Note 12—Income Taxes

On December 22, 2017 (Enactment Date), the President of the United States signed tax reform legislation (2017 Tax Act), which enacted a wide range of changes to the U.S. corporate income tax system, many of which differ significantly from the provisions of the previous U.S. tax law. The 2017 Tax Act contains several key provisions including, among other things:


	•	A one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (E&P), referred to as the "toll charge";
	•	A reduction in the corporate tax rate from 35.0% to 21.0% for the tax years beginning after December 31, 2017;
	•	The introduction of a new U.S. tax on certain off-shore earnings referred to as the "Global Intangible Low-Taxed Income" (GILTI) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset by foreign tax credits; and
	•	The introduction of a territorial tax system beginning in 2018 by providing a 100% dividends received deduction on certain qualified dividends from foreign subsidiaries.

Also on December 22, 2017, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 118, which provides companies with additional guidance on how to implement the provisions of the 2017 Tax Act in their financial statements. The guidance provides for a measurement period, up to one year from the Enactment Date, in which provisional amounts may be adjusted when additional information is obtained, prepared or analyzed about facts and circumstances that existed as of the Enactment Date, if known, which would have impacted the amounts that were initially recorded by the Company.

The Company has not yet completed the assessment of the tax effects associated with the enactment of the 2017 Tax Act; however, a reasonable estimate has been made of the effects on the existing deferred tax balances and the one-time transition tax. Changes in the tax rates and laws are accounted for in the period of enactment. Therefore, during the fourth quarter of 2017, the Company recorded an incremental income tax provision of $68.9 million, which is primarily comprised of the following:


	•	An estimated income tax provision of $55.0 million for the federal and state impacts of the one-time deemed repatriation of pre-2018 E&P. In accordance with the 2017 Tax Act, the federal portion of the toll charge liability may be paid over eight years. Such liability can be reduced by certain credits. Accordingly, we have recorded $30.6 million and $2.7 million in long-term income tax liabilities and accrued income taxes (current), respectively, as of December 31, 2017
	•	An estimated net income tax benefit of $1.4 million, for the remeasurement of our deferred tax assets and liabilities at the newly enacted tax rate of 21%; and
	•	As a result of the 2017 Tax Act and our expectations about distributing certain cash balances from its foreign subsidiaries to the United States, we also recorded estimated income tax provisions for estimated state income taxes and foreign withholding taxes of $12.5 million.

The net charge of $68.9 million recorded was based on currently available information and interpretations of applying the provisions of the 2017 Tax Act as of the time of filing this Annual Report on Form 10-K. The Company expects to finalize these provisional estimates before the end of 2018 after completing the review and analysis, including reviews and analysis of any interpretations issued during this measurement period.

The Company is still evaluating the GILTI provisions of the 2017 Tax Act and its impact, if any, to the consolidated financial statements as of December 31, 2017. Companies are allowed to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. The Company has not yet determined the accounting policy because determining the impact of the GILTI provisions requires analysis of the existing legal entity structure, the reversal of U.S. GAAP and U.S. tax basis differences in the assets and liabilities of foreign subsidiaries, and the ability to offset any tax with foreign tax credits. As such, the Company did not record a deferred income tax expense or benefit related to the GILTI provisions of the 2017 Tax Act in the consolidated statement of income for the year ended December 31, 2017. This will also be finalized during the measurement period.

The Company recorded a provisional amount for the toll charge, which represents its reasonable estimate of the liability due for the mandatory deemed repatriation of its post-1986 untaxed foreign E&P. Determining the provisional toll charge liability required a significant effort based on a number of factors including:


	•	Analyzing the accumulated untaxed foreign E&P since 1986 including historical practices and assertions made in determining such;
	•	Determining the composition, including intercompany receivables and payables of specified foreign corporations, of our post-1986 untaxed foreign E&P that is held in cash or liquid assets and other assets at several measurement dates. This is required because a different tax rate is applied to each when determining the toll charge liability; and
	•	Assessing the potential impact of existing uncertain tax positions in determining our accumulated undistributed E&P.

Due to the timing of the Enactment Date, the Company had limited time to understand the 2017 Tax Act and its various interpretations, to assess how to apply the new tax law to the specific facts and circumstances of the Company and to determine the toll charge. As such the amounts recorded for the toll charge are provisional.

The actual results of the implementation of the 2017 Tax Act may materially differ from the Company's current estimate due to, among other things, further guidance that may be issued by U.S. tax authorities or regulatory bodies including the SEC and the FASB to interpret the 2017 Tax Act. The Company will continue to analyze the 2017 Tax Act and any additional guidance that may be issued and finalize the full effects of applying the new legislation in the measurement period.

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

	2017			2016		2015
Domestic	$	(14.0	)	$	18.4	$	31.6
Foreign		211.8			159.2		96.4

	$	197.8		$	177.6	$	128.0

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

	2017			2016			2015
Current income tax (benefit) expense:
Federal	$	32.2		$	(2.4	)	$	5.7
State		2.0			0.3			1.3
Foreign		42.7			59.8			50.0

Total current income tax expense		76.9			57.7			57.0
Deferred income tax (benefit) expense:
Federal		35.5			3.1			(31.1	)
State		(0.4	)		(5.3	)		(2.4	)
Foreign		5.5			(32.4	)		(0.4	)

Total deferred income tax (benefit) expense		40.6			(34.6	)		(33.9	)

Income tax provision	$	117.5		$	23.1		$	23.1

The income tax provision differs from the tax provision computed at the U.S federal statutory rate due to the following significant components for the years ended December 31:

	2017			2016			2015
Statutory tax rate		35.0	%		35.0	%		35.0	%
Foreign tax rate differential		(11.7	)		(11.6	)		(3.6	)
Permanent differences		(0.5	)		8.2			(2.0	)
Mandatory Repatriation		27.0			—			—
Tax contingencies		(1.3	)		(3.0	)		2.3
Change in tax rates		0.9			0.2			1.3
Withholding taxes		2.2			1.3			8.1
Permanent Reinvestment Assertion Accrual		7.8			—			—
State income taxes, net of federal benefits		1.3			(2.9	)		(0.9	)
Purchase accounting		0.5			1.6			0.8
Tax credits		(0.3	)		(3.0	)		(1.1	)
Other		(1.2	)		4.3			(2.7	)
Change in valuation allowance for unbenefitted losses		(0.3	)		(17.1	)		(19.2	)

Effective tax rate		59.4	%		13.0	%		18.0	%

The tax effect of temporary items that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in millions):

	2017		2016
Deferred tax assets:
Accounts receivable	$	3.9	$	2.9
Accrued expenses		6.7		4.6
Compensation		27.9		30.6
Deferred revenue		0.4		2.0
Net operating loss carryforwards		19.1		14.1
Fixed assets		—		0.8
Inventory		2.8		3.2
Foreign tax and other tax credit carryforwards		5.9		17.2
Unrealized currency gain/loss		3.2		3.0

Gross deferred tax assets		69.9		78.4
Less valuation allowance		—		(0.5	)

Total deferred tax assets		69.9		77.9

Deferred tax liabilities:
Fixed assets		0.3		—
Foreign statutory reserves		0.9		1.1
Intangibles		13.0		7.2
Accrued expenses		0.6		1.2
Accrued Withholding Tax		16.1		2.0
Other		6.4		—

Total deferred tax liabilities		37.3		11.5

Net deferred tax assets	$	32.6	$	66.4

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 during the years ended December 31, 2017, 2016 and 2015 were as follows:

Balance at December 31, 2014	$	57.4
Decreases recorded as a benefit to income tax provision		(20.2	)

Balance at December 31, 2015	$	37.2
Decreases recorded as a benefit to income tax provision		(36.7	)

Balance at December 31, 2016	$	0.5
Decreases recorded as a benefit to income tax provision		(0.5	)

Balance at December 31, 2017	$	—

The decreases related primarily to the realizability of foreign net operating and capital losses based on future taxable income.

As of December 31, 2017, the Company has approximately $23.2 million net operating loss carryforwards available to reduce state taxable income. The Company also has approximately $77.4 million of German Trade Tax and Corporate Income Tax net operating losses that are carried forward indefinitely. Additionally, the Company has $13.9 million of other foreign net operating losses that are expected to expire at various times beginning in 2018. The Company also has state research and development tax credits of $7.5 million. 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 Internal Revenue Code Section 382 and similar state provisions. In the event of a deemed change in control under Internal Revenue 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.

The Company reflects certain statutory reserves in its tabular reconciliation of unrecognized tax benefits. Effective for the year ended December 31, 2013 and thereafter, these unrecognized tax benefits are presented as a reduction of the associated net deferred tax assets.

At December 31, 2017 and in accordance with the 2017 Tax Act, the Company recorded state 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. The Company continues to be indefinitely reinvested amounting to $740.0 million of non-cash E&P that is related to the 2017 Tax Act deemed repatriation. If this E&P is ultimately distributed to the United States in the form of dividends or otherwise the Company would likely be subject to additional withholding tax. The Company will continue to evaluate its assertions on the cumulative historical outside basis differences in its foreign subsidiaries as of December 31, 2017. The Company expects to finalize its analysis and accounting related to the toll charge and any remaining outside basis differences in its foreign subsidiaries during the measurement period. The Company estimates the amount of unrecognized deferred withholding taxes on the undistributed E&P to be approximately $27 million at December 31, 2017.

The Company had gross unrecognized tax benefits, excluding interest, of approximately $4.4 million as of December 31, 2017, 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 $0.8 million due to the expiration of statutes of limitations and favorable settlement with taxing authorities which would reduce the Company's effective tax rate. A tabular reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

Gross unrecognized tax benefits at December 31, 2014	$	40.0
Gross decreases—tax positions in prior periods		(1.5	)
Gross increases—current period tax positions		0.4
Settlements		(2.7	)
Lapse of statutes		(3.0	)

Gross unrecognized tax benefits at December 31, 2015		33.2
Gross decreases—tax positions in prior periods		(4.8	)
Gross increases—current period tax positions		0.9
Settlements		(21.3	)
Lapse of statutes		(1.8	)

Gross unrecognized tax benefits at December 31, 2016		6.2
Lapse of statutes		(1.8	)

Gross unrecognized tax benefits at December 31, 2017	$	4.4

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. As of December 31, 2017 and 2016, the Company had approximately $0.2 million and $0.5 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 a benefit of $0.3 million and $1.8 million for penalties and interest related to unrecognized tax benefits in the provision for income taxes during the year ended December 31, 2017 and December 31, 2016, 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 2017 were approximately 30.0% and 20.0% for Germany and Switzerland, respectively. The mix of earnings in those two jurisdictions resulted in a reduction of 7.8% from the U.S. statutory rate of 35.0% in 2017. The Company has not been a party to any tax holiday agreements. The tax years 2013 to 2016 are open to examination in Germany and Switzerland. In the third quarter of 2015, the Company settled tax audits in Germany and Italy. In 2016, the Company settled tax audits in Germany and Switzerland. The settlements were immaterial to the consolidated financial statements. Tax years 2011 to 2016 remain open for examination in the United States.