Income Taxes
Our income taxes are calculated using the asset and liability method of accounting, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The provision for income taxes includes federal, state and foreign taxes currently payable and those deferred because of net operating losses and temporary differences between the consolidated financial statements and tax bases of assets and liabilities.
The components of income (loss) before income taxes, and the provision (benefit) for income taxes are as follows (in millions):
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income before income taxes | | | | | |
United States | $ | (76.2 | ) | | $ | (140.5 | ) | | $ | (167.2 | ) |
Foreign | 4.0 |
| | 1.3 |
| | (1.3 | ) |
Total | (72.2 | ) | | (139.2 | ) | | (168.5 | ) |
Income tax provision (benefit): | | | | | |
Current: | | | | | |
United States | (27.4 | ) | | (30.6 | ) | | (49.5 | ) |
State | (4.6 | ) | | (3.5 | ) | | (4.2 | ) |
Foreign | 1.4 |
| | 0.7 |
| | (0.2 | ) |
Total | (30.6 | ) | | (33.4 | ) | | (53.9 | ) |
Deferred: |
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| |
|
| |
|
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United States | (9.0 | ) | | (21.3 | ) | | (12.5 | ) |
State | (0.4 | ) | | (1.0 | ) | | (0.8 | ) |
Foreign | (0.1 | ) | | (0.2 | ) | | (0.1 | ) |
Total | (9.5 | ) | | (22.5 | ) | | (13.4 | ) |
Total income tax benefit | $ | (40.1 | ) | | $ | (55.9 | ) | | $ | (67.3 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We have calculated our best estimate of the impact of the Act in its year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing and as a result have recorded $10 million as an additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $16 million of benefit. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $7 million based on cumulative foreign earnings of $101 million. We also recorded a $1 million benefit related to the treatment of current year cash dividends in relation to the repatriation tax.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued 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 Act. In accordance with SAB 118, we have determined that the $16 million of deferred tax benefit recorded in connection with the re-measurement of certain deferred tax assets and liabilities, the $7 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings and the $1 million benefit related to the treatment of current year cash dividends in relation to the repatriation tax are provisional amounts and reasonable estimates at December 31, 2017. The impact of the Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations we have made, guidance that may be issued and actions we may take as a result of the Act. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. We have not accounted for the tax impacts related to the Global Intangible Low Tax Income, Base Erosion Anti Abuse Tax or Foreign Derived Intangible Income regimes or any of the other provisions of the tax legislation that are not effective until fiscal year 2018. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
At December 31, 2017, prior to the calculation of the transition tax on the mandatory deemed repatriation, U.S. income taxes and foreign withholding taxes had not been provided on $151 million of current and prior year undistributed earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to one of our U.S. entities or if we were to sell our stock in the subsidiaries.
While the provisional transition tax of approximately $7 million resulted in the reduction of the excess amount of financial reporting over the tax basis in our foreign subsidiaries, we have not completed our analysis of the Act’s impact as an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We have not completed our analysis of our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation. Therefore, we have not made a provisional estimate of the deferred taxes attributable to repatriation. We will record the tax effects of any change in our prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate, no later than December 2018. While we otherwise intend to maintain the indefinite reinvestment exception, we have provided for a deferred tax asset of $5 million representing our tax basis over book basis in our investment in certain investments in connection with the proposed divestiture of our S&IP business.
Major differences between the federal statutory rate and the effective tax rate are as follows:
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| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Rate of state income taxes, net of federal tax benefit | 4.5 |
| | 2.8 |
| | 2.0 |
|
Statutory rate other than U.S. statutory rate | 0.1 |
| | 0.4 |
| | — |
|
Sec. 987 regulation change, federal and state impact | — |
| | 1.2 |
| | — |
|
U.S. federal research and development credit | 3.0 |
| | 1.5 |
| | 1.0 |
|
Impacts of U.S. federal tax reform | 14.2 |
| | — |
| | — |
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Other, net | (1.2 | ) | | (0.7 | ) | | 1.9 |
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Effective tax rate | 55.6 | % | | 40.2 | % | | 39.9 | % |
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities (in millions):
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| | | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets | | | |
Accrued liabilities | $ | 18.7 |
| | $ | 34.1 |
|
Investment in Joint Venture | 5.3 |
| | — |
|
Stock-based compensation | 7.3 |
| | 8.7 |
|
Transaction costs | 5.8 |
| | — |
|
Other | 6.7 |
| | 8.4 |
|
| 43.8 |
| | 51.2 |
|
Valuation allowance | (1.3 | ) | | (0.5 | ) |
Total deferred assets | 42.5 |
| | 50.7 |
|
| | | |
Deferred tax liabilities | | | |
Intangibles, net | 10.2 |
| | 17.7 |
|
Inventories | 12.8 |
| | 13.0 |
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Property, plant and equipment, net | 29.4 |
| | 45.8 |
|
Other | 0.3 |
| | 1.0 |
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Total deferred tax liabilities | 52.7 |
| | 77.5 |
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Net deferred tax liabilities | $ | 10.2 |
| | $ | 26.8 |
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Valuation allowances increased $0.8 million during the year ended December 31, 2017, primarily relating to net operating losses that we believe will not be realizable as a result of the proposed disposition of our S&IP business. Valuation allowances at the end of 2017 and 2016 primarily relate to tax credits and income tax loss carryforwards.
Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.
At December 31, 2017, we have credit carryforwards for state income tax purposes of $3.0 million, all of which will expire in 2025. At December 31, 2017, certain foreign subsidiaries have net operating loss carryforwards for income tax purposes of $12 million, of which $7 million will expire in 2020. The remaining net operating losses are available for carryforward indefinitely.
In connection with the proposed disposition of our S&IP business, we have recognized a deferred tax asset for our tax basis over book basis of $5 million relating to certain investments.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in millions):
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| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Beginning of year | $ | 2.7 |
| | $ | 1.5 |
|
Gross increases for tax positions of prior years | 0.1 |
| | 1.5 |
|
Gross decreases for tax positions of prior years | — |
| | (0.2 | ) |
Decreases for settlements with taxing authorities | — |
| | (0.1 | ) |
Decreases for lapse of the applicable statute of limitations | (0.1 | ) | | — |
|
End of year | $ | 2.7 |
| | $ | 2.7 |
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The amount, if recognized, that would affect our effective tax rate as of December 31, 2017 and 2016 is $3 million and $2 million, respectively.
We classify interest and penalties on uncertain tax benefits as income tax expense. As of each year ended December 31, 2017 and 2016, before any tax benefits, we had $1 million of accrued interest and penalties on unrecognized tax benefits.
During the next twelve months, we do not expect the resolution of any tax audits which could potentially reduce unrecognized tax benefits by a material amount. In addition, no expiration of the statute of limitations for a tax year in which we have recorded uncertain tax benefits will occur in the next twelve months.
Federal and state income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states. We have various federal and state income tax return positions in the process of examination, administrative appeals or litigation.