contains several key tax provisions impacting the Company including the reduction of the corporate income tax rate from 35.0% to 21.0%, the transition to a territorial tax system and a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries. The impact of these tax law changes, including the remeasurement of our deferred tax assets and liabilities based on the tax rates in effect at the time the deferred balances are expected to reverse, the reassessment of the net realizability of the deferred tax balances, and the transition tax, are required to be recognized in our income tax provision in the fourth quarter 2017, the period of enactment.
In December 2017, U.S. Securities and Exchange Commission ("SEC") issued guidance to address the application of authoritative tax accounting guidance in situations where companies do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. In these instances, the SEC's guidance allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was enacted at the end of 2017 and ongoing guidance and interpretation is expected in the next several months, we have recorded a provisional estimate in our fourth quarter 2017 income tax provision relating to the impact of the transition tax, remeasurement of the deferred tax assets and liabilities, and tax planning strategies. We consider this to be a reasonable estimate and will continue to refine our calculations based on further analysis of final year-end data, including our accumulated foreign earnings and foreign cash balances, and review of forthcoming guidance and interpretation. We expect to complete our analysis within the one-year measurement period permitted in the guidance issued by the SEC.
Income tax benefits recorded directly to additional paid-in capital consisted of the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Stock options exercised and restricted stock units vested | $ | — |
| | $ | — |
| | $ | (1.8 | ) |
| $ | — |
| | $ | — |
| | $ | (1.8 | ) |
Significant components of deferred income tax assets and liabilities at December 31, 2017 and 2016 are as follows:
|
| | | | | | | |
| 2017 | | 2016 |
| (in millions) |
Deferred income tax assets: | | | |
Net operating losses and tax credits | $ | 89.6 |
| | $ | 13.8 |
|
Accrual for post-retirement benefits other than pensions | 4.1 |
| | 4.5 |
|
Environmental reserves | 6.5 |
| | 8.7 |
|
Retained liabilities of previously owned businesses | 1.2 |
| | 2.1 |
|
Accruals and reserves | 6.2 |
| | 8.7 |
|
Pension obligations | — |
| | 10.2 |
|
Inventories | 2.5 |
| | 5.1 |
|
Asbestos settlement | — |
| | 41.4 |
|
Interest | 12.0 |
| | 9.9 |
|
Compensation and benefits | 5.2 |
| | 10.8 |
|
Gross deferred income tax assets | 127.3 |
| | 115.2 |
|
Valuation allowance | (25.7 | ) | | (20.2 | ) |
Total deferred income tax assets | 101.6 |
| | 95.0 |
|
Deferred income tax liabilities: | | | |
Depreciation and amortization | (86.6 | ) | | (44.2 | ) |
GST deconsolidation gain | — |
| | (21.4 | ) |
Joint ventures and partnerships | (0.3 | ) | | — |
|
Asbestos settlement | (6.3 | ) | | — |
|
Pension obligations | (1.7 | ) | | — |
|
Total deferred income tax liabilities | (94.9 | ) | | (65.6 | ) |
Net deferred tax assets | $ | 6.7 |
| | $ | 29.4 |
|
We offset deferred tax assets and liabilities against one another only to the extent they relate to the same tax jurisdiction. If this condition is not satisfied, the balances are classified independently on the balance sheet. In 2015, we adopted authoritative guidance that simplifies the presentation of deferred income taxes through requiring all deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. At December 31, 2017, in accordance with the Tax Act, we remeasured our U.S. deferred tax assets and liabilities from the tax rate of 35.0% to 21.0%. This remeasurement resulted in a $35.0 million provisional net reduction in deferred tax liabilities.
The net deferred tax assets are reflected on the December 31, 2017 and 2016 Consolidated Balance Sheets as follows:
|
| | | | | | | |
| 2017 | | 2016 |
| (in millions) |
Deferred income taxes and income tax receivable | $ | 24.8 |
| | $ | 33.6 |
|
Other liabilities (non-current) | (18.1 | ) | | (4.2 | ) |
Net deferred tax assets | $ | 6.7 |
| | $ | 29.4 |
|
At December 31, 2017, we had $47.6 million of foreign net operating loss carryforwards (tax effect of $12.8 million) of which $17.6 million expire at various dates beginning in 2018, and $30.0 million have an indefinite carryforward period. We also had state net operating loss carryforwards with a tax effect of $17.0 million which expire at various dates between 2018 through 2037. These net operating loss carryforwards may be used to offset a portion of future taxable income and, thereby, reduce or eliminate our U.S. federal, state or foreign income taxes otherwise payable.
As a result of the ten-year carryback of our 2017 net operating tax loss generated by the funding of the Trust (as described in Note 20, "Subsidiary Asbestos Bankruptcies"), $3.2 million of foreign tax credits previously utilized during the carryback period will be available to offset our future tax liability. In addition, foreign tax credits of $43.5 million generated as a result of the transition tax will also be available to offset our future tax liability. These foreign tax credits expire in years 2018 through 2027 and based on our projected foreign source income, are expected to be fully utilized.
We determined, based on the available evidence, that it is uncertain whether future taxable income of certain of our foreign subsidiaries will be significant enough or of the correct character to recognize certain of these deferred tax assets. As a result, valuation allowances of $25.7 million and $20.2 million have been recorded as of December 31, 2017 and 2016, respectively. Valuation allowances primarily relate to certain state and foreign net operating losses and other net deferred tax assets in jurisdictions where future taxable income is uncertain. Valuation allowances may arise associated with deferred tax assets recorded in purchase accounting. In accordance with applicable accounting guidelines, any reversal of a valuation allowance that was recorded in purchase accounting reduces income tax expense.
The effective income tax rate from operations varied from the statutory federal income tax rate as follows:
|
| | | | | | | | |
| Percent of Pretax Income Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
U.S. taxation of foreign profits, net of foreign tax credits | 0.1 |
| | 1.1 |
| | 1.1 |
|
Research and employment tax credits | (0.4 | ) | | 3.2 |
| | 7.7 |
|
State and local taxes | 0.2 |
| | 4.9 |
| | 4.1 |
|
Domestic production activities | (0.4 | ) | | 1.8 |
| | 5.5 |
|
Nondeductible goodwill impairment | — |
| | — |
| | (48.6 | ) |
Foreign tax rate differences | (1.0 | ) | | 4.3 |
| | (10.2 | ) |
Uncertain tax positions | (0.1 | ) | | (1.4 | ) | | 4.3 |
|
Statutory changes in tax rates | 0.3 |
| | 0.2 |
| | 1.4 |
|
Valuation allowance | 0.2 |
| | (6.7 | ) | | (2.1 | ) |
Nondeductible expenses | 0.3 |
| | (1.1 | ) | | (6.6 | ) |
Gain on reconsolidation of GST and OldCo | (32.4 | ) | | — |
| | — |
|
Reconsolidation step-up of net assets of GST and OldCo to fair value | 9.0 |
| | — |
| | — |
|
Tax Act | (5.3 | ) | | — |
| | — |
|
Other items, net | 1.0 |
| | 0.4 |
| | (3.9 | ) |
Effective income tax rate | 6.5 | % | | 41.7 | % | | (12.3 | )% |
The effect of the Tax Act resulted in a $30.9 million provisional net benefit recorded to income tax expense in the fourth quarter. This provisional amount represents a reasonable estimate of the impact and is comprised of a $35.0 million provisional tax benefit related to the remeasurement of deferred tax assets and liabilities, a $53.9 million provisional tax charge for the mandatory one-time transition tax on accumulated earnings of our foreign subsidiaries, and a $43.5 million provisional tax benefit for foreign tax credits related to the transition tax that will be utilized against our future tax liability due to the current year tax loss generated by the funding of the Trust. As a result of the Tax Act, we also implemented tax planning strategies in the fourth quarter of 2017 resulting in an additional provisional tax benefit of $6.3 million.
We have not provided for the federal and foreign withholding taxes on approximately $447 million of foreign subsidiaries’ undistributed earnings as of December 31, 2017, because such earnings are intended to be reinvested indefinitely. Upon repatriation, certain foreign countries impose withholding taxes. The amount of withholding tax that would be payable on remittance of the entire amount would be approximately $5.4 million. Although such earnings are intended to be reinvested indefinitely, any tax liability for withholding taxes would be negated by the availability of corresponding foreign tax credits. As a result of the mandatory one-time transition tax on accumulated foreign earnings imposed by the Tax Act, we are re-evaluating our repatriation policy as earnings of our foreign subsidiaries will be available for repatriation without incremental U.S. taxes. However, we have not yet made any changes to our repatriation policy.
As of December 31, 2017 and 2016, we had $3.8 million and $2.8 million, respectively, of gross unrecognized tax benefits. Of the gross unrecognized tax benefit balances as of December 31, 2017 and 2016, $3.8 million and $2.8 million, respectively, would have an impact on our effective tax rate if ultimately recognized.
We record interest and penalties related to unrecognized tax benefits in income tax expense. In addition to the gross unrecognized tax benefits above, we had $0.2 million and $0.2 million accrued for interest and penalties at December 31, 2017 and 2016, respectively. Income tax expense for the year ended December 31, 2017 was not affected by interest and penalties related to unrecognized tax benefits. Income tax expense for the years ended December 31, 2016 and 2015, includes $0.1 million and $0.1 million, respectively, for interest and penalties related to unrecognized tax benefits. The amounts listed above for accrued interest do not reflect the benefit of any tax deduction, which might be available if the interest were ultimately paid.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits (excluding interest) is as follows:
|
| | | | | | | | | | | |
(in millions) | 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 2.8 |
| | $ | 1.5 |
| | $ | 3.1 |
|
Reconsolidation of GST and OldCo | 0.2 |
| | — |
| | — |
|
Additions based on tax positions related to the current year | 0.3 |
| | 0.4 |
| | 0.3 |
|
Additions for tax positions of prior years | 1.1 |
| | 1.1 |
| | 0.2 |
|
Reductions as a result of a lapse in the statute of limitations | (0.3 | ) | | (0.2 | ) | | (2.0 | ) |
Reductions as a result of audit settlements | (0.3 | ) | | — |
| | — |
|
Changes due to fluctuations in foreign currency | — |
| | — |
| | (0.1 | ) |
Balance at end of year | $ | 3.8 |
| | $ | 2.8 |
| | $ | 1.5 |
|
U.S. federal income tax returns after 2013 remain open to examination. In June 2017, the U.S. Internal Revenue Service (“IRS”) began an examination of our 2014 U.S. federal income tax return. Although this examination is part of a routine and recurring cycle, we cannot predict the final outcome or expected conclusion date of the audit. We and our subsidiaries are also subject to income tax in multiple state and foreign jurisdictions. Various foreign and state tax returns are also currently under examination. The most significant of these include France and Germany. Substantially all significant state, local and foreign income tax returns for the years 2013 and forward are open to examination. We expect that some of these examinations may conclude within the next twelve months, however, the final outcomes are not yet determinable. If these examinations are concluded or effectively settled within the next twelve months, it could reduce the associated gross unrecognized tax benefits by approximately $1.0 million. In addition, another $0.7 million in gross unrecognized tax benefits may be recognized within the next twelve months as the applicable statute of limitations expires.