Income Taxes
(Loss) income from continuing operations before income taxes and Provision for income taxes consisted of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Income (loss) from continuing operations before income taxes: | |
| | |
| | |
|
Domestic operations | $ | (29,470 | ) | | $ | (34,015 | ) | | $ | (35,048 | ) |
Foreign operations | 17,484 |
| | 240,539 |
| | 253,166 |
|
| $ | (11,986 | ) | | $ | 206,524 |
| | $ | 218,118 |
|
Provision for (benefit from) income taxes: | |
| | |
| | |
|
Current: | |
| | |
| | |
|
Federal | $ | 49,259 |
| | $ | 621 |
| | $ | 471 |
|
State | (439 | ) | | (592 | ) | | 941 |
|
Foreign | 53,274 |
| | 60,651 |
| | 67,740 |
|
| $ | 102,094 |
| | $ | 60,680 |
| | $ | 69,152 |
|
Deferred: | |
| | |
| | |
|
Domestic operations | $ | (54,226 | ) | | $ | (2,924 | ) | | $ | (6,134 | ) |
Foreign operations | (5,314 | ) | | (5,984 | ) | | (21,850 | ) |
| (59,540 | ) | | (8,908 | ) | | (27,984 | ) |
| $ | 42,554 |
| | $ | 51,772 |
| | $ | 41,168 |
|
See Note 4, “Discontinued Operations” for the income (loss) from discontinued operations before income taxes and related income taxes.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code which included how the U.S. imposes income tax on multinational corporations. Key changes in the Tax Act which are relevant to the Company and generally effective January 1, 2018 include a flat corporate income tax rate of 21 percent to replace the marginal rates that range from 15 percent to 35 percent, elimination of the corporate alternative minimum tax, the creation of a territorial tax system replacing the worldwide tax system, a one-time tax on accumulated foreign subsidiary earnings to transition to the territorial system, a “minimum tax” on certain foreign earnings above an enumerated rate of return, a new base erosion anti-abuse tax that subjects certain payments made by a U.S. company to its foreign subsidiary to additional taxes, and an incentive for U.S. companies to sell, lease or license goods and services outside the U.S. by taxing the income at a reduced effective rate. The new tax also imposes limits on executive compensation and interest expense deductions, while permitting the immediate expensing for the cost of new investments in certain property acquired after September 27, 2017.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows registrants to include a provisional amount to account for the implications of the Tax Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Tax Act or December 22, 2018. Additionally, the Company will file its 2017 U.S. income tax return in Q4 which may change our tax basis in temporary differences estimated as of December 31, 2017 which will result in an adjustment to the tax provision to the re-measurement amount recorded in the financial statements.
ASC 740 requires changes in tax rates and tax laws to be accounted for in the period of enactment in continuing operations. Accordingly, of significance, the Company included a provisional estimate of approximately $52 million for the Transition Tax, payable over 8 years. Generally, the foreign earnings subject to the Transition Tax can be distributed without additional U.S. tax; however, if distributed, the amount could be subject to foreign taxes and U.S. state and local taxes. The Company continues to evaluate the implications of the Tax Act and its implications including actions we may take to address our business objectives. Therefore, the Company continues to maintain its indefinite reinvestment of foreign earnings. The Company also included a provisional estimate of approximately $55 million tax benefit for the re-measurement of its U.S. deferred tax assets and liabilities to 21 percent.
The Company’s Provision for income taxes from continuing operations differs from the amount that would be computed by applying the U.S. federal statutory rate as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Taxes calculated at the U.S. federal statutory rate | $ | (4,195 | ) | | $ | 72,283 |
| | $ | 76,365 |
|
State taxes | 86 |
| | 228 |
| | 768 |
|
Effect of tax rates on international operations | (13,916 | ) | | (27,831 | ) | | (36,305 | ) |
Change in enacted international tax rates | 536 |
| | (2,419 | ) | | (4,415 | ) |
Changes in valuation allowance and tax reserves | 5,859 |
| | 2,675 |
| | (55 | ) |
Tax Act - re-measurement of U.S. deferred taxes | (54,988 | ) | | — |
| | — |
|
Tax Act - mandatory repatriation taxes | 52,381 |
| | — |
| | — |
|
Non-deductible impairment expenses | 52,570 |
| | — |
| | — |
|
Other | 4,221 |
| | 6,836 |
| | 4,810 |
|
Provision for income taxes | $ | 42,554 |
| | $ | 51,772 |
| | $ | 41,168 |
|
Deferred income taxes, net reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the Tax Act becoming law on December 22, 2017 and the reduction in the U.S. corporate income tax rate from 35% to 21%, the Company revalued its ending net U.S. deferred tax liabilities at December 31, 2017 and recognized a provisional $55 million tax benefit in the Company’s Consolidated Statement of Income for the year ended December 31, 2017. The significant components of deferred tax assets and liabilities, in addition to the reconciliation of the beginning and ending amount of gross unrecognized tax benefits, are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Post-retirement benefit obligation | $ | 23,297 |
| | $ | 66,911 |
|
Expenses currently not deductible | 69,039 |
| | 105,780 |
|
Net operating loss carryforward | 142,700 |
| | 211,205 |
|
Tax credit carryforward | 4,148 |
| | 10,882 |
|
Depreciation and amortization | 10,001 |
| | 7,879 |
|
Other | 36,733 |
| | 14,956 |
|
Valuation allowance | (155,179 | ) | | (153,740 | ) |
Deferred tax assets, net | $ | 130,739 |
| | $ | 263,873 |
|
Deferred tax liabilities: | |
| | |
|
Depreciation and amortization | $ | (271,359 | ) | | $ | (292,906 | ) |
UK and other foreign benefit obligation | (11,317 | ) | | (14,990 | ) |
Inventory | (12,109 | ) | | (18,309 | ) |
Outside basis differences and other | (118,974 | ) | | (178,166 | ) |
Total deferred tax liabilities | $ | (413,759 | ) | | $ | (504,371 | ) |
Total deferred tax liabilities, net | $ | (283,020 | ) | | $ | (240,498 | ) |
The Company evaluates the recoverability of its deferred tax assets on a jurisdictional basis by considering whether deferred tax assets will be realized on a more likely than not basis. To the extent a portion or all of the applicable deferred tax assets do not meet the more likely than not threshold, a valuation allowance is recorded. During the year ended December 31, 2017, the valuation allowance increased from $153.7 million to $155.2 million with a net increase of $17.3 million recognized in Provision for income taxes, a $18.9 million decrease due to reclassifications and the divestiture of Colfax Fluid Handling entities and a $3.1 million increase related to changes in foreign currency rates. Consideration was given to tax planning strategies and future taxable income as to how much of the relevant deferred tax asset could be realized on a more likely than not basis.
The Company has U.S. net operating loss carryforwards of $16.3 million expiring in years 2022 through 2033. The Company’s ability to use these various carryforwards to offset any taxable income generated in future taxable periods may be limited under Section 382 and other federal tax provisions. At December 31, 2017 the Company also has $577.9 million foreign net operating loss carryforwards primarily in Brazil, Czech Republic, Germany, India, Sweden, and the United Kingdom that may subject to local tax restrictive limitations including changes in ownership. Generally, the foreign net operating losses can be carried forward indefinitely, except in the Czech Republic and India where they will expire between 2019 and 2026.
For the year ended December 31, 2017, after accounting for the Tax Act provisional amounts, all undistributed earnings of the Company’s foreign subsidiaries, which are indefinitely reinvested outside the U.S., are provisionally estimated to be $950 million. The amount of deferred tax liability that would have been recognized had such earnings not been indefinitely reinvested is not reasonably determinable.
The Company records a liability for unrecognized income tax benefits for the amount of benefit included in its previously filed income tax returns and in its financial results expected to be included in income tax returns to be filed for periods through the date of its Consolidated Financial Statements for income tax positions for which it is more likely than not that a tax position will not be sustained upon examination by the respective taxing authority. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (inclusive of associated interest and penalties):
|
| | | |
| (In thousands) |
Balance, December 31, 2014 | $ | 77,525 |
|
Addition for tax positions taken in prior periods | 3,924 |
|
Addition for tax positions taken in the current period | 924 |
|
Reductions related to settlements with taxing authorities | (22,473 | ) |
Reductions resulting from a lapse of applicable statute of limitations | (1,143 | ) |
Other, including the impact of foreign currency translation | (5,879 | ) |
Balance, December 31, 2015 | $ | 52,878 |
|
Addition for tax positions taken in prior periods | 6,552 |
|
Addition for tax positions taken in the current period | 1,418 |
|
Reductions related to settlements with taxing authorities | (53 | ) |
Reductions resulting from a lapse of applicable statute of limitations | (2,195 | ) |
Other, including the impact of foreign currency translation | 608 |
|
Balance, December 31, 2016 | $ | 59,208 |
|
Addition for tax positions taken in prior periods | 1,521 |
|
Addition for tax positions taken in the current period | 424 |
|
Reductions related to settlements with taxing authorities | (10,708 | ) |
Reductions resulting from a lapse of applicable statute of limitations | (3,677 | ) |
Other, including the impact of foreign currency translation and U.S. tax rate changes | (5,750 | ) |
Balance, December 31, 2017 | $ | 41,018 |
|
The Company is routinely examined by tax authorities around the world. Tax examinations remain in process in multiple countries, including but not limited to Sweden, Germany, Indonesia, France, the Netherlands, Mexico, Brazil and various U.S. states. The Company files numerous group and separate tax returns in U.S. federal and state jurisdictions, as well as international jurisdictions. In the U.S., tax years dating back to 2003 remain subject to examination, due to tax attributes available to be carried forward to open or future tax years. With some exceptions, other major tax jurisdictions generally are not subject to tax examinations for years beginning before 2011.
The Company’s total unrecognized tax benefits were $41.0 million and $59.2 million as of December 31, 2017 and 2016, respectively, inclusive of $5.4 million and $8.5 million, respectively, of interest and penalties. The Company records interest and penalties on uncertain tax positions as a component of Provision for income taxes, which was $1.3 million, $2.7 million and $1.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Due to the difficulty in predicting with reasonable certainty when tax audits will be fully resolved and closed, the range of reasonably possible significant increases or decreases in the liability for unrecognized tax benefits that may occur within the next 12 months is difficult to ascertain. Currently, the Company estimates that it is reasonably possible that the expiration of various statutes of limitations, resolution of tax audits and court decisions may reduce its tax expense in the next 12 months up to $1.8 million.