Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Income before income taxes consists of the following:



	Year Ended December 31
(in thousands)	2019		2018		2017
U.S.	$	390,144	$	257,312	$	134,276
Non-U.S.	36,335		66,196		48,513
	$	426,479	$	323,508	$	182,789

The provision for (benefit from) income taxes consists of the following:



(in thousands)	Current		Deferred			Total
Year Ended December 31, 2019
U.S. Federal	$	16,500	$	63,838		$	80,338
State and Local	2,949		6,630			9,579
Non-U.S.	9,400		(717		)	8,683
	$	28,849	$	69,751		$	98,600
Year Ended December 31, 2018
U.S. Federal	$	46,059	$	16,718		$	62,777
State and Local	2,240		(23,809		)	(21,569		)
Non-U.S.	10,924		(32		)	10,892
	$	59,223	$	(7,123	)	$	52,100
Year Ended December 31, 2017
U.S. Federal	$	10,743	$	(153,217	)	$	(142,474	)
State and Local	5,930		3,306			9,236
Non-U.S.	10,079		3,459			13,538
	$	26,752	$	(146,452	)	$	(119,700	)

The provision for income taxes differs from the amount of income tax determined by applying the U.S. Federal statutory rate of 21% in 2019 and 2018, and 35% in 2017, to the income before taxes, as a result of the following:



	Year Ended December 31
(in thousands)	2019			2018			2017
U.S. Federal taxes at statutory rate (see above)	$	89,561		$	67,937		$	63,976
State and local taxes, net of U.S. Federal tax	(4,064		)	(1,279		)	6,949
Valuation allowances against state tax benefits, net of U.S. Federal tax	11,632			(15,767		)	(946		)
Stock-based compensation	(1,743		)	(1,731		)	(6,023		)
Valuation allowances against other non-U.S. income tax benefits	1,202			1,322			(1,935		)
U.S. Federal Manufacturing Deduction tax benefits	—			—			(1,329		)
Deferred tax impact of U.S. Federal tax rate reduction to 21%, net of state tax impact	—			—			(153,336		)
Deferred tax benefit on unremitted non-U.S. subsidiary earnings related to the Tax Act	—			—			(28,324		)
Other, net	2,012			1,618			1,268
Provision for (Benefit from) Income Taxes	$	98,600		$	52,100		$	(119,700	)

The Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017, making significant changes to the Internal Revenue Code. Changes as a result of the Tax Act include, but are not limited to, a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018; the imposition of a one-time transition tax on historic earnings of certain non-U.S. subsidiaries that were previously tax deferred; and the imposition of new U.S. taxes on certain non-U.S. earnings. The U.S. Federal corporate income tax rate change resulted in a one-time, non-cash benefit and corresponding reduction of the Company’s U.S. Federal deferred tax liabilities, net of the state tax impact, of $153.3 million, which was recorded in the fourth quarter of 2017, the period in which the legislation was enacted. The Company did not incur, and did not record, any liability with respect to the one-time U.S. transition tax imposed by the Tax Act on unremitted non-U.S. subsidiary earnings. The Company estimates that unremitted non-U.S. subsidiary earnings, when distributed, will not be subject to tax except to the extent non-U.S. withholding taxes are imposed. Accordingly, the Company recorded net deferred tax benefits and a corresponding reduction in U.S. deferred tax liabilities of $28.3 million in the fourth quarter of 2017 with respect to unremitted non-U.S. subsidiary earnings. Approximately $1.7 million of deferred tax liabilities remained recorded on the books at December 31, 2019 with respect to future non-U.S. withholding taxes the Company estimated may be imposed on future cash distributions.

Deferred income taxes consist of the following:



	As of December 31
(in thousands)	2019			2018
Employee benefit obligations	$	69,013		$	68,392
Accounts receivable	3,545			4,449
State income tax loss carryforwards	51,608			34,107
State capital loss carryforwards	307			1,093
U.S. Federal income tax loss carryforwards	1,765			2,100
U.S. Federal foreign income tax credit carryforwards	717			987
Non-U.S. income tax loss carryforwards	15,214			15,868
Non-U.S. capital loss carryforwards	3,583			3,609
Leases	84,923			—
Other	6,003			14,657
Deferred Tax Assets	236,678			145,262
Valuation allowances	(46,243		)	(33,120		)
Deferred Tax Assets, Net	$	190,435		$	112,142
Prepaid pension cost	345,856			269,412
Unrealized gain on available-for-sale securities	75,709			51,242
Goodwill and other intangible assets	92,233			88,798
Property, plant and equipment	16,303			9,997
Leases	74,407			—
Non-U.S. withholding tax	1,670			1,726
Deferred Tax Liabilities	$	606,178		$	421,175
Deferred Income Tax Liabilities, Net	$	415,743		$	309,033

The Company has $849.3 million of state income tax net operating loss carryforwards available to offset future state taxable income. State income tax loss carryforwards, if unutilized, will start to expire approximately as follows:



(in millions)
2020	$	15.7
2021	17.5
2022	0.8
2023	7.5
2024	62.0
2025 and after	745.8
Total	$	849.3

The Company has recorded at December 31, 2019, $51.6 million in deferred state income tax assets, net of U.S. Federal income tax, with respect to these state income tax loss carryforwards. The Company has established $29.8 million in valuation allowances against these deferred state income tax assets, since the Company has determined that it is more likely than not that some of these state tax losses may not be fully utilized in the future to reduce state taxable income. During 2018, the Company’s education division released valuation allowances recorded against state deferred tax assets, net of U.S. Federal tax, of approximately $20.0 million because the education division generated positive operating results that support the realization of these deferred tax assets.

The Company has $8.4 million of U.S. Federal income tax loss carryforwards obtained as a result of prior stock acquisitions. U.S. Federal income tax loss carryforwards are expected to be fully utilized as follows:



(in millions)
2020	$	3.5
2021	1.4
2022	1.1
2023	0.7
2024	0.7
2025 and after	1.0
Total	$	8.4

The Company has established at December 31, 2019, $1.8 million in U.S. Federal deferred tax assets with respect to these U.S. Federal income tax loss carryforwards.

For U.S. Federal income tax purposes, the Company has $0.7 million of foreign tax credits available to be credited against future U.S. Federal income tax liabilities. If unutilized, these foreign tax credits will start to expire in 2023. The Company has established at December 31, 2019, $0.7 million of U.S. Federal deferred tax assets with respect to these U.S. Federal foreign tax credit carryforwards, and the Company has recorded a full valuation allowance against these deferred tax assets since the Company determined that it is more likely than not these foreign tax credit carryforwards may not be utilized in the future to reduce U.S. Federal income taxes.

The Company has $57.8 million of non-U.S. income tax loss carryforwards as a result of operating losses and carryforwards obtained through prior stock acquisitions that are available to offset future non-U.S. taxable income and has recorded, with respect to these losses, $15.2 million in non-U.S. deferred income tax assets. The Company has established $7.4 million in valuation allowances against the deferred tax assets for the portion of non-U.S. tax losses that may not be utilized to reduce future non-U.S. taxable income. The $57.8 million of non-U.S. income tax loss carryforwards consist of $38.5 million in losses that may be carried forward indefinitely; $13.8 million of losses that, if unutilized, will expire in varying amounts through 2024; and $5.5 million of losses that, if unutilized, will start to expire after 2024.

The Company has $12.0 million of non-U.S. capital loss carryforwards that may be carried forward indefinitely and are available to offset future non-U.S. capital gains. The Company recorded a $3.6 million non-U.S. deferred income tax asset for these non-U.S. capital loss carryforwards and has established a full valuation allowance against this non-U.S. deferred tax asset since the Company has determined that it is more likely than not that the capital loss carryforwards may not be utilized to reduce taxable income in the future.

Deferred tax valuation allowances and changes in deferred tax valuation allowances were as follows:



(in thousands)	Balance at Beginning of Period		Tax Expense and Revaluation		Deductions			Balance at End of Period
Year ended
December 31, 2019	$	33,120	$	14,512	$	(1,389	)	$	46,243
December 31, 2018	$	48,742	$	4,413	$	(20,035	)	$	33,120
December 31, 2017	$	41,319	$	7,423	$	—		$	48,742

The Company has established $34.0 million in valuation allowances against deferred state tax assets recognized, net of U.S. Federal tax. As stated above, approximately $29.8 million of the valuation allowances, net of U.S. Federal income tax, relate to state income tax loss carryforwards. In most instances, the Company has established valuation allowances against deferred state income tax assets without considering potentially offsetting deferred tax liabilities established with respect to prepaid pension cost and goodwill. Prepaid pension cost and goodwill have not been considered a source of future taxable income for realizing those deferred state tax assets recognized since these temporary differences are not likely to reverse in the foreseeable future. However, certain deferred state tax assets have an indefinite life. As a result, the Company has considered deferred tax liabilities for prepaid pension cost and goodwill as a source of future taxable income for realizing those deferred state tax assets. The valuation allowances established against deferred state income tax assets may increase or decrease within the next 12 months, based on operating results or the market value of investment holdings. The Company will monitor future results on a quarterly basis to determine whether the valuation allowances provided against deferred state tax assets should be increased or decreased as future circumstances warrant. The Company’s education division released valuation allowances against state deferred tax assets of $20.0 million during 2018, as the education division generated positive operating results that support the realization of these deferred tax assets.

The Company has established $11.4 million in valuation allowances against non-U.S. deferred tax assets, and, as stated above, $7.4 million of the non-U.S. valuation allowances relate to non-U.S. income tax loss carryforwards and $3.6 million relate to non-U.S. capital loss carryforwards. Valuation allowances established against non-U.S. deferred tax assets are recorded at the education division and other businesses. These non-U.S. valuation allowances may increase or decrease within the next 12 months, based on operating results. As a result, the Company is unable to estimate the potential tax impact, given the uncertain operating environment. The Company will monitor future education division and other businesses’ operating results and projected future operating results on a quarterly basis to determine whether the valuation allowances provided against non-U.S. deferred tax assets should be increased or decreased as future circumstances warrant.

The Tax Act generally provides a 100% dividends received deduction for distributions from non-U.S. subsidiaries after December 31, 2017. The Tax Act established a new regime, the Global Intangible Low Taxed Income (GILTI) tax, that may currently subject to U.S. tax the operations of non-U.S. subsidiaries. The GILTI tax is imposed annually based on all current year non-U.S. operations starting January 1, 2018. The Company has elected to record the GILTI tax regime as a periodic tax expense for book purposes. Annually, the Company may elect to credit or deduct foreign taxes for U.S. Federal tax purposes. For the year ended December 31, 2019, the Company

plans to elect to credit foreign taxes. The GILTI tax recorded, net of foreign taxes credited, for the years ended December 31, 2019 and 2018 is not material.

U.S. Federal and state tax liabilities may be recorded if the investment in non-U.S. subsidiaries become held for sale instead of being held indefinitely, but calculation of the tax due is not practicable.

The 2016 U.S. Federal tax return and subsequent years remain open to IRS examination. The Company files income tax returns with the U.S. Federal government and in various state, local and non-U.S. governmental jurisdictions, with the consolidated U.S. Federal tax return filing considered the only major tax jurisdiction.

The Company endeavors to comply with tax laws and regulations where it does business, but cannot guarantee that, if challenged, the Company’s interpretation of all relevant tax laws and regulations will prevail and that all tax benefits recorded in the financial statements will ultimately be recognized in full.

The following summarizes the Company’s unrecognized tax benefits, excluding interest and penalties, for the respective periods:



	Year Ended December 31
(in thousands)	2019			2018			2017
Beginning unrecognized tax benefits	$	2,483		$	17,331		$	17,331
Increases related to current year tax positions	—			—			—
Increases related to prior year tax positions	1,072			500			—
Decreases related to prior year tax positions	—			(12,187		)	—
Decreases related to settlement with tax authorities	(1,291		)	—			—
Decreases due to lapse of applicable statutes of limitations	(692		)	(3,161		)	—
Ending unrecognized tax benefits	$	1,572		$	2,483		$	17,331

The unrecognized tax benefits relate to state income tax filing positions applicable to the 2012-2014 tax periods. In making these determinations, the Company presumes that taxing authorities pursuing examinations of the Company’s compliance with tax law filing requirements will have full knowledge of all relevant information, and, if necessary, the Company will pursue resolution of disputed tax positions by appeals or litigation. Although the Company cannot predict the timing of resolution with tax authorities, the Company estimates that some of the unrecognized tax benefits may change in the next 12 months due to settlement with the tax authorities. The Company expects that a $1.6 million state tax benefit, net of $0.3 million federal tax expense, will reduce the effective tax rate in the future if the unrecognized tax benefits are recognized.

The Company classifies interest and penalties related to uncertain tax positions as a component of interest and other expenses, respectively. As of December 31, 2019, the Company has accrued $0.8 million of interest related to the unrecognized tax benefits. The Company has not accrued any penalties related to the unrecognized tax benefits.