| 8. |
Income Taxes |
The components of income before income taxes and the details of the provision for income taxes were as follows for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
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Income before income taxes: |
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Domestic |
$ | 447,853 | $ | 397,215 | $ | 502,292 | ||||||
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Foreign |
348,876 | 295,888 | 304,088 | |||||||||
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Total |
$ | 796,729 | $ | 693,103 | $ | 806,380 | ||||||
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Provision for income taxes: |
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Current: |
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Federal |
$ | 127,874 | $ | 116,898 | $ | 130,996 | ||||||
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Foreign |
71,846 | 63,170 | 66,691 | |||||||||
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State |
6,744 | 6,509 | 11,376 | |||||||||
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Total current |
206,464 | 186,577 | 209,063 | |||||||||
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Deferred: |
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Federal |
(97,465 | ) | 5,273 | 1,711 | ||||||||
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Foreign |
6,204 | (8,434 | ) | (3,611 | ) | |||||||
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State |
56 | (2,471 | ) | 8,358 | ||||||||
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Total deferred |
(91,205 | ) | (5,632 | ) | 6,458 | |||||||
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Total provision |
$ | 115,259 | $ | 180,945 | $ | 215,521 | ||||||
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Significant components of the deferred tax (asset) liability were as follows at December 31:
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
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Current deferred tax (asset) liability: |
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Reserves not currently deductible |
$ | — | $ | (39,509 | ) | |||
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Share-based compensation |
— | (7,022 | ) | |||||
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Net operating loss carryforwards |
— | (2,072 | ) | |||||
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Other |
— | (1,041 | ) | |||||
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| — | (49,644 | ) | ||||||
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Portion included in other current liabilities |
— | (360 | ) | |||||
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Gross current deferred tax asset |
— | (50,004 | ) | |||||
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Noncurrent deferred tax (asset) liability: |
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Differences in basis of property and accelerated depreciation |
39,816 | 54,243 | ||||||
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Reserves not currently deductible |
(42,966 | ) | (28,808 | ) | ||||
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Pensions |
11,452 | 8,714 | ||||||
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Differences in basis of intangible assets and accelerated amortization |
455,690 | 603,577 | ||||||
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Net operating loss carryforwards |
(10,376 | ) | (8,399 | ) | ||||
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Share-based compensation |
(13,434 | ) | (13,707 | ) | ||||
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Foreign tax credit carryforwards |
— | (3,441 | ) | |||||
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Unremitted earnings |
84,356 | 4,481 | ||||||
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Other |
(23,176 | ) | (1,004 | ) | ||||
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| 501,362 | 615,656 | |||||||
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Less: Valuation allowance |
3,100 | 2,046 | ||||||
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| 504,462 | 617,702 | |||||||
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Portion included in noncurrent assets |
8,064 | 4,074 | ||||||
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Gross noncurrent deferred tax liability |
512,526 | 621,776 | ||||||
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Net deferred tax liability |
$ | 512,526 | $ | 571,772 | ||||
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The Company’s effective tax rate reconciles to the U.S. Federal statutory rate as follows for the years ended December 31:
| 2017 | 2016 | 2015 | ||||||||||
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U.S. Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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State income taxes, net of federal income tax benefit |
0.4 | 0.4 | 1.2 | |||||||||
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Foreign operations, net |
(6.8 | ) | (7.1 | ) | (6.8 | ) | ||||||
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U.S. Manufacturing deduction and credits |
(2.2 | ) | (2.6 | ) | (2.4 | ) | ||||||
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Stock compensation |
(1.6 | ) | 0.2 | 0.1 | ||||||||
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Net deferred tax revaluation |
(23.3 | ) | — | — | ||||||||
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Deemed repatriation of foreign earnings |
11.8 | — | — | |||||||||
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Other |
1.2 | 0.2 | (0.4 | ) | ||||||||
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Consolidated effective tax rate |
14.5 | % | 26.1 | % | 26.7 | % | ||||||
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On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result, in the fourth quarter of 2017, the Company recorded a net benefit of $91.6 million in the consolidated statement of income as a component of Provision for income taxes. The $91.6 million net benefit consisted of a $185.8 million benefit resulting from the remeasurement of the Company’s net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate and $94.2 million expense mostly relating to the one-time mandatory tax on previously deferred earnings of certain non-U.S. subsidiaries that are owned either wholly or partially by a U.S. subsidiary of the Company as discussed further below.
Although the $91.6 million net benefit represents what the Company believes is a reasonable estimate of the impact of the income tax effects of the Act on the Company’s consolidated financial statements as of December 31, 2017, it should be considered provisional. As additional guidance from the U.S. Department of Treasury is provided, the Company may need to adjust the provisional amounts after it finalizes the 2017 U.S. tax return and is able to conclude whether any further adjustments are required to its U.S. portion of net deferred tax liability of $390.4 million as of December 31, 2017, as well as to the liability associated with the one-time mandatory tax. The currently recorded amounts include a variety of estimates of taxable earnings and profits, estimated taxable foreign cash balances, differences between U.S. GAAP and U.S. tax principles and interpretations of many aspects of the Act that may, if changed, impact the final amounts. Any adjustments to these provisional amounts will be reported as a component of Provision for income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018. The Company is still evaluating the potential future impact of the global intangible low-taxed income (“GILTI”) section of the Act and has not provided any provisional deferred tax liability for it. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in the U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company’s measurement of its deferred taxes. Due to the ongoing evaluation, the Company has not yet made the accounting policy decision.
The recently enacted Act mandated a one-time tax on previously deferred foreign earnings of U.S. subsidiaries. At December 31, 2017, included in the $94.2 million expense mentioned above, the Company recorded an expense of $81.9 million relating to the one-time mandatory tax. The Company is electing to pay the tax on an installment basis with $1.2 million recorded in current taxes payable, $13.2 million recorded in noncurrent taxes payable and $67.5 million recorded as a deferred tax liability, which represents the portion relating to certain non-U.S. subsidiaries that have a fiscal year end in 2018 and is not yet payable. The Company intends to reinvest its earnings indefinitely in operations outside the United States except to the extent of $1.5 billion, which is deemed paid earnings under the mandatory tax provision of the Act. In addition, the Company has recorded an incremental $13.3 million in state income and foreign withholding taxes expected to be incurred when the cash amounts related to the mandatory tax are ultimately repatriated to the U.S., offset by $1.0 million for a remeasurement of uncertain tax positions impacted by the mandatory tax inclusion.
Due to the adoption of ASU 2015-17, the Company classified all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet at December 31, 2017. The Company prospectively adopted ASU 2015-17 effective January 1, 2017. Therefore, prior periods have not been adjusted to reflect this adoption.
At December 31, 2016, U.S. and foreign deferred income taxes totaling $4.5 million were provided on undistributed earnings of certain non-U.S. subsidiaries that were not expected to be permanently reinvested in such companies. There was no provision for U.S. deferred income taxes for the undistributed earnings of certain other subsidiaries, which totaled approximately $1.1 billion at December 31, 2016.
At December 31, 2017, the Company had tax effected benefits of $10.4 million related to net operating loss carryforwards, which will be available to offset future income taxes payable, subject to certain annual or other limitations based on foreign and U.S. tax laws. This amount includes net operating loss carryforwards of $1.7 million for federal income tax purposes with no valuation allowance, $6.6 million for state income tax purposes with no valuation allowance and $2.2 million for foreign income tax purposes with a valuation allowance of $2.2 million. These net operating loss carryforwards, if not used, will expire between 2018 and 2037.
At December 31, 2017, the Company had tax effected benefits of $5.1 million related to tax credit carryforwards, which will be available to offset future income taxes payable, subject to certain annual or other limitations based on foreign and U.S. tax laws. This amount includes tax credit carryforwards of $0.6 million for federal income tax purposes with a valuation allowance of $0.6 million, $4.4 million for state income tax purposes with a valuation allowance of $0.3 million and $0.1 million for foreign income tax purposes with no valuation allowance. These tax credit carryforwards, if not used, will expire between 2018 and 2037.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the deferred tax assets established for foreign net operating loss carryforwards and tax credits. In 2017, the Company recorded an increase of $1.1 million in the valuation allowance primarily related to foreign net operating loss carryforwards that are not expected to be utilized.
At December 31, 2017, the Company had gross unrecognized tax benefits of $60.3 million, of which $51.7 million, if recognized, would impact the effective tax rate. At December 31, 2016, the Company had gross unrecognized tax benefits of $57.9 million, of which $48.5 million, if recognized, would impact the effective tax rate.
At December 31, 2017 and 2016, the Company reported $9.7 million and $8.9 million, respectively, related to interest and penalty exposure as accrued income tax expense in the consolidated balance sheet. During 2017, the Company recognized a net expense of $0.9 million, and during 2016 and 2015, the Company recognized a net benefit of $1.8 million and $0.4 million, respectively, for interest and penalties related to uncertain tax positions in the consolidated statement of income as a component of income tax expense.
Approximately 70% of the Company’s overall tax liability is incurred in the United States as measured prior to tax reform. The Company files income tax returns in various other state and foreign tax jurisdictions, in some cases for multiple legal entities per jurisdiction. Generally, the Company has open tax years subject to tax audit on average of between three and six years in these jurisdictions. At December 31, 2017, there were no tax years currently under examination by the Internal Revenue Service (“IRS”) related to the U.S. consolidated tax group, although a separate examination of a pre-acquisition net operating loss carryback is ongoing related to a recently acquired company for which no material liability is expected. The Company has not materially extended any other statutes of limitation for any significant location and has reviewed and accrued for, where necessary, tax liabilities for open periods including state and foreign jurisdictions that remain subject to examination. There have been no penalties asserted or imposed by the IRS related to substantial understatement of income, gross valuation misstatement or failure to disclose a listed or reportable transaction.
During 2017, the Company added $15.4 million of tax, interest and penalties to identified uncertain tax positions and reversed $12.1 million of tax and interest related to statute expirations. During 2016, the Company added $8.6 million of tax, interest and penalties related to identified uncertain tax positions and reversed $16.3 million of tax and interest related to statute expirations and settlement of prior uncertain positions.
The following is a reconciliation of the liability for uncertain tax positions at December 31:
| 2017 | 2016 | 2015 | ||||||||||
| (In millions) | ||||||||||||
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Balance at the beginning of the year |
$ | 57.9 | $ | 63.8 | $ | 71.7 | ||||||
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Additions for tax positions related to the current year |
10.0 | 5.5 | 8.8 | |||||||||
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Additions for tax positions of prior years |
3.1 | 1.5 | 1.3 | |||||||||
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Reductions for tax positions of prior years |
(2.8 | ) | (3.6 | ) | (7.1 | ) | ||||||
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Reductions related to settlements with taxing authorities |
— | (3.4 | ) | (8.3 | ) | |||||||
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Reductions due to statute expirations |
(7.9 | ) | (5.9 | ) | (2.6 | ) | ||||||
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Balance at the end of the year |
$ | 60.3 | $ | 57.9 | $ | 63.8 | ||||||
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In 2017, the additions above primarily reflect the increase in tax liabilities for uncertain tax positions related to certain domestic and foreign issues, while the reductions above primarily relate to statute expirations. At December 31, 2017, tax, interest and penalties of $68.5 million were classified as a noncurrent liability. The net change in uncertain tax positions for the year ended December 31, 2017 resulted in an increase to income tax expense of $4.3 million.