Income Taxes
The Company, as a stand-alone entity commencing with the Spin-Off, files U.S. federal and state tax returns on its own behalf. The responsibility for current income tax liabilities of U.S. federal and state combined tax filings were deemed to settle immediately with MTW paying entities effective with the Spin-Off in the respective jurisdictions, whereas state tax returns for certain separate filing entities of the Company's were filed by the Company for periods prior to and after the Spin-Off. Net cash tax payments commencing with the Spin-Off for the estimated liability are the actual cash taxes paid to the respective tax authorities in the jurisdictions wherever applicable.
Prior to the Spin-Off, the operations of the Company were generally included in the consolidated tax returns filed by the respective MTW entities, with the related income tax expense and deferred income taxes calculated on separate return bases in the consolidated financial statements. As a result, the effective tax rate and deferred income taxes in 2017 may differ from those in historical periods.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that does affect 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years, and (2) bonus depreciation that will allow for full expensing of qualified property. Effective in 2018, the Tax Act reduces the U.S. federal corporate statutory tax rate to 21%, and introduces a new provision designed to tax global intangible low-taxed income (“GILTI”). Refer to additional discussion of the impact of the Tax Act on the consolidated financial statements included below.
"Earnings before income taxes" in the consolidated statements of operations is comprised of the following for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
Domestic | | $ | 20.6 |
| | $ | 30.5 |
| | $ | 121.3 |
|
Foreign | | 98.2 |
| | 74.3 |
| | 75.1 |
|
Total | | $ | 118.8 |
| | $ | 104.8 |
| | $ | 196.4 |
|
"Income taxes" in the consolidated statements of operations is comprised of the following for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal and state | | $ | 21.9 |
| | $ | 15.7 |
| | $ | 51.1 |
|
Foreign | | 26.2 |
| | 19.5 |
| | 18.2 |
|
Total current expense | | 48.1 |
| | 35.2 |
| | 69.3 |
|
Deferred: | | | | | | |
Federal and state | | (55.6 | ) | | (15.5 | ) | | (27.9 | ) |
Foreign | | (7.7 | ) | | 5.6 |
| | (2.1 | ) |
Total deferred benefit | | (63.3 | ) | | (9.9 | ) | | (30.0 | ) |
Income taxes | | $ | (15.2 | ) | | $ | 25.3 |
| | $ | 39.3 |
|
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective tax rate is as follows for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Federal income tax at statutory rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income (benefit) provision | | (2.9 | ) | | 1.5 |
| | 1.4 |
|
Manufacturing and research incentives | | (1.7 | ) | | (1.9 | ) | | (1.7 | ) |
Taxes on foreign income | | (6.6 | ) | | (9.3 | ) | | (9.6 | ) |
Repatriation of foreign income - Tax Act | | 11.4 |
| | — |
| | — |
|
Change in federal income tax statutory rate - Tax Act | | (38.3 | ) | | — |
| | — |
|
Adjustments for valuation allowances | | (10.6 | ) | | 2.5 |
| | (13.8 | ) |
Business divestitures | | — |
| | — |
| | 4.1 |
|
Out of period adjustments | | — |
| | (2.8 | ) | | — |
|
Other items | | 0.9 |
| | (0.9 | ) | | 4.6 |
|
Effective tax rate | | (12.8 | )% | | 24.1 | % | | 20.0 | % |
During 2017, the Company's effective tax rate was (12.8)%, compared to the 2016 effective tax rate of 24.1%. The net decrease in the effective tax rate is primarily due to the benefit from the revaluation of the U.S. deferred tax assets and liabilities in conjunction with the Tax Act. In addition, a valuation allowance was released that was recorded against the deferred tax assets for certain entities in the United Kingdom ("U.K"). A $3.5 million net state tax benefit was recorded in 2017 primarily due to revised estimates of the Company's state tax liabilities. These benefits are partially offset by the Deemed Repatriation Transition Tax (“Transition Tax”) on previously untaxed accumulated and current earnings and profits ("E&P") of certain foreign subsidiaries.
During 2016, the Company's effective tax rate was 24.1%, compared to the 2015 effective tax rate of 20.0%. The change was due to nonrecurring 2015 items and a change in the mix of earnings in jurisdictions without a valuation allowance. Included in the 2016 income tax provision is a $2.9 million benefit for out-of-period balance sheet adjustments related to the Spin-Off. The Company does not believe these adjustments are material to the consolidated financial statements for 2016 or its comparative financial statements.
Domestic earnings before income taxes in 2017 represent 17.3% of total earnings and a favorable 6.6% effective tax rate impact for net lower taxes on foreign income due in part to changes in foreign tax laws, whereas 2016 domestic earnings represent 29.1% of total earnings and a favorable 9.3% effective tax rate impact for net lower taxes on foreign income. The 2017 and 2016 effective tax rates were favorably impacted by income earned in jurisdictions, primarily in Canada and China, where the statutory rates are approximately 25%. The 2015 domestic earnings represent 61.8% of total earnings and a 9.6% effective tax rate benefit for net lower taxes on foreign income.
In connection with the Spin-Off and as a result of MTW filing the 2016 U.S. corporate income tax returns at the end of the third quarter of 2017, an adjustment was recorded during the three months ended September 30, 2017 to true-up for the correction of differences between the book and tax bases of certain assets and liabilities, resulting in a $7.2 million increase in deferred tax liabilities with an offsetting decrease in additional paid-in capital. The true-up was not material to the previously issued consolidated financial statements.
Deferred income taxes are provided for the effects of temporary differences between the assets and liabilities recognized for financial reporting and tax reporting. These temporary differences result in taxable or deductible amounts in future years.
Significant components of the Company’s non-current deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
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| | | | | | | | |
(in millions) | | 2017 | | 2016 |
Non-current deferred tax assets (liabilities): | | | | |
Inventories | | $ | 3.5 |
| | $ | 7.2 |
|
Accounts receivable | | 0.9 |
| | 1.7 |
|
Property, plant and equipment | | (2.4 | ) | | (2.7 | ) |
Intangible assets | | (118.0 | ) | | (190.8 | ) |
Deferred employee benefits | | 19.9 |
| | 19.2 |
|
Product warranty reserves | | 7.5 |
| | 13.3 |
|
Product liability reserves | | 2.2 |
| | 0.9 |
|
Loss carryforwards | | 41.3 |
| | 43.8 |
|
Deferred revenue | | — |
| | 1.3 |
|
Other | | 12.9 |
| | 35.4 |
|
Non-current deferred tax liabilities | | (32.2 | ) | | (70.7 | ) |
Less valuation allowance | | (42.0 | ) | | (59.9 | ) |
Net non-current deferred tax liabilities | | $ | (74.2 | ) | | $ | (130.6 | ) |
Current and long-term tax assets and liabilities included in the consolidated balance sheets are comprised of the following as of December 31, 2017 and 2016:
|
| | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | Financial Statement Line Item |
Income taxes receivable | | $ | 4.3 |
| | $ | 2.9 |
| | Prepaids and other current assets |
Deferred tax assets | | 18.1 |
| | 7.2 |
| | Other non-current assets |
Income taxes payable | | (6.2 | ) | | (2.5 | ) | | Accrued expenses and other liabilities |
Income taxes payable | | (12.5 | ) | | — |
| | Other long-term liabilities |
Deferred tax liabilities | | (92.3 | ) | | (137.8 | ) | | Deferred income taxes |
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB No. 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date. To the extent that the accounting for certain income tax effects of the Tax Act is incomplete but a reasonable estimate can be determined, a provisional estimate must be recorded in the financial statements. If a provisional estimate cannot be determined for inclusion in the financial statements, existing accounting guidance continues to apply on the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company’s accounting for the following elements of the Tax Act is incomplete. However, management was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
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• | Reduction of U.S. federal corporate tax rate: The Tax Act reduces the U.S. corporate statutory tax rate to 21%, effective January 1, 2018. For the U.S. related deferred tax assets and deferred tax liabilities, the Company has recorded a net provisional deferred tax benefit of $45.5 million for the year ended December 31, 2017. While management is able to make a reasonable estimate of the impact of the reduction in U.S. corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. |
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• | Deemed Repatriation Transition Tax: The Transition Tax is a tax on E&P of certain of the Company’s foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Management was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $13.5 million as an element of our current income tax provision, which will be payable over a period of up to eight years. This provisional estimate may be impacted by a number of additional considerations, including but not limited to the issuance of final regulations, ongoing analysis of the Tax Act and gathering additional information to more precisely compute the amount of the Transition Tax. |
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• | Cost recovery: While management has not yet completed all of the computations necessary or completed an inventory of the Company’s 2017 U.S. expenditures that qualify for immediate expensing, the Company has recorded a provisional benefit of approximately $0.1 million, based on management’s current intent to fully expense all qualifying expenditures. |
The Company’s accounting for the following elements of the Tax Act is incomplete, and management was not able to make reasonable estimates of the effects. Therefore, no provisional adjustment was recorded.
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• | GILTI: The Tax Act creates a new requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC's U.S. shareholder. Because of the complexity of the new GILTI tax rules, management is continuing to evaluate this provision of the Tax Act. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense, commencing in 2018 upon its effective date, when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether management expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether management expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company’s current structure and estimated future results of global operations but also management’s intent and ability to modify the structure and/or the business, management is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any deferred tax adjustments related to potential GILTI tax in the consolidated financial statements for the year ended December 31, 2017 and has not made a policy decision regarding whether to record deferred taxes on GILTI. |
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• | Valuation allowances: The Company must determine whether assessments of valuation allowances are affected by various aspects of the Tax Act (e.g., GILTI inclusions, new categories of foreign tax credits). Since, as discussed above, the Company has recorded no deferred tax adjustments related to the GILTI element of the Tax Act, any corresponding determination of the need for or change in a valuation allowance has not been completed and no changes to valuation allowances as a result of the GILTI element of the Tax Act have been recorded. |
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• | Capital requirements: As of December 31, 2017, approximately $120.4 million of the $128.7 million of cash and cash equivalents, including restricted cash, on the consolidated balance sheet was held by foreign entities. Management’s intent is to reinvest the earnings of foreign subsidiaries indefinitely outside the U.S., irrespective of the Tax Act. The Tax Act includes the Transition Tax provision that imposes a tax on foreign earnings whether or not such earnings are repatriated to the U.S. As a result of the Transition Tax, management is reviewing the current position on the reinvestment of the earnings of foreign subsidiaries outside of the U.S. This review may be impacted by a number of additional considerations, including but not limited to the issuance of additional regulations, ongoing analysis of the Tax Act and gathering additional information to make a more informed decision for our intent to reinvest earnings of foreign subsidiaries indefinitely outside the U.S. |
As of December 31, 2017, the Company has approximately $191.3 million of foreign loss carryforwards, which are available to reduce future foreign tax liabilities. Substantially all of the foreign loss carryforwards are not subject to any time restrictions on their future use, and $144.9 million are offset by a valuation allowance. The Company also has approximately $63.3 million of pre-tax U.S. capital loss carryforwards which expire in 2019 and are offset by a valuation allowance and an unrecognized tax benefit.
As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view regarding future realization of deferred tax assets. For the year ended December 31, 2017, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not that additional deferred taxes of $8.6 million of the total $36.8 million recorded in the U.K. are realizable, and therefore, reduced the valuation allowance accordingly. The Company has additional valuation allowances recorded on some of the other deferred income tax assets in the United Kingdom, and certain entities in Singapore, Thailand and India as it remains more likely than not that they will not be utilized.
The Company will continue to periodically evaluate its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the Company will either add to, or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the Company’s income tax provision, and could have a material effect on operating results.
A reconciliation of the Company's unrecognized tax benefits is as follows for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
Balance at beginning of year | | $ | 12.5 |
| | $ | 16.6 |
| | $ | 16.6 |
|
Additions based on tax positions related to the current year | | — |
| | 0.8 |
| | 0.2 |
|
Additions for tax positions of prior years | | 0.2 |
| | 1.0 |
| | — |
|
Reductions for tax positions of prior years | | (0.4 | ) | | — |
| | — |
|
Reductions for equity adjustment | | — |
| | (4.3 | ) | | — |
|
Reductions for lapse of statute | | — |
| | (1.6 | ) | | (0.2 | ) |
Balance at end of year | | $ | 12.3 |
| | $ | 12.5 |
| | $ | 16.6 |
|
The Company’s unrecognized tax benefits as of December 31, 2017, 2016 and 2015, if recognized, would not materially impact the effective tax rate due to the offset of the capital loss carryforward deferred tax asset. The Company recognizes interest and penalties related to tax liabilities as a part of income tax expense. As of December 31, 2017 and 2016, the Company has accrued interest and penalties of $0.2 million and $0.1 million, respectively.
During the next twelve months, it is reasonably possible that federal, state and foreign tax resolutions could change unrecognized tax benefits and income tax expense in the range of $0.1 million to $0.3 million.
MTW has filed tax returns on behalf of the Company in the U.S. and various state and foreign jurisdictions prior to the Spin-Off. The Company's separate federal and state tax returns for the 2013 through 2017 tax years generally remain subject to examination by U.S. and various state authorities. Tax years 2013 through 2017 remain subject to examination in Canada and Germany. Tax years 2008 through 2017 remain subject to audit in China.
The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of December 31, 2017, the Company believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.