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 and caused us to:


•	Remeasure our net deferred tax assets to the reduced 21% corporate income tax rate effective January 1, 2018 (“Re-measurement”),


•	Record a one-time transition tax on our previously deferred non-U.S. earnings (“Toll Tax”), and


•	Reassess our assertion regarding the re-investment of our non-US undistributed earnings (“Assertion Tax”).

We availed ourselves of the one-year measurement period provided by SAB 118 and have now completed our accounting for the TCJA.

During the years ended December 31, 2018 and 2017, we recorded the following (benefit) provision related to the enactment of the TCJA:



	Year ended December 31,
(in millions)	2018			2017
Re-measurement	$	(5.1	)	$	75.0
Toll Tax	0.7			8.0
Assertion Tax	(0.4		)	4.0
Total (benefit) provision for income taxes	$	(4.8	)	$	87.0

Provision for Income Taxes

Our income before taxes is as follows:



(in millions) For year ended December 31,	2018		2017		2016
U.S. operations	$	296.4	$	270.1	$	63.5
Non-U.S. operations	115.0		97.4		100.6
Total	$	411.4	$	367.5	$	164.1

Our provision (benefit) for income taxes consists of:



(in millions) For the year ended December 31,	2018		2017		2016
Current:
U.S. federal tax	$	9.3	$	58.4	$	38.7
U.S. state and local tax	4.9		5.0		5.1
Non-U.S. tax	14.0		29.3		21.6
Total current	28.2		92.7		65.4
Deferred:
U.S. federal tax	35.7		99.2		(28.0		)
U.S. state and local tax	2.0		0.1		1.5
Non-U.S. tax	10.0		3.0		1.4
Total deferred	47.7		102.3		(25.1		)
Total provision for income taxes	$	75.9	$	195.0	$	40.3

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



For the year ended December 31,	2018		2017		2016
Statutory U.S. federal tax rate	21.0	%	35.0	%	35.0	%
Increase (reduction) from:
Income taxed at non-U.S. rates	(0.2	)%	(0.5	)%	(7.4	)%
Non-U.S. income inclusion, net of tax credits	(2.3	)%	(1.6	)%	(1.0	)%
State and local taxes, net of federal benefit	1.4	%	1.0	%	3.1	%
U.S. research and development tax credit	(0.7	)%	(1.0	)%	(3.2	)%
U.S. domestic manufacturing deduction	(0.3	)%	(1.6	)%	(3.2	)%
Effect of the enactment of the TCJA	(0.8	)%	23.8	%	—	%
U.S. deduction for foreign - derived intangible income	(1.1	)%	—	%	—	%
Global intangible low taxed income	2.2	%	—	%	—	%
Other	(0.8	)%	(2.0	)%	1.3	%
Effective tax rate	18.4	%	53.1	%	24.6	%

As of December 31, 2018, we have made the following determinations with regards to our non-U.S. earnings:



(in millions)	Permanently reinvested		Not permanently reinvested
Amount of earnings	$	232.4	$	1,168.7
Associated tax	NA *		$	7.5

* Determination of U.S. income taxes and non-U.S. withholding taxes due upon repatriation of this $232 million of earnings is not practicable because the amount of such taxes depends upon circumstances existing in numerous taxing jurisdictions at the time the remittance occurs.

During the fourth quarter of 2016, we 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 our provision for income taxes rather than capital surplus. We had excess tax benefits from share-based compensation of $5.4 million, $4.3 million and $0.4 million in 2018, 2017 and 2016, respectively, which were reflected as reductions in our provision for income taxes in 2018, 2017 and 2016.

During 2018, 2017 and 2016, tax provision (benefit) of $(7.1) million, $3.5 million and $(8.4) 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 our Consolidated Balance Sheets are as follows:



(in millions) December 31,	2018			2017
Deferred tax assets:
Asbestos-related liabilities	$	110.0		$	127.0
Tax loss and credit carryforwards	124.8			104.2
Pension and post-retirement benefits	50.2			41.6
Inventories	20.8			18.3
Accrued bonus and stock-based compensation	11.5			11.5
Environmental reserves	6.2			8.0
Restructuring reserves	3.0			6.4
Warranty	5.8			4.9
Insurance	3.1			2.9
Compensated Absences	6.2			4.8
Total	$	341.6		$	329.6
Less: valuation allowance	124.3			123.0
Total deferred tax assets, net of valuation allowance	$	217.3		$	206.6
Deferred tax liabilities:
Basis difference in fixed assets	$	(53.7	)	$	(6.0	)
Basis difference in intangible assets	(176.0		)	(116.9		)
Other	(22.0		)	(24.4		)
Total deferred tax liabilities	$	(251.7	)	$	(147.3	)
Net deferred tax asset (liability)	$	(34.4	)	$	59.3
Balance sheet classification:
Long-term deferred tax assets	18.8			104.2
Long-term deferred tax liability	(53.2		)	(44.9		)
Net deferred tax asset (liability)	$	(34.4	)	$	59.3

As of December 31, 2018, we 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
2019-2023	$	2.8		$	—		$	2.6		$	56.5		$	45.6
After 2023	1.0			0.9			4.2			815.0			4.4
Indefinite	0.8			27.3			22.1			2.1			181.1
Total tax carryforwards	$	4.6		$	28.2		$	28.9		$	873.6		$	231.1
Deferred tax asset on tax carryforwards	$	4.6		$	5.9		$	22.9		$	45.8		$	45.5		$	124.7
Valuation allowance on tax carryforwards	(2.9		)	(0.2		)	(20.2		)	(45.1		)	(32.8		)	(101.2		)
Net deferred tax asset on tax carryforwards	$	1.7		$	5.7		$	2.7		$	0.7		$	12.7		$	23.5

As of December 31, 2018 and 2017, we determined that it was more likely than not that $101.2 million and $99.7 million, respectively, of our deferred tax assets related to tax loss and credit carryforwards will not be realized. As a result, we recorded a valuation allowance against these deferred tax assets. We 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 not be realized. Accordingly, as of December 31, 2018 and 2017, a valuation allowance of $23.1 million and $23.3 million, respectively, was established against these U.S. state and non-U.S. deferred tax assets. Our total valuation allowance as of December 31, 2018 and 2017 was $124.3 million and $123.0 million, respectively.

Unrecognized Tax Benefits

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



(in millions)	2018			2017			2016
Balance of liability as of January 1,	$	46.4		$	46.5		$	45.2
Increase as a result of tax positions taken during a prior year	4.6			2.5			0.5
Decrease as a result of tax positions taken during a prior year	(1.5		)	(1.5		)	(7.3		)
Increase as a result of tax positions taken during the current year	3.1			5.2			10.3
Decrease as a result of settlements with taxing authorities	(1.1		)	(0.3		)	(1.2		)
Reduction as a result of a lapse of the statute of limitations	(9.5		)	(6.0		)	(1.0		)
Balance of liability as of December 31,	$	42.0		$	46.4		$	46.5

As of December 31, 2018, 2017 and 2016, the amount of our unrecognized tax benefits that, if recognized, would affect our effective tax rate were $43.1 million, $49.2 million, and $47.6 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, and (3) unrecognized tax benefits whose reversals would be recorded to goodwill.

We recognize interest and penalties related to unrecognized tax benefits as a component of our income tax expense. During the years ended December 31, 2018, 2017 and 2016, we recognized interest and penalty expense of $0.7 million, $0.3 million, and $0.4 million, respectively, in our Consolidated Statements of Operations. As of December 31, 2018 and 2017, we had accrued $7.2 million and $6.5 million, respectively, of interest and penalties related to unrecognized tax benefits on our Consolidated Balance Sheets.

During the next twelve months, it is reasonably possible that our unrecognized tax benefits could change by $6.8 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, we will record additional income tax expense or benefit in the period in which such matters are effectively settled.

Income Tax Examinations

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

Our federal income tax returns for the years 2015 through 2017 remain subject to examination by the IRS. In addition, acquired subsidiaries’ federal tax carryforwards (2007 through 2012) remain subject to IRS examination.

With few exceptions, we are no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2011. Currently, we and our subsidiaries are under examination in various jurisdictions, including Germany (2013 through 2015) and Canada (2013 through 2015). During 2018, the income tax examination of our 2015 through 2017 Japanese tax returns was completed, resulting in a minimal assessment.