Income Taxes
The components of income before income taxes and provision for income taxes for the years ended December 31 are as follows: |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income before income taxes | | | | | |
U.S. | $ | 48.3 |
| | $ | (1.2 | ) | | $ | 71.2 |
|
Non-U.S. | 45.5 |
| | 39.5 |
| | 33.3 |
|
| $ | 93.8 |
| | $ | 38.3 |
| | $ | 104.5 |
|
Income tax provision (benefit) | | | | | |
Current tax provision: | | | | | |
Federal | $ | 28.3 |
| | $ | (1.3 | ) | | $ | 22.1 |
|
State | 1.4 |
| | (0.3 | ) | | 3.4 |
|
Non-U.S. | 7.1 |
| | 5.0 |
| | 5.3 |
|
Total current | $ | 36.8 |
| | $ | 3.4 |
| | $ | 30.8 |
|
Deferred tax provision (benefit): | | | | | |
Federal | $ | 10.7 |
| | $ | (5.8 | ) | | $ | (0.4 | ) |
State | (0.7 | ) | | 0.8 |
| | 1.2 |
|
Non-U.S. | (1.9 | ) | | (2.4 | ) | | (2.2 | ) |
Total deferred | $ | 8.1 |
| | $ | (7.4 | ) | | $ | (1.4 | ) |
| $ | 44.9 |
| | $ | (4.0 | ) | | $ | 29.4 |
|
The Company made income tax payments of $14.0 million, $19.3 million and $32.7 million during 2017, 2016 and 2015, respectively. The Company received income tax refunds of $2.2 million, $11.1 million and $0.2 million during 2017, 2016 and 2015, respectively.
A reconciliation of the federal statutory and reported income tax rate for the year ended December 31 is as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income before income taxes | $ | 93.8 |
| | $ | 38.3 |
| | $ | 104.5 |
|
Statutory taxes at 35.0% | $ | 32.8 |
| | $ | 13.4 |
| | $ | 36.6 |
|
Tax Reform Act | 38.2 |
| | — |
| | — |
|
State income taxes | 0.2 |
| | (0.6 | ) | | 4.1 |
|
Valuation allowance | 0.1 |
| | (0.2 | ) | | 5.9 |
|
Sale of non-U.S. investment | (9.1 | ) | | (1.9 | ) | | (3.7 | ) |
Equity interest earnings | (8.1 | ) | | (2.2 | ) | | (1.9 | ) |
Non-U.S. rate differences | (7.2 | ) | | (9.6 | ) | | (10.5 | ) |
R&D and other federal credits | (1.8 | ) | | (1.8 | ) | | (1.7 | ) |
Unremitted non-U.S. earnings | (0.4 | ) | | (3.9 | ) | | 0.1 |
|
Tax controversy resolution | — |
| | 2.1 |
| | (0.2 | ) |
Other | 0.2 |
| | 0.7 |
| | 0.7 |
|
Income tax provision (benefit) | $ | 44.9 |
| | $ | (4.0 | ) | | $ | 29.4 |
|
Reported income tax rate | 47.9 | % | | n.m. |
| | 28.1 | % |
n.m. - not meaningful |
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, repealing the deduction for domestic production activities, allowing the immediate expensing of certain qualified capital expenditures, implementing a territorial tax system and imposing a one-time transition tax on certain unremitted earnings of non-U.S. subsidiaries. As a result of the Tax Reform Act, the Company recorded the provisional tax effects of $38.2 million, comprised of $33.1 million of tax expense due to the transition tax on the unremitted earnings and profits of non-U.S. subsidiaries and $5.1 million of tax expense due to the effects on the Company’s deferred tax assets and liabilities. The final amounts recorded in subsequent financial statements may materially differ from these provisional amounts due to among other things, additional analysis, changes in interpretations of the Tax Reform Act including interpretations by state and local taxing authorities and related assumptions of the Company, and additional regulatory guidance that may be issued which could potentially effect the measurement of these provisional tax amounts. The provisional amounts are expected to be finalized when the U.S. corporate income tax return for 2017 is filed in 2018, but in no event later than one year from the enactment date.
The one-time transition tax is based on the post-1986 unremitted earnings and profits of non-U.S. subsidiaries which have been previously deferred from U.S. income taxes including such earnings through the measurement date as determined by the Tax Reform Act. The amount of transition tax also depends on the amount of earnings and profits held in cash or other specified assets. The Company had an estimated $310 million of undistributed non-U.S. earnings and profits subject to the transition tax and recognized a provisional $33.1 million of income tax expense in the fourth quarter of 2017. After the utilization of existing tax credits, the Company expects to pay cash taxes, including state income taxes, of an estimated $22.5 million with respect to the transition tax payable over eight years. These amounts may change upon the issuance of additional regulatory guidance or when the Company finalizes its calculation of earnings and profits, including the amounts held in cash or other specified assets and its calculation of available foreign tax credits. The Company intends that future distributions will be from earnings which would otherwise qualify for the one hundred percent dividends received deduction provided in the Tax Reform Act and earnings which would not result in any significant foreign taxes. As a result, no additional income taxes have been provided for any undistributed foreign earnings not subject to the transition tax, nor any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in non-U.S. operations. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed foreign earnings.
While the Tax Reform Act provides for a territorial system, beginning in 2018, it includes new anti-deferral and anti-base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return non-U.S. earnings in excess of an allowable return on the Company’s non-U.S. subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI beginning in 2018 due to expense allocations required by the U.S foreign tax credit rules and various adjustments required to determine tangible assets provided in the Tax Reform Act. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI as of December 31, 2017.
The BEAT provisions in the Tax Reform Act create a minimum tax where a lower tax rate is applied to pre-tax income without the benefit of certain base-erosion payments made to related non-U.S. corporations. The Company will only be taxed under this regime if such tax exceeds the regular corporate tax. The Company continues to evaluate whether it will be subject to BEAT provisions.
During 2017, the Company recognized a tax benefit of $9.1 million and tax expense of $1.4 million for unrecognized tax benefits, from an internal sale of a subsidiary between consolidated companies resulting in the repatriation of non-U.S. accumulated earnings taxed at higher rates. In addition, the Company settled various federal obligations in Brazil through the utilization of its federal net operating loss carryforwards for which a valuation allowance was previously provided. As a result of the utilization of the underlying deferred tax assets, the Company released the associated valuation allowance previously provided of $4.7 million. This was partly offset by a $1.6 million valuation allowance provided against deferred tax assets in China where the Company has determined that such deferred tax assets no longer meet the more likely than not standard for realization.
During 2016, the Company received a notice from the Italian Tax Authority approving the transfer of certain tax losses as part of an internal restructuring. As a result, the Company believes it is more likely than not that deferred tax assets for such losses of approximately $3.2 million will be realized in the foreseeable future, and has released the valuation allowance previously provided.
Other items during 2016 include a tax benefit of $4.0 million. As a result of the Bolzoni acquisition, the Company changed its previous reinvestment assertion; and consequently, all of the earnings of its European operations are now considered permanently reinvested and the previously provided deferred tax liability is no longer required. In addition, the Company recognized tax expense of $1.6 million related to non-deductible acquisition expenses and tax expense of $2.1 million for net additions for unrecognized tax benefits.
The Company continually evaluates its deferred tax assets to determine if a valuation allowance is required. A valuation allowance is required where realization is determined to no longer meet the "more likely than not" standard. During 2014 and 2015, a significant downturn was experienced in the Company's Brazilian operations. This significant decrease in operations and actions taken by management to reduce its manufacturing activity to more appropriate levels, coupled with the continued low expectations in the near term for the Brazilian lift truck market and the continuing devaluation of the Brazilian real, caused the Company in 2015 to forecast a three-year cumulative loss for its Brazilian operations. Although the Company projects earnings over the longer term for its Brazilian operations, such longer-term forecasts are not sufficient positive evidence to support the future utilization of deferred tax assets when a three-year loss is determined. Accordingly, in 2015, the Company recorded a valuation allowance adjustment of $1.9 million against its deferred tax assets in Brazil. The Company also recognized $2.7 million, $2.4 million and $5.6 million in 2017, 2016 and 2015, respectively, of valuation allowances related to pre-tax losses in Brazil and $0.6 million in 2017 due to pre-tax losses in China in its effective tax rate.
A detailed summary of the total deferred tax assets and liabilities in the Consolidated Balance Sheets resulting from differences in the book and tax basis of assets and liabilities follows: |
| | | | | | | |
| December 31 |
| 2017 | | 2016 |
Deferred tax assets | | | |
Tax attribute carryforwards | $ | 28.3 |
| | $ | 31.6 |
|
Product warranties | 9.1 |
| | 13.7 |
|
Accrued expenses and reserves | 8.3 |
| | 23.2 |
|
Accrued product liability | 6.5 |
| | 9.3 |
|
Other employee benefits | 3.2 |
| | 5.2 |
|
Accrued pension benefits | 2.2 |
| | 8.2 |
|
Other | — |
| | 2.2 |
|
Total deferred tax assets | 57.6 |
| | 93.4 |
|
Less: Valuation allowance | 31.0 |
| | 29.3 |
|
| 26.6 |
| | 64.1 |
|
Deferred tax liabilities | | | |
Depreciation and amortization | 22.2 |
| | 25.4 |
|
Inventories | 0.5 |
| | 5.8 |
|
Unremitted earnings | — |
| | 0.4 |
|
Other | 0.3 |
| | — |
|
Total deferred tax liabilities | 23.0 |
| | 31.6 |
|
Net deferred tax asset | $ | 3.6 |
| | $ | 32.5 |
|
The following table summarizes the tax carryforwards and associated carryforward periods and related valuation allowances where the Company has determined that realization is uncertain: |
| | | | | | | | | |
| December 31, 2017 |
| Net deferred tax asset | | Valuation allowance | | Carryforwards expire during: |
Non-U.S. net operating loss | $ | 21.9 |
| | $ | 13.9 |
| | 2018 - Indefinite |
Non-U.S. capital losses | 6.5 |
| | 6.5 |
| | 2018 - Indefinite |
State net operating losses and credits | 3.8 |
| | 2.4 |
| | 2018 - 2036 |
Less: Unrecognized tax benefits | (3.9 | ) | | — |
| | |
Total | $ | 28.3 |
| | $ | 22.8 |
| | |
|
| | | | | | | | | |
| December 31, 2016 |
| Net deferred tax asset | | Valuation allowance | | Carryforwards expire during: |
Non-U.S. net operating loss | $ | 25.2 |
| | $ | 15.7 |
| | 2017 - Indefinite |
Non-U.S. capital losses | 5.9 |
| | 5.9 |
| | 2017 - Indefinite |
State net operating losses and credits | 2.8 |
| | 2.0 |
| | 2017 - 2031 |
U.S. foreign tax credit | 2.5 |
| | — |
| | 2017 - 2026 |
U.S. net operating loss | 0.8 |
| | — |
| | 2017 - 2036 |
Less: Unrecognized tax benefits | (5.6 | ) | | — |
| | |
Total | $ | 31.6 |
| | $ | 23.6 |
| | |
The establishment of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or other deferred tax assets in future periods. The tax net operating losses attributable to Brazil and Australia comprise a substantial portion of the deferred tax assets and do not expire under local law.
During 2017 and 2016, the net valuation allowance provided against certain deferred tax assets increased by $1.7 million and $0.7 million, respectively. The change in the total valuation allowance in 2017 and 2016 included a net increase in tax expense of $0.1 million and a net decrease of $0.2 million, respectively, a net change in the overall U.S. dollar value of valuation allowances previously recorded in non-U.S. currencies and amounts recorded directly in equity of a net increase of $1.1 million and $0.9 million in 2017 and 2016, respectively. Additionally in 2017, the change in valuation allowance included a net increase of $0.5 million due to the remeasurement of deferred taxes as a result of the Tax Reform Act.
Based upon a review of historical earnings and trends, forecasted earnings and the relevant expiration of carryforwards, the Company believes the valuation allowances provided are appropriate. At December 31, 2017, the Company had gross net operating loss carryforwards in U.S. state jurisdictions of $19.6 million and non-U.S. jurisdictions of $75.7 million.
The following is a reconciliation of total gross unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the consolidated financial statements for the years ended December 31, 2017, 2016 and 2015. Approximately $10.9 million, $11.1 million and $3.8 million of these amounts as of December 31, 2017, 2016 and 2015, respectively, relate to permanent items that, if recognized, would impact the reported income tax rate. This amount differs from gross unrecognized tax benefits presented in the table below for December 31, 2016 due to the increase in U.S. federal income taxes which would occur upon the recognition of the state tax benefits included herein. |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | 11.2 |
| | $ | 3.8 |
| | $ | 4.3 |
|
Additions (reductions) for business acquisitions | (1.0 | ) | | 6.3 |
| | — |
|
Additions based on tax positions related to the current year | 2.7 |
| | 2.8 |
| | 0.7 |
|
Additions (reductions) for tax positions of prior years | (1.5 | ) | | 0.1 |
| | 0.1 |
|
Reductions due to settlements with taxing authorities and the lapse of the applicable statute of limitations | (1.2 | ) | | (0.9 | ) | | (1.1 | ) |
Other changes in unrecognized tax benefits including foreign currency translation adjustments | 0.7 |
| | (0.9 | ) | | (0.2 | ) |
Balance at December 31 | $ | 10.9 |
| | $ | 11.2 |
| | $ | 3.8 |
|
The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The Company recorded a net decrease of $0.1 million during 2017 and a net increase of $0.1 million during 2016 and 2015 in interest and penalties. In addition, during 2016, the balance of accrued interest and penalty was increased for uncertain tax positions related to business acquisitions by $0.5 million. The total amount of interest and penalties accrued was $0.8 million, $0.9 million and $0.3 million as of December 31, 2017, 2016 and 2015, respectively.
The Company expects the amount of unrecognized tax benefits will change within the next twelve months; however, the change in unrecognized tax benefits which is reasonably possible within the next twelve months, is not expected to have a significant effect on the Company's financial position or results of operations. It is reasonably possible the Company will record unrecognized tax benefits within the next twelve months in the range of zero to $0.5 million resulting from the possible expiration of certain statutes of limitation and settlement of audits. If recognized, the previously unrecognized tax benefits will be recorded as discrete tax benefits in the interim period in which the items are effectively settled.
The tax returns of the Company and its non-U.S. subsidiaries are routinely examined by various taxing authorities. The Company has not been informed of any material assessment for which an accrual has not been previously provided and the Company would vigorously contest any material assessment. Management believes any potential adjustment would not materially affect the Company's financial condition or results of operations.
In general, the Company operates in taxing jurisdictions that provide a statute of limitations period ranging from three to five years for the taxing authorities to review the applicable tax filings. The examination of U.S. federal tax returns for all years prior to 2014 have been settled with the Internal Revenue Service or otherwise have essentially closed under the applicable statute of limitations. However, the Company has elected to voluntarily extend the statute of limitations for U.S. federal tax return for 2012 at the request of its prior parent company such that attributes may be adjusted in limited circumstances. The Company is routinely under examination in various state and non-U.S. jurisdictions and in most cases the statute of limitations has not been extended. The Company believes these examinations are routine in nature and are not expected to result in any material tax assessments.