Income Taxes

12 Months Ended

Dec. 31, 2019

11. Income Taxes

The provision for income taxes was as follows:

(In thousands)	2019			2018			2017
Currently (receivable) payable:
Federal ⁽¹⁾	$	12,994		$	(9,071	)	$	15,513
State		2,622			205			642
Foreign		22,680			23,187			25,254
		38,296			14,321			41,409
Deferred expense (benefit):
Federal		(17,246	)		3,977			18,458
State		18			3,164			215
Foreign		(2,112	)		2,703			(1,259	)
		(19,340	)		9,844			17,414
Income taxes	$	18,956		$	24,165		$	58,823

⁽¹⁾

In 2018 and 2017, this amount includes $(3.9) million and $7.4 million, respectively, of income tax (benefit) expense related to the one-time transition tax on earnings of foreign subsidiaries enacted by the 2017 Tax Legislation (See discussion below). There was no liability for this amount recorded as of December 31, 2018.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following:

(in thousands)	2019			2018
Deferred tax assets:
Benefit plans	$	6,293		$	6,788
Liabilities and reserves		21,085			12,563
Operating loss and credit carryovers⁽¹⁾		82,000			65,392
Other		1,126			1,404
Gross deferred tax assets		110,504			86,147
Valuation allowance⁽¹⁾		(54,326	)		(50,702	)
Deferred tax assets		56,178			35,445
Deferred tax liabilities:
Property, plant and equipment		(29,869	)		(29,372	)
Goodwill		(21,744	)		(21,372	)
Other		(5,192	)		(4,488	)
Deferred tax liabilities		(56,805	)		(55,232	)
Net deferred tax liabilities	$	(627	)	$	(19,787	)

⁽¹⁾

In the first quarter of 2019, the Company recognized an increase in its foreign tax credit carryover and corresponding valuation allowance of $16.2 million, related to the finalization of certain tax regulations.

At December 31, 2019, $0.6 million of the net deferred tax liabilities is classified as Liabilities held for sale on the Consolidated Balance Sheet.

The Company is subject to current tax on Global Intangible Low-Taxed Income (GILTI) earned by foreign subsidiaries. The FASB Staff Q&A Topic No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election either to recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. Sensient is electing to recognize GILTI as a period expense in the period the tax is incurred.

At December 31, 2019, foreign tax credit carryovers were $40.6 million, all of which expires before 2034. At December 31, 2019, foreign operating loss carryovers were $120.9 million. Included in the foreign operating loss carryovers are losses of $26.1 million that expire through 2034, and $94.8 million that expire after 2034 or do not have an expiration date. At December 31, 2019, state operating loss carryovers were $135.8 million, of which $135.8 million expires through 2034.

The effective tax rate differed from the statutory federal income tax rate as described below:

	2019			2018			2017
Taxes at statutory rate		21.0	%		21.0	%		35.0	%
State income taxes, net of federal income tax benefit		2.2			1.1			0.3
Tax credits		(2.6	)		(1.5	)		(1.1	)
Taxes on foreign earnings		5.1			(0.4	)		0.2
Global Intangible Low-Taxed Income		0.9			0.6			-
Resolution of prior years’ tax matters		(0.4	)		(0.3	)		0.1
U.S. manufacturing deduction		-			-			(1.4	)
Valuation allowance adjustments		(8.8	)		0.4			-
2017 Tax Legislation		-			(3.7	)		12.4
Loss on foreign branch remittances		-			-			(5.2	)
U.S. tax accounting method changes		-			(2.9	)		-
Other, net		1.4			(1.0	)		(0.7	)
Effective tax rate		18.8	%		13.3	%		39.6	%

The Company’s valuation allowance at December 31, 2019 and 2018 was $54.3 million and $50.7 million, respectively. The valuation allowance was increased by $16.2 million in the first quarter of 2019 related to the increase in the foreign tax credit deferred tax asset. In the third and fourth quarters of 2019, the Company completed tax planning strategies and Federal tax regulations were finalized that resulted in the partial release of this valuation allowance. The valuation allowance was also increased by $6.8 million for the deferred tax assets related to net operating losses that the Company does not believe are more likely than not to be realized.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (2017 Tax Legislation). The 2017 Tax Legislation significantly changed the U.S. corporate income tax laws by reducing the U.S. corporate income tax rate to 21% beginning in 2018 and imposing a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries in 2017. Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Legislation. In accordance with SAB 118, the Company recorded a net charge of $18.4 million during the fourth quarter of 2017. The amount consists of reassessing the U.S. deferred tax assets and liabilities, adjustments to the Company’s foreign tax credit carryover, and the one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Based on additional guidance, changes in interpretation, additional analysis, and assumptions, the Company reduced this net charge by $6.6 million in 2018. Sensient considers $11.8 million to be the final net charge related to the 2017 Tax Legislation.

During the third and fourth quarters of 2018, the US Treasury released numerous proposed regulations related to the 2017 Tax Legislation. The Company has reviewed and evaluated these proposed regulations. Some of these regulations were finalized in 2019 and the Company has recorded adjustments to its deferreds accordingly.

The 2017 loss on remittances is the result of the cumulative foreign currency effect related to certain repatriation transactions.

Taxes on foreign earnings include the difference between the tax rates applied to foreign earnings relative to the U.S. statutory tax rate, accruals for foreign unrecognized tax benefits, and the impact of the U.S. foreign tax credit, not including the impact from GILTI. The impact on the Company’s effective tax rate varies from year to year based on the finalization of prior year foreign and domestic tax items, audit settlements, and mix of foreign earnings. The effective tax rate in 2019 was impacted by tax costs related to the divestitures and the release of valuation allowances related to the foreign tax credit carryover and foreign net operating losses. The effective tax rate in 2018 was also favorably impacted by U.S. tax accounting method changes that were filed with the IRS in the second quarter of 2018 and generation of foreign tax credits during 2018.

The decrease of the 2019 effective tax rate from valuation allowance adjustments compared to 2018 is primarily the result of the release of valuation allowances on the deferred tax asset related to foreign tax credit carryforwards.

Earnings before income taxes were as follows:

(In thousands)	2019		2018		2017
United States	$	38,356	$	80,641	$	88,479
Foreign		62,647		100,884		59,944
Total	$	101,003	$	181,525	$	148,423

Federal and state income taxes are provided on international subsidiary income distributed to or taxable in the U.S. during the year. At December 31, 2019, no additional income or withholding taxes have been provided for the $580 million of undistributed earnings or any additional outside basis differences inherent in these entities, as these amounts are considered to be invested indefinitely. If the undistributed earnings were repatriated, the Company estimates it would have a withholding tax liability of $24.7 million. The determination of the tax liability for any outside basis differences is not practicable.

A reconciliation of the change in the liability for unrecognized tax benefits for 2019 and 2018 is as follows:

(in thousands)	2019			2018
Balance at beginning of year	$	6,026		$	6,276
Increases for tax positions taken in the current year		750			834
Increases for tax positions taken in prior years		199			271
Decreases related to settlements with tax authorities		(341	)		(177	)
Decreases as a result of lapse of the applicable statutes of limitations		(591	)		(920	)
Foreign currency exchange rate changes		(11	)		(258	)
Balance at the end of year	$	6,032		$	6,026

The amount of the unrecognized tax benefits that would affect the effective tax rate, if recognized, was approximately $4.9 million. The Company recognizes interest and penalties related to the unrecognized tax benefits in income tax expense. As of December 31, 2019 and 2018, $0.6 million and $0.5 million, respectively, of accrued interest and penalties were reported as an income tax liability in each period. The liability for unrecognized tax benefits relates to multiple jurisdictions and is reported in Other liabilities on the Company’s Consolidated Balance Sheet at December 31, 2019.

The Company believes that it is reasonably possible that the total amount of liability for unrecognized tax benefits as of December 31, 2019, will decrease by approximately $0.6 million during 2020, of which $0.6 million is estimated to impact the effective tax rate. The potential decrease relates to various tax matters for which the statute of limitations may expire or will be otherwise settled in 2020. The amount that is ultimately recognized in the financial statements will be dependent upon various factors including potential increases or decreases in unrecognized tax benefits as a result of examinations, settlements, and other unanticipated items that may occur during the year. With limited exceptions, the Company is no longer subject to federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2015.