Income Taxes

12 Months Ended

Dec. 31, 2016

INCOME TAXES

For each of the years ended December 31, 2016, 2015, and 2014 the tax data related to continuing operations is as follows:



	2016			2015			2014
Income components:
United States	$	87.5		$	159.3		$	44.5
International	170.9			223.0			217.5
Income from continuing operations before income tax	258.4			382.3			262.0
Income tax expense (benefit) components:
Current income tax expense (benefit):
United States – federal	4.3			(8.5		)	16.2
United States – state and local	(0.3		)	0.1			0.7
International	51.1			52.9			54.6
Total current income tax expense	55.1			44.5			71.5
Deferred income tax expense (benefit) components:
United States – federal	26.4			31.9			(0.6		)
United States – state and local	(2.1		)	6.0			5.1
International	(3.4		)	(12.3		)	(4.7		)
Total deferred income tax (benefit) expense	20.9			25.6			(0.2		)
Income tax expense	$	76.0		$	70.1		$	71.3
Effective income tax rate	29.4		%	18.3		%	27.2		%

A reconciliation of the income tax expense (benefit) for continuing operations from the U.S. statutory income tax rate to the effective income tax rate is as follows for each of the years ended December 31, 2016, 2015, and 2014:



	2016		2015		2014
Tax provision at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Tax exempt interest	(5.2	)%	(6.7	)%	(10.3	)%
Audit settlements & unrecognized tax benefits	(5.2	)%	(5.0	)%	0.9	%
Tax on undistributed foreign earnings	4.9	%	(5.6	)%	(8.1	)%
U.S. tax on foreign earnings	4.7	%	3.8	%	9.3	%
Foreign tax rate differential	(3.5	)%	(3.6	)%	(6.2	)%
U.S. permanent items	(1.9	)%	(1.0	)%	(1.0	)%
Valuation allowance on deferred tax assets	1.4	%	2.1	%	8.6	%
Other adjustments	(0.7	)%	(0.6	)%	(1.3	)%
State and local income tax	(0.1	)%	1.0	%	1.6	%
Foreign tax holiday	—	%	(1.1	)%	(1.3	)%
Effective income tax rate	29.4	%	18.3	%	27.2	%

Our effective tax rate in 2016 includes tax benefits for previously unrecognized tax positions of approximately $13.4 due to the completion of tax examinations and lapses in the statute of limitations.

During 2015, the Company settled the U.S. income tax audit for tax years 2009 to 2011. The Company recorded a tax benefit of $18.0 in continuing operations, which includes a net tax benefit of $8.0 from favorable audit adjustments and $10.0 from the recognition of previously unrecognized tax benefits. In addition, this U.S. income tax audit resulted in a tax benefit of $20.9 related to discontinued operations, which includes net tax expense of $17.4 from unfavorable audit adjustments and a tax benefit of $38.3 from the recognition of previously unrecognized tax positions. In accordance with the existing Tax Matters Agreement with Exelis and Xylem, the Company is entitled to reimbursement for a portion of the tax liability and has recorded a receivable of $1.6 and $13.2 in continuing and discontinued operations, respectively. During 2016, ITT collected those receivables from Exelis and Xylem.

As a result of investment opportunities and other factors, and their impact on the Company’s expected liquidity, certain earnings generated in Hong Kong, Japan, Luxembourg, The Netherlands, and South Korea may be repatriated in the future and are therefore not considered to be indefinitely reinvested outside of the U.S. In 2016, the Company repatriated certain foreign earnings of its Luxembourg subsidiary and accordingly reversed a portion of deferred tax liability. Also in 2016, the Company recorded incremental deferred tax liability on an additional amount of undistributed foreign earnings of its Luxembourg subsidiary. The Company also recorded additional deferred tax liabilities on the current year earnings of the foreign subsidiaries in The Netherlands, Japan, and South Korea. The net movement in the Company's deferred tax liability was an increase of $12.7. We have not provided for deferred taxes on the remaining excess of financial reporting over tax bases of investments in foreign subsidiaries in the amount of $671.6 because we plan to reinvest such earnings indefinitely outside of the U.S. While the amount of U.S. federal income taxes, if such earnings are distributed in the future, cannot be determined, such taxes may be reduced by tax credits and other tax deductions. As of December 31, 2016, the amount of cash, cash equivalents and marketable securities held by foreign subsidiaries was $435.5. Our intent is to permanently reinvest these funds outside of the U.S., and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations in excess of those on which a deferred tax liability has been recorded. In the event funds from foreign operations are needed to fund operations in the U.S. and if U.S. tax has not already been previously provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.

Deferred tax assets and liabilities include the following:



	2016			2015
Deferred Tax Assets:
Asbestos	$	209.8		$	228.7
Loss carryforwards	112.3			125.1
Employee benefits	98.9			110.4
Accruals	74.8			88.0
Credit carryforwards	50.7			34.5
Other	21.2			15.5
Gross deferred tax assets	567.7			602.2
Less: Valuation allowance	113.3			135.7
Net deferred tax assets	$	454.4		$	466.5
Deferred Tax Liabilities:
Intangibles	$	(68.3	)	$	(70.8	)
Undistributed earnings	(52.3		)	(39.6		)
Accelerated depreciation	(36.5		)	(31.0		)
Investment	(0.4		)	(0.5		)
Total deferred tax liabilities	$	(157.5	)	$	(141.9	)
Net deferred tax assets	$	296.9		$	324.6

Deferred taxes are presented in the Consolidated Balance Sheets as follows:



	2016			2015
Non-current assets	297.4			326.1
Other non-current liabilities	(0.5		)	(1.5		)
Net deferred tax assets	$	296.9		$	324.6

The table included below provides a rollforward of our valuation allowance on net deferred income tax assets from December 31, 2013 to December 31, 2016.



	Federal		State			Foreign			Total
DTA valuation allowance - December 31, 2013	$	—	$	44.7		$	90.6		$	135.3
Change in assessment	—		—			2.5			2.5
Current year operations	—		0.3			9.0			9.3
DTA valuation allowance - December 31, 2014	—		45.0			102.1			147.1
Change in assessment	—		—			(7.4		)	(7.4		)
Current year operations	—		(3.5		)	(0.5		)	(4.0		)
DTA valuation allowance - December 31, 2015	—		41.5			94.2			135.7
Change in assessment	—		—			(0.3		)	(0.3		)
Current year operations	—		4.4			(26.5		)	(22.1		)
DTA valuation allowance - December 31, 2016	$	—	$	45.9		$	67.4		$	113.3

After considering all available evidence, including cumulative income and the absence of any significant negative evidence, the Company released the valuation allowance against certain foreign net deferred tax assets in Germany. The Company continues to maintain a valuation allowance against certain deferred tax assets attributable to state net operating losses and tax credits, and certain foreign net deferred tax assets primarily in Luxembourg, Germany and India which are not expected to be realized.

We have the following tax attributes available for utilization at December 31, 2016:



Attribute	Amount		First Year of Expiration
U.S. federal net operating losses	$	4.6	12/31/2033
U.S. state net operating losses	$	1,322.7	12/31/2017
U.S. federal tax credits	$	44.7	12/31/2021
U.S. state tax credits	$	6.0	12/31/2027
Foreign net operating losses	$	251.4	12/31/2017

We have approximately $152.1 of net operating loss carryforwards in Luxembourg as of December 31, 2016 that do not expire.

Shareholders’ equity at December 31, 2016 and 2015 includes excess income tax benefits related to stock-based compensation in 2016 and 2015 of approximately $3.2 and $3.4, respectively.

Uncertain Tax Positions

We recognize income tax benefits from uncertain tax positions only if, based on the technical merits of the position, it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the Consolidated Financial Statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for each of the years ended December 31, 2016, 2015, and 2014 is as follows:



	2016			2015			2014
Unrecognized tax benefits – January 1	$	87.6		$	160.1		$	161.2
Additions for:
Current year tax positions	1.2			3.4			2.8
Prior year tax positions	0.2			1.8			2.4
Assumed in acquisition	0.2			1.9			—
Reductions for:
Prior year tax positions	(3.8		)	(56.6		)	(2.8		)
Settlements	(10.9		)	(19.0		)	(1.0		)
Expiration of statute of limitations	(5.0		)	(4.0		)	(2.5		)
Unrecognized tax benefits – December 31	$	69.5		$	87.6		$	160.1

As of December 31, 2016, $27.0 and $3.1 of the unrecognized tax benefits would affect the effective tax rate for continuing operations and discontinued operations respectively, if realized. The Company operates in various tax jurisdictions and is subject to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including Canada, China, Germany, Hong Kong, Italy, Korea, Mexico, the U.S. and Venezuela.

The calculation of our tax liability for unrecognized tax benefits includes dealing with uncertainties in the application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit. Over the next 12 months, the net amount of the tax liability for unrecognized tax benefits in foreign and domestic jurisdictions could change by approximately $16 due to changes in audit status, expiration of statutes of limitations and other events. The settlement of any future examinations could result in changes in the amounts attributable to the Company under its existing Tax Matters Agreement with Exelis and Xylem.

The following table summarizes the earliest open tax years by major jurisdiction as of December 31, 2016:



Jurisdiction	Earliest Open Year
China	2009
Czech	2013
Germany	2010
Italy	2005
Korea	2011
Luxembourg	2011
Mexico	2012
United States	2014

We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated Statements of Operations. During 2016, 2015, and 2014 we recognized a net interest benefit of $2.9, a net interest benefit of $5.7, and a net interest expense of $0.8, respectively, related to tax matters. We had $6.8, $9.8, and $19.4 of interest expense accrued from continuing and discontinued operations related to tax matters as of December 31, 2016, 2015, and 2014, respectively.

Tax Matters Agreement

On October 25, 2011, we entered into a Tax Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of the companies after the 2011 spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. Exelis and Xylem have liability with ITT to the U.S. Internal Revenue Service (IRS) for the consolidated U.S. Federal income taxes of the ITT consolidated group relating to the taxable periods in which Exelis and Xylem were part of that group. During 2015, the Company settled the U.S. income tax audit for tax years 2009 to 2011. Pursuant to the Tax Matters Agreement, the Company was entitled to reimbursement for a portion of the tax liability and recorded an aggregate receivable of $14.8 from Exelis and Xylem as of December 31, 2015. During 2016, ITT collected the receivables from Exelis and Xylem. Exelis reimbursed ITT for an additional $1.5 of Tax Matters Agreement balances related to compliance and audit service fees and U.S. state refunds. The settlement of future examinations in state or foreign jurisdictions and additional audit service fees may result in changes in amounts attributable to us through the Tax Matters Agreement entered into with Exelis and Xylem. Currently we cannot reasonably estimate the amount of such changes.