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. In accordance with SAB 118, 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; and


•	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-U.S. subsidiaries' undistributed earnings, together totaling $12 million.

The Company considered the entire $87 million charge to be a provisional estimate as of December 31, 2017.

During the three and six months ended June 30, 2018, the only change that the Company recorded to its $87 million provisional estimate related to tax associated with its non-U.S. subsidiaries' undistributed earnings in the amount of $0.8 million and $0.4 million, respectively. These benefits decreased the Company’s effective tax rate by 80 and 20 basis points for the three and six months ended June 30, 2018, respectively.

Since the enactment of the TCJA, the U.S. Department of the Treasury and the Internal Revenue Service (“IRS”) have issued limited interpretive guidance on the new law. Some U.S. states have issued guidance on particular aspects of the TCJA, while other states have issued no guidance. During the remainder of 2018, the Company will analyze any new pronouncements, and gather any outstanding information required in order to finalize its calculation of the effect of 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 December 31, 2018.

Effective Tax Rates

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented.

The Company’s effective tax rates are as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Effective Tax Rate	23.1%	30.5%	21.1%	29.4%

The Company’s effective tax rates for both the three and six months ended June 30, 2018 are lower than the prior year’s comparable periods primarily due to the TCJA, specifically, the reduction in the statutory U.S. federal tax rate, partially offset by:


•	The elimination of certain deductions


•	U.S. taxes related to non-U.S. earnings


•	Earnings in jurisdictions with statutory tax rates higher than the U.S.

While the Company's effective tax rate for the three months ended June 30, 2018 is higher than the statutory U.S. federal tax rate of 21%, the effective tax rate for the six months ended June 30, 2018 is approximately equal to the statutory U.S. federal tax rate of 21%. The higher rate for the three months ended June 30, 2018 is primarily due to U.S. state taxes, taxes on certain non-U.S. earnings and certain expenses that are statutorily non-deductible for income tax purposes. These items are partially offset by excess tax benefits associated with share-based payments and the U.S. federal research credit.

Unrecognized Tax Benefits

During the three and six months ended June 30, 2018, the Company's gross unrecognized tax benefits, excluding interest and penalties, increased by $0.7 million and $0.8 million respectively, primarily as a result of tax positions taken in both the current and prior periods, partially offset by reductions resulting from the expiration of statutes of limitations.

During the three and six months ended June 30, 2018, the total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate increased by $1.0 million and $1.4 million, respectively.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the three and six months ended June 30, 2018, the Company recognized $0.6 million and $1.0 million, respectively, of interest and penalty expense related to unrecognized tax benefits in its Condensed Consolidated Statement of Operations.

As of each of June 30, 2018 and December 31, 2017, the total amount of accrued interest and penalty expense related to unrecognized tax benefits recorded on the Company’s Condensed Consolidated Balance Sheets was $7.5 million and $6.5 million, respectively.

During the next twelve months, it is reasonably possible that the Company's unrecognized tax benefits may decrease by $14.7 million due to expiration of statutes of limitations and settlements with tax authorities. 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 IRS. In addition, acquired subsidiaries’ federal income tax returns (2014 through 2016) and 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 2015), Canada (2013 through 2015), and Japan (2015 through 2017).