Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Income tax expense represented 12.4 percent, 28.7 percent and 32.7 percent of income from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015, respectively.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the "Tax Act". The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes and changing how foreign earnings are subject to U.S. tax. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company has not completed our determination of the accounting implications of the Tax Act on its tax accruals. However, the Company reasonably estimated the effects of the Tax Act and recorded provisional amounts in the financial statements as of December 31, 2017. Consistent with guidance issued by the Securities Exchange Commission ("SEC"), which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the Tax Act, the Company provisionally recorded an income tax benefit of $6.5 million related to the Tax Act. This amount is comprised of a $10.3 million tax benefit from the remeasurement of federal net deferred tax liabilities resulting from the reduction in the U.S. statutory corporate tax rate to 21% from 35%, less $3.8 million of tax expense from the mandatory one-time tax on the accumulated earnings of its foreign subsidiaries. As the Company completes its analysis of the Tax Act, collects and prepares necessary data and interprets any additional guidance issued by the U.S. Treasury Department, the IRS and other standard-setting bodies, adjustments to the provisional amounts may be required. In addition, adjustments to the provisional amounts may be needed to reflect legislative actions by the various U.S. states related to application of the Tax Act provisions on 2017 state tax returns. These adjustments could significantly impact the Company’s provision for income taxes in the period in which the adjustments are made.
In conjunction with the Tax Act, The Company early adopted ASU 2018-02 in the fourth quarter of 2017 and accordingly reclassified $10.9 million related to stranded tax effects resulting from the Tax Act from AOCI to retained earnings. See Note 10, "Stockholders' Equity."
For the Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Act, a provisional estimate could not be made as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies and changes in assumptions.
In June 2017, as part of our annual strategic plan review, the Company reassessed its intentions regarding the indefinite reinvestment of undistributed earnings of our German operations and asserted its intent to indefinitely reinvest them. As a result, the Company did not provide deferred income taxes on the 2017 unremitted earnings of our German operations. In addition, in the second quarter of 2017, the deferred tax liability of $4.1 million which was recorded in 2016 on unremitted German earnings was eliminated with a reduction to income tax expense. As noted above, the Tax Act includes a mandatory one-time tax on unremitted accumulated earnings of all foreign subsidiaries, and as a result, all previously unremitted earnings are now subject to U.S. tax and a liability of $3.8 million was recorded thereon as of December 31, 2017. Beginning in 2018, the Tax Act will generally provide a 100% deduction for U.S. federal tax purposes of dividends received by the Company from its foreign subsidiaries. The Company is currently evaluating the potential U.S. federal and state and foreign tax liabilities that would result from future repatriations, if any, and how the Tax Act will affect the Company's existing accounting assertion with regard to the indefinite reinvestment of undistributed foreign earnings. The Company will complete this evaluation and determine the impacts, if any, of U.S. federal and state and foreign legislation on its indefinite reinvestment assertion within the one-year measurement period.
The following table presents the principal reasons for the difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2017 | | 2016 | | 2016 | | 2015 | | 2015 |
U.S. federal statutory income tax rate | | 35.0 | % | | $ | 32.1 |
| | 35.0 | % | | $ | 36.1 |
| | 35.0 | % | | $ | 31.5 |
|
U.S. state income taxes, net of federal income tax benefit | | 1.9 | % | | 1.7 |
| | 1.9 | % | | 2.0 |
| | 2.1 | % | | 1.9 |
|
Tax on foreign dividends (a) | | (0.3 | )% | | (0.3 | ) | | 4.5 | % | | 4.6 |
| | 3.6 | % | | 3.2 |
|
Foreign tax rate differences (b) | | (3.4 | )% | | (3.1 | ) | | (2.7 | )% | | (2.8 | ) | | (2.2 | )% | | (2.0 | ) |
Foreign financing structure (c) | | (2.2 | )% | | (2.0 | ) | | (1.6 | )% | | (1.7 | ) | | (1.3 | )% | | (1.2 | ) |
Excess tax benefits from stock compensation | | (4.9 | )% | | (4.5 | ) | | (3.0 | )% | | (3.1 | ) | | — |
| | — |
|
Research and development and other tax credits (d) | | (3.3 | )% | | (3.0 | ) | | (2.8 | )% | | (2.9 | ) | | (3.9 | )% | | (3.5 | ) |
Domestic production activities deduction | | (0.6 | )% | | (0.5 | ) | | (1.5 | )% | | (1.5 | ) | | (2.2 | )% | | (2.0 | ) |
Uncertain income tax positions | | 0.8 | % | | 0.7 |
| | (0.4 | )% | | (0.4 | ) | | 1.3 | % | | 1.2 |
|
Change in statutory tax rates (e) | | (10.6 | )% | | (9.7 | ) | | — | % | | — |
| | — | % | | — |
|
Other differences — net | | — | % | | — |
| | (0.7 | )% | | (0.7 | ) | | 0.3 | % | | 0.3 |
|
Effective income tax rate | | 12.4 | % | | $ | 11.4 |
| | 28.7 | % | | $ | 29.6 |
| | 32.7 | % | | $ | 29.4 |
|
| |
(a) | For 2017, the amount reflects the net benefit of the indefinite reinvestment assertion of $4.1 million, less the $3.8 mandatory one-time tax on the accumulated earnings of foreign subsidiaries from the Tax Act. |
| |
(b) | Represents the impact on the Company's effective tax rate due to changes in the mix of earnings among taxing jurisdictions with differing statutory rates. |
| |
(c) | Represents the impact on the Company's effective tax rate of the Company's financing strategies. |
| |
(d) | For 2015, the Company recognized a $1.4 million benefit related to research and development ("R&D") tax credits of FiberMark for the period 2012 through July 2015. |
| |
(e) | Represents the net benefit from remeasurement of the net deferred tax liabilities, including a tax benefit of $10.3 million from the Tax Act, less $0.6 million of tax expense from a state tax rate change in Germany. |
The Company's effective income tax rate can be affected by many factors, including but not limited to, changes in the mix of earnings in taxing jurisdictions with differing statutory rates, the availability of R&D and other tax credits, changes in corporate structure as a result of business acquisitions and dispositions, changes in the valuation of deferred tax assets and liabilities, the results of audit examinations of previously filed tax returns and changes in tax laws. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. The Company is no longer subject to U.S. federal examination for years before 2014, to state and local examinations for years before 2013 and to non-U.S. income tax examinations for years before 2012.
The following table presents the U.S. and foreign components of income from continuing operations before income taxes:
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| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Income from continuing operations before income taxes: | | |
| | |
| | |
|
U.S. | | $ | 53.6 |
| | $ | 68.3 |
| | $ | 62.2 |
|
Foreign | | 38.1 |
| | 34.7 |
| | 27.7 |
|
Total | | $ | 91.7 |
| | $ | 103.0 |
| | $ | 89.9 |
|
The following table presents the components of the provision (benefit) for income taxes:
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| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Provision (benefit) for income taxes: | | |
| | |
| | |
|
Current: | | |
| | |
| | |
|
Federal | | $ | 4.7 |
| | $ | 7.1 |
| | $ | 12.7 |
|
State | | 0.5 |
| | (0.5 | ) | | 1.3 |
|
Foreign | | 6.4 |
| | 5.9 |
| | 5.1 |
|
Total current tax provision | | 11.6 |
| | 12.5 |
| | 19.1 |
|
Deferred: | | |
| | |
| | |
|
Federal | | (1.8 | ) | | 14.8 |
| | 7.7 |
|
State | | (0.1 | ) | | 1.8 |
| | 2.3 |
|
Foreign | | 1.7 |
| | 0.5 |
| | 0.3 |
|
Total deferred tax provision | | (0.2 | ) | | 17.1 |
| | 10.3 |
|
Total provision for income taxes | | $ | 11.4 |
| | $ | 29.6 |
| | $ | 29.4 |
|
The federal deferred tax provision was reduced by a net $8.1 million as a result of the Tax Act and the German tax rate increase. This amount includes $10.3 million of tax rate reduction from the Tax Act, less $0.6 million from the German tax rate increase, less $1.6 million of impact of the mandatory one-time tax on the accumulated earnings of foreign subsidiaries from the Tax Act. The remaining $2.2 million of impact of the mandatory one-time tax on foreign earnings increased the federal current tax provision.
The Company has elected to treat its Canadian operations as a branch for U.S. income tax purposes. Therefore, the amount of income (loss) before income taxes from Canadian operations are included in the Company's consolidated U.S. income tax returns and such amounts are subject to U.S. income taxes.
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities, net of reserves for uncertain tax positions and valuation allowances, are as follows:
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| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred income tax assets (liabilities) | | |
| | |
|
Research and development tax credits | | $ | 6.6 |
| | $ | 15.0 |
|
Net operating losses and credits | | 4.2 |
| | 10.5 |
|
Employee benefits | | 1.1 |
| | 26.0 |
|
Inventories | | 0.2 |
| | (0.5 | ) |
Accrued liabilities | | 0.1 |
| | 3.2 |
|
Intangibles | | (0.5 | ) | | (10.8 | ) |
Accelerated depreciation | | (1.6 | ) | | (34.0 | ) |
Undistributed foreign earnings | | — |
| | (4.4 | ) |
Other | | — |
| | 1.1 |
|
Net deferred income tax assets | | $ | 10.1 |
| | $ | 6.1 |
|
| | | | |
Deferred income tax assets (liabilities) | | |
| | |
|
Accelerated depreciation | | $ | (45.1 | ) | | $ | (12.3 | ) |
Intangibles | | (11.4 | ) | | (2.8 | ) |
Interest limitation | | — |
| | (0.3 | ) |
Other | | 1.3 |
| | — |
|
Inventories | | 1.8 |
| | 0.3 |
|
Accrued liabilities | | 1.9 |
| | — |
|
Net operating losses | | 5.0 |
| | — |
|
Research and development tax credits | | 8.6 |
| | — |
|
Employee benefits | | 22.9 |
| | 5.0 |
|
Net deferred income tax liabilities | | $ | (15.0 | ) | | $ | (10.1 | ) |
As of December 31, 2017, the net deferred tax assets relate to the state of Wisconsin and the net deferred tax liabilities relate to U.S. federal and all other U.S. state jurisdictions, and operations of Germany, the Netherlands and the U.K. The presentation as of December 31, 2016 reflected net deferred tax assets of U.S. federal and state jurisdictions and the net deferred tax liabilities related to operations of Germany and the U.K. As of December 31, 2017, the Company had $37.3 million of undistributed earnings (net of foreign taxes) of foreign subsidiaries. There were $12.5 million undistributed earnings (net of foreign taxes) of foreign subsidiaries as of December 31, 2016.
As of December 31, 2017, the Company had $15.5 million of U.S. federal and $6.9 million of U.S. state R&D tax credits which, if not used, will expire between 2030 and 2037 for the U.S. federal R&D tax credits and between 2020 and 2032 for the state R&D tax credits. As of December 31, 2017, we had $44.0 million of state NOLs which may be used to offset state taxable income. The NOLs are reflected in the consolidated financial statements as a deferred tax asset of $2.6 million. If not used, substantially all of the NOLs will expire in various amounts between 2018 and 2036. The Company also had pre-acquisition and recognized built-in loss carryovers of $9.3 million, reflected as a deferred tax asset of $2.0 million. In addition, the Company had $3.1 million of federal Alternative Minimum Tax Credit carryovers, which under the Tax Act are fully refundable by no later than 2021.
The following is a tabular reconciliation of the total amounts of uncertain tax positions as of and for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | | | |
| | For the Years Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
Balance at January 1, | | $ | 10.3 |
| | $ | 12.9 |
| | $ | 7.0 |
|
Increases in prior period tax positions | | 0.4 |
| | — |
| | 0.5 |
|
Decreases in prior period tax positions | | (1.0 | ) | | (2.6 | ) | | — |
|
Increases in current period tax positions | | 0.7 |
| | 0.6 |
| | 5.5 |
|
Decreases due to lapse of statute of limitations | | (1.0 | ) | | (0.3 | ) | | — |
|
Increases due to change in tax rates | | 0.4 |
| | — |
| | — |
|
Increases (decreases) from foreign exchange rate changes | | 0.2 |
| | (0.3 | ) | | (0.1 | ) |
Balance at December 31, | | $ | 10.0 |
|
| $ | 10.3 |
|
| $ | 12.9 |
|
The $10.0 million of reserves for uncertain tax positions as of December 31, 2017 were reflected on the consolidated balance sheets as follows: $2.3 million netted against deferred tax assets, $5.3 million added to deferred tax liabilities and $2.4 million in other noncurrent obligations. The $10.3 million of reserves for uncertain tax positions as of December 31, 2016 were reflected on the consolidated balance sheets as follows: $7.6 million netted against deferred tax assets, $1.2 million netted against (added to) deferred tax liabilities and $1.5 million in other noncurrent obligations.
If recognized, $9.6 million of the benefit for uncertain tax positions at December 31, 2017 would favorably affect the Company's effective tax rate in future periods. The Company does not expect that the expiration of the statute of limitations or the settlement of audits in the next 12 months will result in liabilities for uncertain income tax positions that are materially different than the amounts that were accrued as of December 31, 2017.
The Company recognizes accrued interest and penalties related to uncertain income tax positions in the Provision for income taxes on the consolidated statements of operations. As of December 31, 2017 and 2016, the Company had $0.1 million and $0.2 million, respectively, accrued for interest and penalties related to uncertain income tax positions.
As of December 31, 2017, the Company had a valuation allowance of $0.4 million against its state NOLs. As of December 31, 2016, the Company had a valuation allowance of $3.1 million against its state R&D tax credits and $0.4 million against its state NOLs. In determining the need for a valuation allowance, the Company considers many factors, including specific taxing jurisdictions, sources of taxable income, income tax strategies and forecasted earnings for the entities in each jurisdiction. A valuation allowance is recognized if, based on the weight of available evidence, the Company concludes that it is more likely than not that some portion or all of the deferred income tax asset will not be realized.