Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

Note 13—Income Taxes

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

	2019		2018		2017
Domestic	$	3.8	$	(15.4)	$	(14.0)
Foreign		276.6		260.1		211.8
	$	280.4	$	244.7	$	197.8

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

	2019		2018		2017
Current income tax expense:
Federal	$	0.6	$	10.1	$	32.2
State		2.2		1.0		2.0
Foreign		82.1		61.8		42.7
Total current income tax expense		84.9		72.9		76.9
Deferred income tax (benefit) expense:
Federal		(2.2)		(15.4)		35.5
State		0.3		(0.3)		(0.4)
Foreign		(0.6)		6.5		5.5
Total deferred income tax (benefit) expense		(2.5)		(9.2)		40.6
Income tax provision	$	82.4	$	63.7	$	117.5

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:

	2019		2018		2017
Statutory tax rate	21.0	%	21.0	%	35.0	%
Foreign tax rate differential	5.9		4.6		(11.7)
Permanent differences	1.1		0.7		(0.5)
Mandatory Repatriation	(0.6)		1.7		27.0
Tax contingencies	1.4		0.9		(1.3)
Change in tax rates	0.3		1.1		0.9
Withholding taxes	(0.1)		0.1		2.2
Permanent reinvestment assertion accrual	0.3		(4.9)		7.8
State income taxes, net of federal benefits	0.7		(0.4)		1.3
Purchase accounting	—		0.1		0.5
Tax credits	(0.6)		—		(0.3)
Other	—		0.6		(1.2)
Change in valuation allowance for unbenefitted losses	—		0.5		(0.3)
Effective tax rate	29.4	%	26.0	%	59.4	%

The tax effect of temporary items that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows (dollars in millions):

	2019		2018
Deferred tax assets:
Accrued expenses	$	7.5	$	5.3
Compensation		32.6		26.9
Investments		0.1		—
Deferred revenue		8.4		—
Net operating loss carryforwards		21.2		24.3
Fixed assets		2.9		3.9
Foreign tax and other tax credit carryforwards		11.0		8.3
Unrealized currency gain/loss		6.1		1.1
Lease obligations		16.3		—
Gross deferred tax assets		106.1		69.8
Less valuation allowance		(4.2)		(4.3)
Total deferred tax assets		101.9		65.5
Deferred tax liabilities:
Accounts receivable		0.6		1.2
Investments		—		0.5
Inventory		13.3		1.8
Deferred revenue		—		5.9
Fixed assets		4.9		—
Foreign statutory reserves		2.2		0.4
Intangibles		40.1		47.6
Accrued expenses		0.9		0.3
Accrued Withholding Tax		5.2		4.8
Right of use asset		15.6		—
Other		7.4		3.2
Total deferred tax liabilities		90.2		65.7
Net deferred tax assets	$	11.7	$	(0.2)

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, 2019, 2018 and 2017 were as follows:

Balance at December 31, 2016	$	0.5
Decreases recorded as a benefit to income tax provision		(0.5)
Balance at December 31, 2017	$	—
Increases recorded as a loss to income tax provision		1.3
Increases recorded as part of acquisition purchase accounting		3.0
Balance at December 31, 2018	$	4.3
Decreases recorded as a benefit to income tax provision		(0.1)
Balance at December 31, 2019	$	4.2

As of December 31, 2019, the Company has approximately $38.8 million net operating loss carryforwards available to reduce state taxable income that are expected to expire at various times beginning in 2020. The Company also has approximately $82.7 million of German Trade Tax and Corporate Income Tax net operating losses that are carried forward indefinitely. Additionally, the Company has $13.2 million of other foreign net operating losses that are expected to expire at various times beginning in 2020. The Company also has state research and development tax credits of $7.7 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.

At December 31, 2019 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 $1.6 billion of unremitted foreign earnings is indefinitely reinvested. This figure is comprised of $1.1 billion in unremitted earnings as well as $447 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 or otherwise 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 $58 million at December 31, 2019.

The Company had gross unrecognized tax benefits, excluding interest, of approximately $15.9 million as of December 31, 2019, 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 beginning and ending amount of unrecognized tax benefits is as follows (dollars in millions):

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
Gross increases - tax positions in prior periods		3.1
Lapse of statutes		(0.9)
Gross unrecognized tax benefits at December 31, 2018		6.6
Gross increases - tax positions in prior periods		4.7
Gross increases - current period tax positions		4.7
Lapse of statutes		(0.1)
Gross unrecognized tax benefits at December 31, 2019	$	15.9

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. As of December 31, 2019 and 2018, the Company

had approximately $0.4 million and $0.2 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 $0.2 million for penalties and interest related to unrecognized tax benefits in the provision for income taxes during the year ended December 31, 2018. There was no benefit recognized during the year ended December 31, 2019.

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 2019 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 5.51% from the U.S. statutory rate of 21% in 2019. 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 2016, the Company settled tax audits in Germany and Switzerland. The settlements were immaterial to the consolidated financial statements. Tax years 2013 to 2018 remain open for examination in the United States.

U.S. Tax Reform

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 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 territorial tax system beginning in 2018 by providing a 100% dividends received deduction on certain qualified dividends from foreign subsidiaries;

● To fund the territorial tax system, 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”, and;

● The introduction of a new U.S. tax on certain off-shore earnings associated with so-called “Global Intangible Low-Taxed Income” (GILTI). This tax is imposed 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.

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.

During the fourth quarter of 2017, the Company recognized within its provision for income taxes 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.

During the fourth quarter of 2018, the Company completed its accounting for the elements of U.S. Tax Reform. During 2018, the Company recorded tax adjustments under SAB 118 equal to a net benefit of $5.4 million. Among those adjustments were $6.6 million of additional tax expense related to the toll charge liability that was estimated to be $55.0 million in 2017. In addition, a $12.0 million tax benefit was recorded in 2018 that reduced the estimated liability of $12.5 that the Company recorded in 2017 for expected state income and foreign withholding taxes associated with unremitted foreign earnings. There was no change from the $1.4 million that was recorded in 2017 to the net deferred tax liability related to the reduction on the U.S. federal statutory tax rate from 35% to 21%.

During 2019, the Company recorded a tax adjustment equal to a net benefit of $1.6 million related to the recalculation of the toll charge liability. The Company expects to reflect this change on a 2017 amended tax return. The total toll charge liability as of December 31, 2019 was $34.4 million. Of that amount, approximately $5.8 million has already been paid.

The Company recorded tax expense associated with the GILTI provisions of the 2017 Tax Act as of December 31, 2019. 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 determined to treat such as a tax cost in the year incurred. 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, 2019.