|12 Months Ended|
Dec. 31, 2018
|Income Tax Disclosure [Abstract]|
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. The TCJA made significant changes to the U.S. tax code effective for 2018, although certain provisions affected the Company’s 2017 financial results. The changes impacting 2017 included, but are not limited to, the write-down of net deferred tax assets resulting from the reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent, imposing a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries, and bonus depreciation that will allow for immediate full expensing of qualified property acquired and placed in service after September 27, 2017. The TCJA also established new corporate tax laws that are effective in 2018 but did not impact the Company’s 2017 financial results. These changes include, but are not limited to, lowering the U.S. federal corporate income tax rate from 35 percent to 21 percent, a general elimination of U.S. federal income taxes on income and dividends from foreign subsidiaries, a new tax on global intangible low-taxed income (GILTI) net of allowable foreign tax credits, a new deduction for foreign derived intangible income (FDII), the repeal of the domestic production activity deduction, new limitations on the deductibility of certain executive compensation and interest expense, and limitations on the use of foreign tax credits to reduce the U.S. federal income tax liability.
Due to the complexities involved in accounting for the enactment of the TCJA, the SEC staff issued Staff Accounting Bulletin (SAB) 118 which provided guidance on accounting for the income tax effects of the TCJA. SAB 118 provided a measurement period that should not extend beyond one year from the TCJA enactment date to complete the accounting for the impact of the TCJA. SAB 118 allowed the Company to provide provisional estimates of the impact of the TCJA in our financial statements for the year ended December 31, 2017. Accordingly, based on information and IRS guidance available as of December 31, 2017, we recorded a discrete net tax expense of $71.8 million for the year ended December 31, 2017. This expense consisted primarily of a net expense of $56.5 million for the write down of our net deferred tax balances due to the U.S. corporate income tax rate reduction and a net expense of $15.3 million for the one-time deemed repatriation tax. The Company has now completed its accounting for the income tax effects of the TCJA and based on additional guidance from the IRS and updates to our calculations, for the year ended December 31, 2018, the Company recorded a tax benefit of $5.1 million. This benefit consists primarily of an additional $7.0 million tax expense related to the one-time deemed repatriation tax and a tax benefit of $12.1 million primarily related to additional tax benefits for pension contributions.
The TCJA created a new requirement that certain income (i.e. GILTI) earned by controlled foreign corporations (CFC’s) must be included in the gross income of the CFC’s U.S. shareholder. Under U.S. GAAP, we are 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 when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has elected to use the period cost method and has reflected the impact of the GILTI tax in its financial statements for the period ended December 31, 2018 using such method.
The sources of Earnings before income taxes were as follows:
The Income tax provision consisted of the following:
Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31, 2018 and 2017 are summarized in the table below:
The Company's total net deferred tax asset as of December 31, 2018 and 2017 reflects the impact of the U.S. federal corporate tax rate at 21 percent that was part of the TCJA. The Company was required to value its net deferred tax balance at the new lower tax rate.
At December 31, 2018, the Company had a total valuation allowance against its deferred tax assets of $83.4 million. The remaining realizable value of deferred tax assets at December 31, 2018 was determined by evaluating the potential to recover the value of these assets through the utilization of tax loss and credit carrybacks, the reversal of existing taxable temporary differences and carryforwards, certain tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. At December 31, 2018, the Company retained valuation allowance reserves of $52.3 million against deferred tax assets in the U.S. primarily related to non-amortizable intangibles and various state operating loss carryforwards and state tax credits that are subject to restrictive rules for future utilization, and valuation allowances of $31.1 million for deferred tax assets related to foreign jurisdictions, primarily Brazil and Luxembourg.
At December 31, 2018, the tax benefit of loss carryforwards totaling $78.7 million was available to reduce future tax liabilities. This deferred tax asset was comprised of $2.0 million for the tax benefit of federal net operating loss (NOL) carryforwards, $44.9 million for the tax benefit of state NOL carryforwards and $31.8 million for the tax benefit of foreign NOL carryforwards. NOL carryforwards of $47.8 million expire at various intervals between the years 2019 and 2038, while $30.9 million have an unlimited life.
At December 31, 2018, tax credit carryforwards totaling $57.8 million were available to reduce future tax liabilities. This deferred tax asset was comprised of $15.4 million related to general business credits and other miscellaneous federal credits, and $42.4 million of various state tax credits related to research and development, capital investment and job incentives. Tax credit carryforwards of $57.6 million expire at various intervals between the years 2019 and 2038, while $0.2 million have an unlimited life.
No deferred income taxes have been provided as of December 31, 2018 or 2017, on the applicable undistributed earnings of the non-U.S. subsidiaries where the indefinite reinvestment assertion has been applied. If at some future date these earnings cease to be indefinitely reinvested and are repatriated, the Company may be subject to additional U.S. income taxes and foreign withholding and other taxes on such amounts. Pursuant to changes made by the TCJA, remittances from foreign subsidiaries made in 2018 and future years are generally not subject to U.S. income taxation. These remittances are either excluded from U.S. taxable income as earnings that have already been subjected to taxation, or in the alternative are subject to a 100 percent foreign dividends received deduction. The Company continues to provide deferred taxes, primarily related to foreign withholding taxes, on the undistributed net earnings of foreign subsidiaries and unconsolidated affiliates that are not deemed to be indefinitely reinvested in operations outside the United States, although such amounts were immaterial as of December 31, 2018 and 2017.
As of December 31, 2018, 2017 and 2016 the Company had $2.3 million, $2.3 million and $3.5 million of gross unrecognized tax benefits, including interest, respectively. Substantially all of these amounts, if recognized, would not impact the Company's tax provision and the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2018, 2017 and 2016, the amounts accrued for interest and penalties were not material.
The following is a reconciliation of the total amounts of unrecognized tax benefits excluding interest and penalties for the 2018, 2017 and 2016 annual reporting periods:
The Company believes it is reasonably possible that the total amount of gross unrecognized tax benefits as of December 31, 2018 could decrease by approximately $1.0 million in 2019 due to settlements with taxing authorities or lapses in applicable statutes of limitation. Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be significant changes in the amount of unrecognized tax benefits in 2019, but the amount cannot be estimated at this time.
The Company is regularly audited by federal, state and foreign tax authorities. The Internal Revenue Service (IRS) has completed its field examination and has issued its Revenue Agents Report through the 2014 tax year and all open issues have been resolved. The Company is currently open to tax examinations by the IRS for the 2014 through 2017 tax years. Primarily as a result of filing amended returns, which were generated by the closing of federal income tax audits, the Company is still open to state and local tax audits in major tax jurisdictions dating back to the 2012 taxable year. The Company is no longer subject to income tax examinations by any major foreign tax jurisdiction for years prior to 2013.
The difference between the actual income tax provision (benefit) and the tax provision computed by applying the statutory Federal income tax rate to Earnings before income taxes is attributable to the following:
The Company's effective tax rate also reflects the benefit of having earnings from foreign entities that are in jurisdictions that have lower statutory tax rates than the U.S. with the most significant impact related to Hungary, China and Poland, which have applicable statutory tax rates of 9 percent, 15 percent and 19 percent, respectively.
In addition, the Company's effective tax rate for 2017 and 2016 includes the utilization of excess foreign tax credits in connection with the repatriation of foreign earnings.
Income tax provision allocated to continuing operations and discontinued operations for the years ended December 31 was as follows:
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef