Note 17: Income Taxes
The elements of the provision (benefit) for income taxes were as follows:
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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(In millions) |
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Income (loss) before income tax: |
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U.S. |
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$ |
11.3 |
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$ |
20.1 |
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$ |
13.2 |
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Foreign |
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5.4 |
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6.0 |
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(11.3 |
) |
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$ |
16.7 |
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$ |
26.1 |
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$ |
1.9 |
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Current income taxes: |
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Federal |
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$ |
5.6 |
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|
$ |
(0.3 |
) |
|
$ |
(0.3 |
) |
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Foreign |
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1.8 |
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2.8 |
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1.2 |
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State |
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0.5 |
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— |
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(0.4 |
) |
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7.9 |
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2.5 |
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0.5 |
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Deferred income taxes |
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(9.2 |
) |
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4.7 |
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3.2 |
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Total income tax provision (benefit) |
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$ |
(1.3 |
) |
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$ |
7.2 |
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$ |
3.7 |
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Income taxes differ from the amounts computed by applying the federal tax rate as follows:
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Year Ended December 31, |
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2017 |
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2016 |
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2015 |
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(In millions) |
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Federal income tax expense computed at statutory tax rate of 35% |
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$ |
5.8 |
|
|
$ |
9.1 |
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$ |
0.7 |
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Additional taxes or credits from: |
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State and local income taxes, net of federal income tax effect |
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(0.8 |
) |
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(0.7 |
) |
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(0.5 |
) |
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Non-deductible expenses and non-taxable income |
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0.2 |
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(1.2 |
) |
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1.8 |
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Foreign income (expense) not includable in federal taxable income |
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(0.2 |
) |
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2.8 |
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0.8 |
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Valuation allowance changes (net) |
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(2.9 |
) |
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(2.6 |
) |
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0.1 |
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Changes in uncertain tax positions |
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(1.0 |
) |
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(0.3 |
) |
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— |
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Effect of U.S. Tax Cuts and Jobs Act - deemed repatriation transaction tax |
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7.2 |
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— |
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— |
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Effect of U.S. Tax Cuts and Jobs Act - revaluation of deferred taxes |
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(10.6 |
) |
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— |
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— |
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All other, net |
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1.0 |
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0.1 |
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0.8 |
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Total income tax provision (benefit) |
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$ |
(1.3 |
) |
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$ |
7.2 |
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$ |
3.7 |
|
The U.S. Tax Cuts and Jobs Act (the “Act”), enacted on December 22, 2017, 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. Under ASC Topic 740, the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. As a result of the Act, we have recorded a benefit for the revaluation of our deferred tax assets of $10.6 million during the fourth quarter of 2017 within the provision (benefit) for income taxes line of the Consolidated Statement of Operations.
The Act subjects a US shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At December 31, 2017, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements.
The components of the deferred income tax assets and liabilities arising under FASB ASC 740, “Income Taxes” (“ASC 740”) were as follows:
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At December 31, |
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2017 |
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2016 |
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(In millions) |
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Deferred tax assets: |
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AMT tax credit carryforwards |
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$ |
30 |
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$ |
30 |
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Post-retirement benefits other than pensions |
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15 |
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28 |
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Federal and foreign net operating loss carryforwards |
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59 |
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84 |
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State net operating loss carryforwards |
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19 |
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12 |
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Pension liability |
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46 |
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85 |
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Other deductible temporary differences |
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27 |
|
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25 |
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Less: valuation allowances |
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(24 |
) |
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(20 |
) |
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$ |
172 |
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$ |
244 |
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Deferred tax liabilities: |
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Fixed asset basis difference |
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$ |
53 |
|
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$ |
81 |
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Inventory basis difference |
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|
92 |
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|
129 |
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Other intangibles |
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9 |
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13 |
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154 |
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|
223 |
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Net deferred tax asset |
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$ |
18 |
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$ |
21 |
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The Company will continue to maintain a valuation allowance on certain U.S. federal and state deferred tax assets until such time as in management’s judgment, considering all available positive and negative evidence, the Company determines that these deferred tax assets are more likely than not realizable.
The Company had available at December 31, 2017, federal AMT credit carryforwards of approximately $30 million, which as a result of the US Tax Cuts and Jobs Act will be refundable beginning in 2019 to the extent not utilized to offset future federal income tax liabilities of the Company.
The Company’s deferred tax assets also include $53 million related to U.S. federal net operating loss (“NOL”) carryforwards which expire in 15 years, $19 million related to state NOL carryforwards which expire generally in 1 to 20 years, and $6 million related to foreign NOL carryforwards which expire in 1 to 5 years, available at December 31, 2017.
Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes or foreign withholding tax has been made in our consolidated financial statements related to the indefinitely reinvested earnings. At December 31, 2017, the Company had approximately $112 million of undistributed foreign earnings, predominately in Canada and China. As a result of the US Tax Cuts and Jobs Act passed during the year, a significant portion of these earnings were deemed repatriated. The Company has recorded a $7.2 million provisional estimate of the US tax liability on this deemed distribution in the current year (“Transition Tax”). Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” allows for reporting provisional amounts based on reasonable estimates for items for which accounting is incomplete. Of the $7.2 million of estimated tax expense, $0.5 million is reflected in our deferred tax balances and $6.7 million is reflected in income taxes payable. We have chosen to include an estimate of the Transition Tax due to the complex nature of the calculation and the short amount of time between passing of the legislation and the filing of our financial statements. Were the Company to distribute these non-U.S. earnings in the form of dividends or otherwise in the future, it would no longer be subject to U.S. federal income taxes. A determination of the amount of any unrecognized deferred income tax liability on the undistributed earnings is predominately dependent upon the applicability of foreign withholding taxes and potential U.S. state income taxes. Modeling of the many future potential scenarios and the related unrecognized deferred tax liability is therefore not practicable. None of the Company’s other foreign subsidiaries have a material amount of assets available for repatriation.
The Company accounts for uncertain income tax positions in accordance with ASC 740. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
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Unrecognized Tax Benefits |
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(In millions) |
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Unrecognized tax benefits balance at January 1, 2015 |
|
$ |
7.6 |
|
|
Gross increases – tax positions in current periods |
|
|
— |
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Settlements and closing of statute of limitations |
|
|
— |
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Unrecognized tax benefits balance at December 31, 2015 |
|
$ |
7.6 |
|
|
Gross increases – tax positions in current periods |
|
|
— |
|
|
Settlements and closing of statute of limitations |
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|
(0.3 |
) |
|
Unrecognized tax benefits balance at December 31, 2016 |
|
$ |
7.3 |
|
|
Gross increases – tax positions in current periods |
|
|
— |
|
|
Settlements and closing of statute of limitations |
|
|
(1.0 |
) |
|
Unrecognized tax benefits balance at December 31, 2017 |
|
$ |
6.3 |
|
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for all years through 2009. Substantially all state and local income tax matters have been concluded through 2006. The Company has substantially concluded foreign income tax matters through 2009 for all significant foreign jurisdictions.
We recognize interest and penalties related to uncertain tax positions in income tax expense. We had approximately $1.7 million of accrued interest related to uncertain tax positions at December 31, 2017 and 2016, respectively. The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $4.6 and $5.6 million as of December 31, 2017 and 2016, respectively.