Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

14.   Income Taxes

The domestic and foreign components of income before taxes are as follows (in millions):

	2020		2019		2018
Domestic	$	(31.1)	$	3.8	$	(15.4)
Foreign		256.9		276.6		260.1
Total income before provision for income taxes	$	225.8	$	280.4	$	244.7

The components of the income tax provision are as follows (in millions):

	2020		2019		2018
Current income tax expense:
Federal	$	(0.5)	$	0.6	$	10.1
State		(0.5)		2.2		1.0
Foreign		85.4		82.1		61.8
Total current income tax expense		84.4		84.9		72.9
Deferred income tax (benefit) expense:
Federal		(4.9)		(2.2)		(15.4)
State		(1.0)		0.3		(0.3)
Foreign		(14.1)		(0.6)		6.5
Total deferred income tax (benefit) expense		(20.0)		(2.5)		(9.2)
Income tax provision	$	64.4	$	82.4	$	63.7

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

	2020		2019		2018
Statutory tax rate	21.0	%	21.0	%	21.0	%
Foreign tax rate differential	4.9		5.9		4.6
Permanent differences	1.6		1.1		0.7
Mandatory Repatriation	0.5		(0.6)		1.7
Tax contingencies	1.4		1.4		0.9
Change in tax rates	0.1		0.3		1.1
Withholding taxes	(0.1)		(0.1)		0.1
Repatriation of foreign earnings	0.6		0.3		(4.9)
State income taxes, net of federal benefits	(0.6)		0.7		(0.4)
Purchase accounting	—		—		0.1
Tax credits	(0.6)		(0.6)		—
Other	(1.3)		—		0.6
Change in valuation allowance for unbenefitted losses	1.0		—		0.5
Effective tax rate	28.5	%	29.4	%	26.0	%

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

	2020		2019
Deferred tax assets:
Accrued expenses	$	4.7	$	7.5
Compensation		32.3		32.6
Deferred revenue		13.9		8.4
Disallowed interest carryforward		5.0		2.9
Net operating loss carryforwards		31.1		21.2
Foreign tax and other tax credit carryforwards		16.4		11.0
Unrealized currency gain/loss		9.6		6.1
Lease obligations		15.2		16.3
Gross deferred tax assets		128.2		106.0
Less valuation allowance		(6.6)		(4.2)
Total deferred tax assets		121.6		101.8
Deferred tax liabilities:
Accounts receivable		2.7		0.6
Inventory		10.8		13.3
Fixed assets		10.4		4.9
Foreign patent reserves		2.4		2.2
Intangibles		40.2		40.1
Accrued expenses		2.8		0.9
Accrued Withholding Tax		6.7		5.2
Right of use asset		14.9		15.6
Other		2.2		7.3
Total deferred tax liabilities		93.1		90.1
Net deferred tax assets	$	28.5	$	11.7

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, 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
Increases recorded as part of acquisition purchase accounting		2.4
Balance at December 31, 2020	$	6.6

As of December 31, 2020, the Company has approximately $65.2 million net operating loss carryforwards available to reduce state taxable income that are expected to expire at various times beginning in 2021. The Company also has approximately $108.4 million of German Trade Tax and Corporate Income Tax net operating losses that are carried forward indefinitely. Additionally, the Company has $18.5 million of other foreign net operating losses that are expected to expire at various times beginning in 2021. The Company also has state research and development tax credit carryforwards of $7.1 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 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.

At December 31, 2020 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 $1.7 billion of unremitted foreign earnings is indefinitely reinvested. This figure is comprised of $1.2 billion in unremitted earnings as well as $436 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 $63 million at December 31, 2020.

The Company had gross unrecognized tax benefits, excluding interest, of approximately $22.7 million as of December 31, 2020, 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, 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
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

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, 2020 and 2019, the Company had approximately $1.8 million and $0.7 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 an expense of $1.1 million for penalties and interest related to unrecognized tax benefits in the provision for income taxes during the year ended December 31, 2020. There was no benefit recognized during the year ended December 31, 2020.

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 2020 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 5.2% from the U.S. statutory rate of 21% in 2020. The tax

years 2013 through present are open to examination in Germany and Switzerland. During the 2020 fiscal year, the Company settled tax audits in some of the entities located in Germany for tax years 2013 and 2014. The settlements were immaterial to the consolidated financial statements. Tax years 2013 through present remain open for examination in the United States.

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, Malaysia tax holiday has an immaterial impact to earnings per share for the year ended December 31, 2020.

In connection with the Tax Act, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), to provide guidance to companies that had not completed their accounting for the income tax effects of the Tax Act. Under SAB 118, companies were permitted to record provisional amounts to the extent reasonable estimates could be made. Additionally, upon obtaining, preparing, or analyzing additional information (including computations), companies were permitted to record additional tax effects and adjustments to previously recorded provisional amounts within one year from the enactment date of the Tax Act.

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 2020, the Company recorded a tax expense of $1.1 million related to the recalculation of the toll charge liability as reflected on a 2017 amended tax return. The total toll charge liability as of December 31, 2020 was $35.4 million. Of that amount, approximately $8.5 million has already been paid.

In 2020, the U.S. Treasury Department issued final regulations regarding Foreign Derived Intangible Income (“FDII”) and Global Intangible Low-Taxed Income (“GILTI”). We have determined we will elect the GILTI high tax exception as allowed by the final regulations and we will be assessing the impact to our 2018 and 2019 US Federal consolidated income tax returns.