Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

The domestic and foreign components of income before income taxes for the years ended December 31 (in millions):

	2022			2021			2020
Domestic	$	(13.3	)	$	(15.4	)	$	(31.1	)
Foreign		427.2			409.0			256.9
Total income before provision for income taxes	$	413.9		$	393.6		$	225.8

The components of the income tax provision for the years ended December 31 (in millions):

	2022			2021			2020
Current income tax expense (benefit):
Federal	$	(10.4	)	$	1.0		$	(0.5	)
State		2.5			1.2			(0.5	)
Foreign		135.3			118.0			85.4
Total current income tax expense		127.4			120.2			84.4
Deferred income tax expense (benefit):
Federal		(3.1	)		(7.8	)		(4.9	)
State		(1.7	)		(2.5	)		(1.0	)
Foreign		(6.2	)		3.1			(14.1	)
Total deferred income tax benefit		(11.0	)		(7.2	)		(20.0	)
Income tax provision	$	116.4		$	113.0		$	64.4

The income tax provision differs from the tax provision computed at the U.S. federal statutory rate due to the following significant components:

	2022			2021			2020
Statutory tax rate		21.0	%		21.0	%		21.0	%
Foreign tax rate differential		5.2	%		5.2	%		4.9	%
Permanent differences		1.1	%		1.2	%		2.0	%
U.S. tax on foreign earnings		(0.1	)%		1.6	%		0.3	%
Stock compensation		(0.6	)%		(2.5	)%		(0.7	)%
Mandatory repatriation		—			—			0.5	%
Tax contingencies		3.3	%		2.6	%		1.4	%
Change in tax rates		0.1	%		(0.1	)%		0.1	%
Withholding taxes		—			—			(0.1	)%
Repatriation of foreign earnings		0.2	%		(0.4	)%		0.6	%
State income taxes, net of federal benefits		0.2	%		(0.4	)%		(0.6	)%
Research and development credits		(2.1	)%		(0.9	)%		(1.2	)%
Other		(0.1	)%		1.2	%		(0.7	)%
Change in valuation allowance for unbenefited losses		(0.1	)%		0.2	%		1.0	%
Effective tax rate		28.1	%		28.7	%		28.5	%

The tax effect of temporary items that give rise to significant portions of the deferred tax assets and liabilities are as follows (in millions):

	2022			2021
Deferred tax assets:
Accrued expenses	$	4.4		$	0.3
Compensation		15.3			28.8
Section 174 capitalization		15.8			—
Disallowed interest carryforwards		9.1			9.3
Net operating loss carryforwards		21.9			23.5
Foreign tax and other tax credit carryforwards		20.3			21.4
Unrealized currency gain/loss		13.1			6.8
Inventory		1.9			—
Hedge unrealized FX gain/loss		—			12.5
Lease obligations		10.5			14.1
Other		4.8			2.4
Gross deferred tax assets		117.1			119.1
Less valuation allowance		(6.6	)		(7.1	)
Total deferred tax assets		110.5			112.0
Deferred tax liabilities:
Accounts payable		7.7			—
Inventory		—			3.6
Hedge unrealized FX gain/loss		1.3			—
Deferred revenue		0.9			—
Fixed assets		10.1			6.1
Foreign patent reserves		2.9			4.4
Intangibles		53.8			32.6
Accrued expenses		1.3			0.5
Accrued withholding tax		7.9			6.7
Right-of-use asset		10.5			14.0
Other		—			0.2
Total deferred tax liabilities		96.4			68.1
Net deferred tax assets	$	14.1		$	43.9

The Company uses the liability method to account for income taxes. Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at each reporting period. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the period in which these differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the expected realizable amounts.

The Company can only recognize a deferred tax asset to the extent this it is “more likely than not” that these assets will be realized. Judgments around realizability depend on the availability and weight of both positive and negative evidence. Changes in the valuation allowance for deferred tax assets were as follows (in millions):

Balance at December 31, 2019	$	4.2
Increases recorded as part of acquisition purchase accounting		2.4
Balance at December 31, 2020		6.6
Increases recorded as an expense to income tax provision		0.5
Balance at December 31, 2021		7.1
Decrease recorded for state valuation allowance release		(0.5	)
Balance at December 31, 2022	$	6.6

As of December 31, 2022, the Company had approximately $65.8 million net operating loss carryforwards available to reduce state taxable income that are expected to expire at various times beginning in 2023. The Company also has approximately $74.4 million of German Trade Tax and Corporate Income Tax net operating losses that are carried forward indefinitely. Additionally, the Company has $15.2 million of other foreign net operating losses that are expected to expire at various times in the future. We had U.S. federal foreign tax credit carried forwards in the amount of $5.2 million. We also had U.S. federal and state research and development tax credit of $3.1 million and $9.5 million respectively. Utilization of these credits and state net operating losses may be subject to annual limitations due to the ownership percentage change limitations provided by the Code Section 382 and similar state provisions. In the event of a deemed change in control under Code Section 382, an annual limitation on the utilization of net operating losses and

credits may result in the expiration of all or a portion of the net operating loss and credit carryforwards. Additionally, the Company has $39.8 million of gross interest expense carryforward as provided by Code Section 163(j) that can be carried forward indefinitely.

At December 31, 2022 the Company recorded state income and foreign withholding taxes on the cash and liquid assets portion of the unremitted earnings and profits (E&P) of foreign subsidiaries expected to be repatriated from its foreign subsidiaries to the United States, except for amounts from certain subsidiaries, which the Company has asserted to be indefinitely reinvested. Specifically, the Company asserts that a total of $2.5 billion of unremitted foreign earnings is indefinitely reinvested. This figure is comprised of $1.7 billion in unremitted earnings as well as $851 million of non-cash E&P in all jurisdictions not indefinitely reinvested. If this E&P is ultimately distributed to the United States in the form of dividends the Company would likely be subject to additional withholding tax. The Company estimates the amount of unrecognized deferred withholding taxes on the undistributed E&P to be approximately $82.2 million at December 31, 2022.

The Company had gross unrecognized tax benefits, excluding interest, of approximately $54.9 million as of December 31, 2022, that if recognized, would reduce the Company’s effective tax rate. In the next twelve months it is reasonably possible that the Company will reduce its unrecognized tax benefits by an immaterial amount due to the expiration of statutes of limitations. A tabular reconciliation of the Company’s gross unrecognized tax benefits is as follows (in millions):

Gross unrecognized tax benefits at December 31, 2019	$	15.9
Gross increases—tax positions in prior periods		1.2
Gross increases—current period tax positions		5.6
Gross unrecognized tax benefits at December 31, 2020		22.7
Gross increases—tax positions in prior periods		17.8
Gross increases—current period tax positions		10.9
Gross unrecognized tax benefits at December 31, 2021		51.4
Gross decreases—tax positions in prior periods		(8.2	)
Gross increases—current period tax positions		11.7
Gross unrecognized tax benefits at December 31, 2022	$	54.9

The Company’s policy is to include accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, in income tax expense. At December 31, 2022 and 2021, the Company had approximately $4.2 million and $3.1 million, respectively, of accrued interest and penalties related to uncertain tax positions included in other long-term liabilities in the consolidated balance sheets. The Company recorded expense of $1.1 million and $1.5 million for penalties and interest related to unrecognized tax benefits in the provision for income taxes during the years ended December 31, 2022 and 2021, respectively.

The Company files tax returns in the United States, which includes federal, state and local jurisdictions, and many foreign jurisdictions with varying statutes of limitations. The Company considers Germany, the United States and Switzerland to be its significant tax jurisdictions. The majority of the Company’s earnings are derived in Germany and Switzerland. Accounting for the various federal and local taxing authorities, the statutory rates for 2022 were approximately 30.0% and 20.0% for Germany and Switzerland, respectively. The mix of earnings in those two jurisdictions resulted in an increase of 5.7% from the U.S. statutory rate of 21% in 2022.

The Company has been subject to tax examinations in Germany for the years 2009 through 2012 whereby the German tax authorities had imposed additional tax assessments for those years. Due to the nature of the additional tax assessments, the Company filed for competent authority relief from those assessments and reached a final resolution during the first quarter of 2022. In addition, the Company has been subject to tax examinations for the years 2013-2017 with Germany taxing authorities and 2013-2022 in various taxing authorities.

In 2020, the Company was granted an income tax holiday for our manufacturing facility in Malaysia. The tax holiday allows for tax-free operations through February 28, 2023, with the option to apply for a 5 year extension if certain conditions are met. This tax holiday had an immaterial impact to earnings per share for the year ended December 31, 2022.

In connection with the Tax Cuts and Jobs Act (“TCJA”) of 2017, the Company recorded a toll charge liability of $35.4 million. Of that amount, approximately $14.2 million has already been paid as of December 31, 2022.

In July and August 2022, the CHIPS and Science Act, of CHIPS, and the Inflation Reduction Act, or IRA were signed into law. The IRA introduced tax provisions primarily focused on implementing a 15% corporate alternative minimum tax on global adjusted financial statement income of certain large corporations and 1% excise tax on share repurchases, which are both effective January 1, 2023. While we are still evaluating the impact of the provisions in the Inflation Reduction Act, we do not believe this legislation will have a material impact on our consolidated financial statements.

Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization did not result in a material impact in the overall effective tax rate for the year ended December 31, 2022.