Income Taxes

Impact of the Tax Cuts and Jobs Act

Enacted on December 22, 2017, the TCJA significantly changed U.S. corporate income tax law by reducing federal statutory tax rates from 35% to 21%, instituting a territorial tax system that provides a 100% exemption on future repatriations from certain foreign subsidiaries, and imposing a one-time transition tax on previously deferred non-U.S. earnings. The Company recorded a one-time charge of $87 million in the fourth quarter of 2017 primarily consisting of:


•	A re-measurement of the Company's net deferred tax assets due to a reduction in U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, totaling $75 million.


•	A one-time mandatory transition tax on previously deferred earnings of foreign subsidiaries and a reassessment of the Company's assertion regarding re-investment of its non-US subsidiaries' undistributed earnings, together totaling $12 million.

The Company calculated this $87 million charge based on its understanding of both the TCJA as drafted and interpretative guidance issued as of the time of this filing. In accordance with SAB 118, the Company considers the entire $87 million charge to be a provisional estimate. The TCJA includes provisions effective beginning on January 1, 2018, which include a tax on 50% of global intangible low-taxed income (“GILTI”), which is income determined to be in excess of a specified routine rate of return, as well as a base erosion and anti-abuse tax (“BEAT”) aimed at preventing the erosion of the U.S. tax base. The Company continues to review GILTI and BEAT provisions and expects further guidance on the application of these provisions. The Company has not yet adopted an accounting policy as to whether the Company will treat taxes on GILTI as period costs or whether the Company will recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal.

During 2018, the Company will gather outstanding information, further analyze its computations, and incorporate any guidance issued by U.S. federal, U.S. state or non-U.S. regulatory authorities related to the TCJA. The Company will record any changes to its provisional estimate in the quarter in which it completes its analysis, but no later than the quarter ending December 31, 2018.

Provision for Income Taxes

The Company’s income before taxes is as follows:



(in millions) For year ended December 31,	2017		2016		2015
U.S. operations	$	270.1	$	63.5	$	261.9
Non-U.S. operations	97.4		100.6		74.6
Total	$	367.5	$	164.1	$	336.5

The Company’s provision (benefit) for income taxes consists of:



(in millions) For the year ended December 31,	2017		2016			2015
Current:
U.S. federal tax	$	58.4	$	38.7		$	43.0
U.S. state and local tax	5.0		5.1			5.4
Non-U.S. tax	29.3		21.6			18.4
Total current	92.7		65.4			66.8
Deferred:
U.S. federal tax	99.2		(28.0		)	36.5
U.S. state and local tax	0.1		1.5			(0.4		)
Non-U.S. tax	3.0		1.4			3.6
Total deferred	102.3		(25.1		)	39.7
Total provision for income taxes	$	195.0	$	40.3		$	106.5

A reconciliation of the statutory U.S. federal tax rate to the Company’s effective tax rate is as follows:



(in millions) For the year ended December 31,	2017		2016		2015
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (reduction) from:
Income taxed at non-U.S. rates	(0.5	)%	(7.4	)%	(2.0	)%
Non-U.S. income inclusion, net of tax credits	(1.6	)%	(1.0	)%	—	%
State and local taxes, net of federal benefit	1.0	%	3.1	%	1.3	%
U.S. research and development tax credit	(1.0	)%	(3.2	)%	(0.9	)%
U.S. domestic manufacturing deduction	(1.6	)%	(3.2	)%	(1.3	)%
Enactment of Tax Cuts and Jobs Act	23.8	%	—	%	—	%
Other	(2.0	)%	1.3	%	(0.4	)%
Effective tax rate	53.1	%	24.6	%	31.7	%

At December 31, 2016, the Company had not provided deferred taxes of $725 million of non-U.S. subsidiaries' undistributed earnings because the Company intended to permanently reinvest these earnings. Due to the 100% tax exemption on certain foreign dividends provided by the TCJA, the Company has provisionally determined that it no longer plans to permanently reinvest its non-U.S. subsidiaries' earnings. Accordingly, the Company recorded a charge of $3.8 million to reflect this change. In order to finalize this provisional deferred tax liability during 2018, the Company will (1) complete its analysis of the effects of the TCJA on the tax bases of its non-U.S. subsidiaries, (2) complete its computations related to non-U.S. withholding, corporate income, and distribution taxes, and (3) analyze expected responses by U.S. states to the TCJA.

During the fourth quarter of 2016, the Company adopted the FASB's amended guidance related to employee share-based payment accounting. The primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes rather than capital surplus. The Company had excess tax benefits from share-based compensation of $4.3 million, $0.4 million and $1.6 million in 2017, 2016 and 2015, respectively, which were reflected as reductions in the Company's provision for income taxes in 2017 and 2016, and an increase to the Company's capital surplus in 2015.

During 2017, 2016 and 2015, tax provision (benefit) of $3.5 million, $(8.4) million, and $4.6 million, respectively, related to changes in pension and post-retirement plan assets and benefit obligations, were recorded to accumulated other comprehensive loss.

Deferred Taxes and Valuation Allowances

The components of deferred tax assets and liabilities included on the Company’s Consolidated Balance Sheets are as follows:



(in millions) December 31,	2017			2016
Deferred tax assets:
Asbestos-related liabilities	$	127.0		$	215.4
Tax loss and credit carryforwards	104.2			101.3
Pension and post-retirement benefits	41.6			74.3
Inventories	18.3			25.0
Accrued bonus and stock-based compensation	11.5			16.9
Environmental reserves	8.0			12.3
Restructuring reserves	6.4			3.0
Warranty	4.9			8.0
Compensated Absences	4.8			7.4
Other	—			18.3
Total	$	326.7		$	481.9
Less: valuation allowance	123.0			148.2
Total deferred tax assets, net of valuation allowance	$	203.7		$	333.7
Deferred tax liabilities:
Basis difference in fixed assets	$	(6.0	)	$	(17.6	)
Basis difference in intangible assets	(116.9		)	(147.2		)
Other	(21.5		)	—
Total deferred tax liabilities	$	(144.4	)	$	(164.8	)
Net deferred tax asset	$	59.3		$	168.9
Balance sheet classification:
Current deferred tax assets	$	—		$	29.6
Long-term deferred tax assets	104.2			181.8
Accrued liabilities	—			(0.1		)
Long-term deferred tax liability	(44.9		)	(42.4		)
Net deferred tax asset	$	59.3		$	168.9

As of December 31, 2017, the Company had U.S. federal, U.S. state and non-U.S. tax loss and credit carryforwards that will expire, if unused, as follows:



(in millions) Year of expiration	U.S. Federal Tax Credits			U.S. Federal Tax Losses			U.S. State Tax Credits			U.S. State Tax Losses			Non- U.S. Tax Losses			Total
2018-2022	$	—		$	—		$	3.6		$	43.3		$	48.8
After 2022	2.2			1.0			1.8			808.3			4.5
Indefinite	—			—			20.6			—			132.0
Total tax carryforwards	$	2.2		$	1.0		$	26.0		$	851.6		$	185.3
Deferred tax asset on tax carryforwards	$	2.2		$	0.2		$	20.5		$	45.3		$	36.0		$	104.2
Valuation allowance on tax carryforwards	(1.8		)	(0.2		)	(19.9		)	(44.6		)	(33.2		)	(99.7		)
Net deferred tax asset on tax carryforwards	$	0.4		$	—		$	0.6		$	0.7		$	2.8		$	4.5

As of December 31, 2017 and 2016, the Company determined that it was more likely than not that $99.7 million and $96.5 million, respectively, of its deferred tax assets related to tax loss and credit carryforwards will not be realized. As a result, the Company recorded a valuation allowance against these deferred tax assets. The Company also determined that it is more likely than not that a portion of the benefit related to U.S. state and non-U.S. deferred tax assets other than tax loss and credit carryforwards will be not realized. Accordingly, as of December 31, 2017 and 2016, a valuation allowance of $23.3 million and $51.7 million, respectively, was established against these U.S. state and non-U.S. deferred tax assets. The Company’s total valuation allowance as of December 31, 2017 and 2016 was $123.0 million and $148.2 million, respectively.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of the Company’s gross unrecognized tax benefits, excluding interest and penalties, is as follows:



(in millions)	2017			2016			2015
Balance of liability as of January 1	$	46.5		$	45.2		$	40.7
Increase as a result of tax positions taken during a prior year	2.5			0.5			1.5
Decrease as a result of tax positions taken during a prior year	(1.5		)	(7.3		)	(2.1		)
Increase as a result of tax positions taken during the current year	5.2			10.3			9.2
Decrease as a result of settlements with taxing authorities	(0.3		)	(1.2		)	—
Reduction as a result of a lapse of the statute of limitations	(6.0		)	(1.0		)	(4.1		)
Balance of liability as of December 31	$	46.4		$	46.5		$	45.2

As of December 31, 2017, 2016 and 2015, the amount of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate was $49.2 million, $47.6 million, and $46.6 million, respectively. The difference between these amounts and those reflected in the table above relates to (1) offsetting tax effects from other tax jurisdictions, and (2) interest expense, net of deferred taxes.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company recognized interest and penalty expense of $0.3 million, $0.4 million, and $1.1 million, respectively, in its Consolidated Statements of Operations. As of December 31, 2017 and 2016, the Company had accrued $6.5 million and $6.2 million, respectively, of interest and penalties related to unrecognized tax benefits in its Consolidated Balance Sheets.

During the next twelve months, it is reasonably possible that the Company's unrecognized tax benefits could change by $11.4 million due to settlements of income tax examinations, the expiration of statutes of limitations or other resolution of uncertainties. However, if the ultimate resolution of income tax examinations results in amounts that differ from this estimate, the Company will record additional income tax expense or benefit in the period in which such matters are effectively settled.

Income Tax Examinations

The Company's income tax returns are subject to examination by the U.S. federal, U.S. state and local, and non-U.S. tax authorities.

The Company’s consolidated federal income tax returns for the years 2014 through 2016 remain subject to examination by the Internal Revenue Service (“IRS”). In addition, acquired subsidiaries’ federal tax carryforwards (2007 through 2012) remain subject to IRS examination.

With few exceptions, the Company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2011. Currently the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2010 through 2012), Canada (2013 through 2015) and California (2012 and 2013).