INCOME TAXES

The following table presents components of loss from continuing operations before taxes for the years ended December 31:



	2018			2017			2016
Domestic	$	(300.9	)	$	(212.6	)	$	(219.2	)
Foreign	(214.7		)	20.7			(29.5		)
Total	$	(515.6	)	$	(191.9	)	$	(248.7	)

The following table presents the components of income tax (benefit) expense for the years ended December 31:



	2018			2017			2016
Current
U.S. federal	$	0.8		$	(5.9	)	$	(68.6	)
Foreign	49.0			72.9			54.0
State and local	1.9			1.7			(10.6		)
Total current	51.7			68.7			(25.2		)
Deferred
U.S. federal	4.6			7.6			3.6
Foreign	(19.8		)	(44.9		)	(50.2		)
State and local	0.7			(3.1		)	2.8
Total deferred	(14.5		)	(40.4		)	(43.8		)
Income tax expense (benefit)	$	37.2		$	28.3		$	(69.0	)

In addition to the income tax expense (benefit) listed above for the years ended December 31, 2018, 2017 and 2016, income tax expense (benefit) allocated directly to shareholders equity for the same periods was $4.8, $7.2 and $(1.8), respectively. The income tax expense (benefit) allocated directly to shareholders equity for the years ended December 31, 2018, 2017 and 2016 also includes expense of $11.6, $9.9 and $7.7, respectively, related to current year movement in valuation allowance. Income tax expense (benefit) allocated to discontinued operations for the year ended December 31, 2016 was $93.9.

Income tax expense (benefit) attributable to loss from continuing operations before taxes differed from the amounts computed by applying the U.S. federal income tax rate of 21 percent to pre-tax loss from continuing operations for year ended December 31, 2018 as a result of the Tax Act. The applicable U.S. federal rate of 35 percent to pre-tax loss from continuing operations was used for the years ended December 31, 2017 and 2016. The following table presents these differences for the years ended December 31:



	2018			2017			2016
Statutory tax benefit	$	(108.3	)	$	(67.2	)	$	(87.0	)
Brazil non-taxable incentive	(3.8		)	(3.9		)	(5.8		)
Valuation allowances	80.6			10.5			14.9
Goodwill impairment	41.8			—			—
Foreign tax rate differential	(33.7		)	(31.5		)	(10.0		)
Foreign subsidiary earnings	4.9			14.4			13.7
Accrual adjustments	3.1			4.1			1.1
Tax Act - rate impact on deferred tax balance	(2.5		)	45.1			—
Tax Act - deemed repatriation tax	32.6			36.6			—
Business tax credits	(1.1		)	(0.6		)	(0.7		)
Non-deductible (non-taxable) items	18.9			22.1			4.5
Other	4.7			(1.3		)	0.3
Income tax expense (benefit)	$	37.2		$	28.3		$	(69.0	)

The Tax Act was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, required companies to pay a one-time transition tax on earnings for certain foreign subsidiaries and created new taxes on certain foreign sourced earnings. Due to the complexities involved in accounting for the enacted Tax Act, the Company applied the guidance in SAB 118 and a reasonable estimate of the impacts was included for the year ended December 31, 2017. At December 31, 2017, the Company recorded a non-cash charge to tax expense of $81.7 of which $45.1 represented the reduction to deferred income taxes for the income tax rate change and $36.6 related to the one-time transition tax on deferred foreign earnings. As of December 31, 2018, the Company completed the accounting as required under SAB 118 for items previously considered provisional. While the Company was able to make an estimate of the transition tax for 2017, it continued to gather additional information to more precisely compute the amount reported on its 2017 U.S. Federal tax return which was filed in the fourth quarter of 2018. Additionally, the Company was affected by other analyses related to the Tax Act. Transition tax was $41.1 greater than the Company’s initial estimate and was included in tax expense for 2018. Likewise, while the Company was able to make an estimate of the impact of the reduction to the corporate tax rate, in 2018 the Company recorded additional tax benefits of $2.5 as a result of adjustments made to federal temporary differences including a pension contribution made in 2018 that was deductible for 2017 at the higher 35 percent federal tax rate. In 2018, the Company also recorded a tax benefit of $8.5 related to the one-time transition tax for a fiscal year foreign subsidiary. The Company will continue to analyze the full effects of the Tax Act on its financial statements as additional guidance is issued and interpretations evolve.

The effective tax rate for 2018 was 7.2 percent and is primarily due to a goodwill impairment charge, impacts of the Tax Act, valuation allowances on certain foreign and state jurisdictions, foreign tax credits and the higher interest expense burden resulting from the debt restructuring. More specifically, the expense on the loss reflects the reduction of the U.S. federal corporate income tax rate from 35 percent to 21 percent, refinement of the transition tax under SAB 118, a goodwill impairment charge, which for tax purposes is primarily nondeductible and the business interest deduction limitation. As a result of the Company’s debt restructuring activity during the year, a full valuation allowance was required on the current year nondeductible business interest expense. The overall effective tax rate is also impacted by the jurisdictional income (loss) and varying respective statutory rates which is reflected in the foreign tax rate differential caption of the rate reconciliation.

The effective tax rate for 2017 was 14.7 percent on the overall loss from continued operations and is primarily driven by the provisional impacts of the Tax Act. In addition to the impact of the Tax Act, the overall effective tax rate is impacted by the jurisdictional income (loss) and varying respective statutory rates which is reflected in the foreign tax rate differential caption of the rate reconciliation.

The Company recognizes the benefit of tax positions taken or expected to be taken in its tax returns in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by authorities. Recognized tax positions are measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.

Details of the unrecognized tax benefits are as follows:



	2018			2017
Balance at January 1	$	48.4		$	43.2
Increases (decreases) related to prior year tax positions, net	(1.5		)	6.1
Increases related to current year tax positions	4.8			7.5
Settlements	(1.5		)	(1.8		)
Reductions due to lapse of applicable statute of limitations	(0.7		)	(6.6		)
Balance at December 31	$	49.5		$	48.4

The entire amount of unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate.

The Company classifies interest expense and penalties related to the underpayment of income taxes in the consolidated financial statements as income tax expense. Consistent with the treatment of interest expense, the Company accrues interest income on overpayments of income taxes where applicable and classifies interest income as a reduction of income tax expense in the consolidated financial statements. As of December 31, 2018 and 2017, accrued interest and penalties related to unrecognized tax benefits totaled $6.3 and $5.5, respectively.

It is reasonably possible that the total amount of unrecognized tax benefits will change during the next 12 months. The Company does not expect those changes to have a significant impact on its consolidated financial statements. The expected timing of payments cannot be determined with any degree of certainty.

During 2018, the Internal Revenue Service (IRS) issued the final Revenue Agent’s Report (RAR) for the tax year 2013 for the Company’s U.S. federal income tax return. The Company agreed to a draft RAR in 2017, effectively settling the findings and accruing all amounts. At December 31, 2018, the Company is under audit by the IRS for the tax year ended December 31, 2016. The Company believes it has adequately provided for any related uncertain tax positions. There are no other outstanding audits by the IRS and all U.S. federal tax years prior to 2014 are closed by statute. The company is subject to tax examination in various U.S. state jurisdictions for tax years 2012 to the present, as well as various foreign jurisdictions for tax years 2011 to the present.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows:



	2018			2017
Deferred tax assets
Accrued expenses	$	64.0		$	43.0
Warranty accrual	6.7			13.5
Deferred compensation	9.6			10.6
Allowances for doubtful accounts	3.2			3.8
Inventories	23.9			14.4
Deferred revenue	28.6			38.1
Pensions, post-retirement and other benefits	76.9			82.6
Tax credits	74.1			81.9
Net operating loss carryforwards (NOL's)	160.0			125.9
Capital loss carryforwards	2.6			2.6
State deferred taxes	19.8			17.4
Other	—			0.8
	469.4			434.6
Valuation allowances	(175.4		)	(105.6		)
Net deferred tax assets	$	294.0		$	329.0

Deferred tax liabilities
Property, plant and equipment, net	$	3.5		$	1.2
Goodwill and intangible assets	245.9			302.8
Undistributed earnings	20.6			16.0
Other	1.7			2.3
Net deferred tax liabilities	271.7			322.3
Net deferred tax asset	$	22.3		$	6.7

Deferred income taxes reported in the consolidated balance sheets as of December 31 are as follows:



	2018			2017
Deferred income taxes - assets	$	243.9		$	293.8
Deferred income taxes - liabilities	(221.6		)	(287.1		)
Net deferred tax asset	$	22.3		$	6.7

As of December 31, 2018, the Company had domestic and international NOLs of $964.8, resulting in an NOL deferred tax asset of $160.0. Of these NOL carryforwards, $647.2 expire at various times between 2019 and 2039 and $317.6 does not expire. At December 31, 2018, the Company had a domestic foreign tax credit carryforward resulting in a deferred tax asset of $68.4 that will expire between 2020 and 2029 and a general business credit carryforward resulting in a deferred tax asset of $5.7 that will expire between 2035 and 2039.

The Company recorded a valuation allowance to reflect the estimated amount of certain foreign and state deferred tax assets that, more likely than not, will not be realized. The net change in total valuation allowance for the years ended December 31, 2018 and 2017 was an increase of $69.8 and $17.8, respectively. The 2018 valuation allowance increase is driven primarily by current year domestic interest expense in which a full valuation allowance has been placed, domestic foreign tax credits scheduled to expire as well as certain foreign jurisdictions which are now in a three year cumulative loss position.

For the years ended December 31, 2018 and 2017, provisions were made for foreign withholding taxes and estimated foreign income taxes which may be incurred upon the remittance of certain undistributed earnings in foreign subsidiaries and foreign unconsolidated affiliates. Provisions have not been made for income taxes on $865.4 of undistributed earnings at December 31, 2018 in foreign subsidiaries and corporate joint ventures that were deemed permanently reinvested. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, depends on certain circumstances existing if and when remittance occurs. A deferred tax liability will be recognized if and when the Company no longer plans to permanently reinvest these undistributed earnings.