INCOME TAXES
Domestic and foreign components of income from continuing operations before income taxes for the years ended on December 31, are shown below:
|
| | | | | | | | | | | | |
(In millions) | 2017 | | 2016 | | 2015 | |
Domestic | $ | 72.8 |
| | $ | 43.6 |
| | $ | 38.2 |
| |
Foreign | 59.4 |
| | 50.4 |
| | 44.0 |
| |
Income before income taxes | $ | 132.2 |
| | $ | 94.0 |
| | $ | 82.2 |
| |
The provision for income taxes related to income from continuing operations for the years ended on December 31, consisted of:
|
| | | | | | | | | | | | |
(In millions) | 2017 | | 2016 | | 2015 | |
Current: | | | | | | |
Federal | $ | 13.2 |
| | $ | 7.8 |
| | $ | 6.0 |
| |
State | 1.0 |
| | 2.2 |
| | 1.2 |
| |
Foreign | 17.6 |
| | 16.1 |
| | 13.2 |
| |
Total current | 31.8 |
| | 26.1 |
| | 20.4 |
| |
Deferred: | | | | | | |
Federal | 16.6 |
| | 1.0 |
| | 4.8 |
| |
State | 1.6 |
| | 0.3 |
| | 0.9 |
| |
Foreign | (1.0 | ) | | (0.9 | ) | | (0.8 | ) | |
Change in the valuation allowance for deferred tax assets | 0.4 |
| | — |
| | — |
| |
Change in deferred tax liabilities due to foreign tax rate change | 0.3 |
| | — |
| | 0.4 |
| |
Benefits of operating loss carryforward | 0.4 |
| | (0.5 | ) | | 0.5 |
| |
Total deferred | 18.3 |
| | (0.1 | ) | | 5.8 |
| |
Provision for income taxes | $ | 50.1 |
| | $ | 26.0 |
| | $ | 26.2 |
| |
Significant components of our deferred tax assets and liabilities at December 31, were as follows:
|
| | | | | | | | |
(In millions) | 2017 | | 2016 | |
Deferred tax assets attributable to: | | | | |
Accrued pension and other post-retirement benefits | $ | 20.5 |
| | $ | 30.1 |
| |
Accrued expenses and accounts receivable allowances | 13.6 |
| | 20.5 |
| |
Net operating loss carryforwards | 5.9 |
| | 2.3 |
| |
Inventories | 5.5 |
| | 9.0 |
| |
Stock-based compensation | 5.4 |
| | 8.4 |
| |
Research and development credit carryforwards | 3.4 |
| | 1.5 |
| |
Foreign tax credit carryforward | 0.3 |
| | 0.2 |
| |
Total deferred tax assets | 54.6 |
| | 72.0 |
| |
Valuation allowance | (2.7 | ) | | — |
| |
Deferred tax assets, net of valuation allowance | 51.9 |
| | 72.0 |
| |
Deferred tax liabilities attributable to: | | | | |
Liquidation of subsidiary for income tax purposes | 13.3 |
| | 13.3 |
| |
Property, plant and equipment | 11.6 |
| | 14.1 |
| |
Goodwill and amortization | 24.3 |
| | 15.5 |
| |
Other | 0.6 |
| | 0.2 |
| |
Total deferred tax liabilities | 49.8 |
| | 43.1 |
| |
Net deferred tax assets | $ | 2.1 |
| | $ | 28.9 |
| |
Included in our deferred tax assets are tax benefits related to net operating loss carryforwards attributable to our foreign and domestic operations. At December 31, 2017, we had $7.8 million of net operating losses that are available to offset future taxable income in several foreign jurisdictions indefinitely, and $18.5 million of net operating losses that are available to offset future taxable income through 2034. Of the $18.5 million, approximately $14.1 million of net operating losses in Switzerland are subject to a full valuation allowance. During 2017, we expect to use $3.6 million of net operating losses relating to prior years in the filing of our 2017 corporate income tax returns.
Also included in our deferred tax assets at December 31, 2017 are $2.5 million of U.S. research and development credit carryforwards, which will expire beginning in 2022, if unused.
The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following:
|
| | | | | | | | | |
| 2017 | | 2016 | | 2015 | |
Statutory U.S. federal tax rate | 35 | % | | 35 | % | | 35 | % | |
Net difference resulting from: | | | | | | |
Research and development tax credit | (4 | ) | | (4 | ) | | (2 | ) | |
Foreign earnings subject to different tax rates | (2 | ) | | (3 | ) | | (3 | ) | |
Tax on foreign intercompany dividends and deemed dividends for tax purposes | — |
| | — |
| | 6 |
| |
Nondeductible expenses | 1 |
| | — |
| | — |
| |
State income taxes | 2 |
| | 2 |
| | 2 |
| |
Foreign tax credits | (1 | ) | | (1 | ) | | (7 | ) | |
Foreign withholding taxes | 1 |
| | — |
| | 1 |
| |
Effect of US Law Change | 12 |
| | — |
| | — |
| |
Stock Based Compensation - Excess Tax Benefit under ASC 2016-09 | (5 | ) | | — |
| | — |
| |
Other | (1 | ) | | (1 | ) | | — |
| |
Total difference | 3 |
| | (7 | ) | | (3 | ) | |
Effective income tax rate | 38 | % | | 28 | % | | 32 | % | |
U.S. income taxes have not been provided on $15.4 million of undistributed earnings of foreign subsidiaries at December 31, 2017 as these amounts are considered permanently invested under ASC 740-30-25-17 [formerly known as APB 23]. A liability could arise if our intention to permanently invest such earnings were to change and amounts are distributed by such subsidiaries, or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to the hypothetical distribution of permanently invested earnings.
Additionally, in accordance with guidance as set-forth in SEC Staff Accounting Bulletin No. 118 ("SAB 118") other than the amount accrued for the Transition Tax per IRC 965, the company does not include a provisional amount related to any of the impacted items covered under APB 23, as we have not performed sufficient analysis to make a determination as to the appropriateness and resulting tax effects.
The following tax years remain subject to examination in the following significant jurisdictions:
|
| |
Belgium | 2014-2017 |
Brazil | 2012-2017 |
Italy | 2014-2017 |
Netherlands | 2012-2017 |
Sweden | 2011-2017 |
United States | 2016-2017 |
Income Tax Reform Disclosures
On December 22, 2017, Congress passed, and the President signed, the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax Code, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35.0 percent to 21.0 percent; (2) requiring companies to pay a one-time transitional tax on certain un-repatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income tax on dividends from foreign subsidiaries of U.S. corporations; (4) repealing the domestic production activity deduction; (5) providing for the full expensing of qualified property; (6) adding a new provision designed to tax global intangible low-taxed income (“GILTI”); (7) revising the limitation imposed on deductions for executive compensation paid by publicly-traded companies; (8) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be utilized; (9) creating a base erosion-anti-abuse tax (“BEAT”), a new minimum tax on payments made by certain U.S. corporations to related foreign parties; (10) imposing a new limitation on the deductibility of interest expense; (11) allowing for a deduction related to foreign-derived intangible income (“FDII”); and (12) changing the rules related to the uses and limitations of net operating loss carryforwards generated in tax years beginning after December 31, 2017. Some of the changes that are material to the company are discussed below in more detail.
The SEC recently issued SAB 118 which provides guidance on how companies should account for the tax effects related to the Tax Act. According to SAB 118, companies should make a good faith effort to compute the impact of the Tax Act in a timely manner once the company has obtained, prepared, and analyzed the information needed in order to complete their accounting requirements under ASC 740, which in no circumstances should extend beyond one year from the enactment date. However, in situations when the company’s accounting is incomplete, SAB 118 authorizes companies to record a reasonable provisional estimate of the tax impact resulting from the Tax Act.
The Tax Act imposed a one-time deemed repatriation transition tax on the previously untaxed and un-repatriated current and accumulated post-1986 foreign earnings of certain foreign subsidiaries. The Tax Act further provides for a deduction to offset a portion of the deemed repatriated earnings such that taxpayers are effectively taxed at a reduced tax rate of 15.5 percent to the extent that the earnings are held in cash or cash equivalents, and 8.0 percent on all other earnings. In order to compute the tax impact of this deemed repatriation for the Company’s taxable year ending December 31, 2017, the applicable amount of un-repatriated earnings and foreign taxes paid by each relevant foreign subsidiary must be determined. We have computed a reasonable estimate of the tax impact related to this deemed repatriation in accordance with SAB 118 and recorded a provisional tax obligation because the Company is still collecting and analyzing the necessary information and will reflect any changes to this calculation in a subsequent reporting period. Due to the timing of the Tax Act and related changes we will update our computations as information becomes available with regard to the 2017 tax return filings and as tax technical guidance on remaining items is issued at the federal and state level.
The Tax Act also revised the definition of “covered employees” who are subject to the $1.0 million limitation imposed on deductions for executive compensation paid by publicly-traded corporations. As a result, the limitation now applies to the Company’s CEO, CFO and the 3 highest paid employees. The Tax Act also eliminated the exception to this rule for commission or performance-based compensation paid to these covered employees. This new provision is effective for contracts executed on or after November 3, 2017. Based on this new provision, the Company adjusted its deferred tax asset related to future stock compensation deductions for amounts that it does not expect it will be able to deduct in the future. We will continue to analyze executive compensation in future periods and adjust our Deferred Tax Asset for future stock compensation deductions as information becomes available.
The Tax Act reduces the corporate tax rate to 21.0 percent, effective January 1, 2018. For certain deferred taxes, we have recorded a provisional adjustment to decrease net deferred tax assets by $7.0 million, with a corresponding net adjustment to deferred tax expense of $7.0 million for the year ended December 31, 2017. We made a reasonable estimate of the impact of the reduction in the corporate tax rate under the Tax Act, but the analysis will continue during 2018 and will be completed once the Company files its income tax returns in 2018.
The Tax Act changes also require JBT to analyze other areas including, but not limited to, interest deductibility, accelerated cost recovery of fixed assets, GILTI, BEAT, FDII, and stranded tax effects within Accumulated other comprehensive income. The Company has not made any policy decisions as to how to account for the tax effects of these items and will continue to analyze the impact during 2018 as more information is available and more technical guidance is issued at the federal and state levels.
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| | | | | | | | | | | | |
(in millions) | Increase (Decrease)(a) |
Tax Act Provision | Income Tax Provision | Income Taxes Payable | Deferred Tax Assets and Liabilities | Other Long-term Liabilities |
Reduction in U.S. Federal corporate rate | $ | 7.0 |
| $ | — |
| $ | (7.0 | ) | $ | — |
|
One-time repatriation transition tax | 7.7 |
| 1.0 |
| — |
| 6.7 |
|
Revision to deduction for executive compensation | 0.8 |
| — |
| (0.8 | ) | — |
|
Tax Act impact as of and for the year ended December 31, 2017 | $ | 15.5 |
| $ | 1.0 |
| $ | (7.8 | ) | $ | 6.7 |
|
(a) Reflects provisional amounts reported in results until full accounting for the income tax effect is complete.