Income Taxes
The components of our income before income taxes and the provision for income taxes are as follows (in millions): |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income before income taxes: | | | | | |
Domestic | $ | 290.4 |
| | $ | 265.8 |
| | $ | 259.5 |
|
Foreign | 107.6 |
| | 89.5 |
| | 81.0 |
|
Total | $ | 398.0 |
| | $ | 355.3 |
| | $ | 340.5 |
|
Income tax expense (benefit): | | | | | |
Current: | | | | | |
Federal | $ | 89.1 |
| | $ | 100.1 |
| | $ | 88.6 |
|
Foreign | 30.3 |
| | 22.9 |
| | 22.6 |
|
State | 10.1 |
| | 14.1 |
| | 9.7 |
|
Total current provision | 129.5 |
| | 137.1 |
| | 120.9 |
|
Deferred: | | | | | |
Federal | (96.1 | ) | | (1.6 | ) | | 6.5 |
|
Foreign | (3.6 | ) | | (2.4 | ) | | (1.8 | ) |
State | 6.2 |
| | (0.2 | ) | | 0.3 |
|
Total deferred provision | (93.5 | ) | | (4.2 | ) | | 5.0 |
|
Income tax expense | $ | 36.0 |
| | $ | 132.9 |
| | $ | 125.9 |
|
The provision for income taxes was different from the U.S. federal statutory rate applied to income before taxes, and is reconciled as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes, net | 2.3 | % | | 2.4 | % | | 2.1 | % |
Reserves for tax exposures | (0.1 | )% | | (0.2 | )% | | 0.3 | % |
Change in valuation allowance | (0.6 | )% | | 0.6 | % | | 0.3 | % |
International operations | (3.1 | )% | | (0.8 | )% | | (1.2 | )% |
Stock-based compensation | (1.6 | )% | | — | % | | — | % |
Impact of law and rate change | (23.2 | )% | | — | % | | — | % |
Other, net | 0.3 | % | | 0.4 | % | | 0.5 | % |
Effective rate | 9.0 | % | | 37.4 | % | | 37.0 | % |
On December 22, 2017, U.S. tax reform (Tax Cuts and Jobs Act of 2017) was enacted. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate income tax rate reduction from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. As a result, the Company recorded a deferred income tax benefit of $102.7 million related to the remeasurement of its deferred tax assets and liabilities. In addition, the law imposes a one-time deemed repatriation transition tax on the accumulated unrepatriated and untaxed earnings of our foreign subsidiaries. This resulted in the Company recording a current tax expense of $11.1 million.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The valuation allowance as of December 31, 2017 primarily relates to net operating losses, tax credits and capital loss carryforwards that are not more likely than not to be utilized prior to their expiration.
We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them as a single non-current deferred income tax liability. Deferred tax assets (liabilities) are comprised of the following at December 31 (in millions): |
| | | | | | | |
| 2017 | | 2016 |
Gross deferred tax assets: | | | |
Allowances for trade and finance receivables | $ | 5.8 |
| | $ | 9.1 |
|
Accruals and liabilities | 50.5 |
| | 62.6 |
|
Employee benefits and compensation | 22.7 |
| | 30.6 |
|
Net operating loss carryforwards | 38.7 |
| | 25.1 |
|
Investment basis difference | (2.1 | ) | | 4.1 |
|
Other | 9.6 |
| | 11.6 |
|
Total deferred tax assets | 125.2 |
| | 143.1 |
|
Deferred tax asset valuation allowance | (28.1 | ) | | (26.4 | ) |
Total | 97.1 |
| | 116.7 |
|
Gross deferred tax liabilities: | | | |
Property and equipment | (94.3 | ) | | (120.0 | ) |
Goodwill and intangible assets | (179.6 | ) | | (274.6 | ) |
Other | (15.9 | ) | | (13.8 | ) |
Total | (289.8 | ) | | (408.4 | ) |
Net deferred tax liabilities | $ | (192.7 | ) | | $ | (291.7 | ) |
The tax benefit from state and federal net operating loss carryforwards expires as follows (in millions):
|
| | | |
2018 | $ | 0.4 |
|
2019 | 0.3 |
|
2020 | 0.8 |
|
2021 | 0.8 |
|
2022 | 0.1 |
|
2023 to 2037 | 36.3 |
|
| $ | 38.7 |
|
Permanently reinvested undistributed earnings of our foreign subsidiaries were approximately $282.9 million at December 31, 2017. This balance was impacted in the fourth quarter by management's change in assertion surrounding permanent reinvestment of undistributed earnings of our foreign subsidiaries. Because these amounts have been or will be permanently reinvested in properties and working capital, we have not recorded the deferred taxes associated with these earnings. If the undistributed earnings of foreign subsidiaries were to be remitted, state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits. It is not practical for us to determine the additional tax that would be incurred upon remittance of these earnings.
We made federal income tax payments, net of federal income tax refunds, of $81.5 million, $79.2 million and $95.2 million in 2017, 2016 and 2015, respectively. State and foreign income taxes paid by us, net of refunds, totaled $44.5 million, $42.4 million and $34.7 million in 2017, 2016 and 2015, respectively.
We apply the provisions of ASC 740, Income Taxes. ASC 740 clarifies the accounting and reporting for uncertainty in income taxes recognized in an enterprise's financial statements. These provisions prescribe a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken on income tax returns.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions): |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Balance at beginning of period | $ | 14.0 |
| | $ | 14.9 |
|
Increase in prior year tax positions | 0.2 |
| | 1.2 |
|
Decrease in prior year tax positions | — |
| | — |
|
Increase in current year tax positions | 1.6 |
| | 1.4 |
|
Settlements | — |
| | — |
|
Lapse in statute of limitations | (4.1 | ) | | (3.5 | ) |
Balance at end of period | $ | 11.7 |
| | $ | 14.0 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $7.8 million at December 31, 2017 and 2016.
We record interest and penalties associated with the uncertain tax positions within our provision for income taxes on the income statement. We had reserves totaling $2.4 million and $3.2 million in 2017 and 2016, respectively, associated with interest and penalties, net of tax.
The provision for income taxes involves management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, U.S. and non-U.S. tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or deductions and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business we are subject to examination by taxing authorities in the U.S., Canada, United Kingdom and Mexico. In general, the examination of our material tax returns is completed for the years prior to 2012.
Based on the potential outcome of the Company's tax examinations and the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the currently remaining unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the reserve balance is estimated to be in the range of a $1.0 million to $2.5 million decrease.