INCOME TAXES

12 Months Ended

Dec. 31, 2023

INCOME TAXES

INCOME TAXES

12. INCOME TAXES

Income before income taxes consisted of:

(millions)	2023		2022		2021
United States (U.S.)		$408.9		$295.6		$277.7
International		1,346.6		1,047.8		1,136.5
Total		$1,755.5		$1,343.4		$1,414.2

The provision (benefit) for income taxes consisted of:

(millions)	2023		2022		2021
U.S. federal and state		$137.6		$145.7		$30.9
International		280.0		231.4		240.2
Total current		417.6		377.1		271.1
U.S. federal and state		(40.1)		(78.9)		3.6
International		(15.0)		(63.7)		(4.5)
Total deferred		(55.1)		(142.6)		(0.9)
Provision for income taxes		$362.5		$234.5		$270.2

The Company’s overall net deferred tax assets and deferred tax liabilities were comprised of the following:

December 31 (millions)	2023		2022
Deferred tax assets
Pension and post-retirement benefits		$82.1		$87.0
Other accrued liabilities		162.0		129.6
Lease liability		135.9		109.2
Credit carryforwards		83.7		97.8
Capitalization of R&D costs		180.9		84.5
Loss carryforwards		57.3		67.2
Share-based compensation		54.5		51.2
Deferred income		27.9		59.6
Other, net		113.3		98.8
Valuation allowance		(65.7)		(65.2)
Total deferred tax assets		831.9		719.7
Deferred tax liabilities
Goodwill		(160.1)		(124.8)
Intangible assets		(451.3)		(486.3)
Property, plant and equipment		(332.3)		(319.7)
Lease asset		(136.1)		(109.1)
Financing		(32.1)		(33.5)
Other, net		(18.9)		(43.8)
Total deferred tax liabilities		(1,130.8)		(1,117.2)
Net deferred tax liabilities balance		($298.9)		($397.5)

Presentation of prior year amounts relating to goodwill and intangible assets are now presented separately and have been reclassified to conform with the current year presentation. These reclassifications had no effect on the reported results of operations.

As of December 31, 2023 the Company has tax effected federal, state and international net operating loss carryforwards of $0.2 million, $16.2 million and $40.9 million, respectively, and a tax effected federal tax capital loss carryforward of $3.6 million which will be available to offset future taxable income. The federal and state loss carryforwards of $16.4 million expire from 2024 to 2044. The international loss carryforwards of $14.1 million expire from 2024 to 2043 and $26.8 million have no expiration. The federal capital loss carryforwards of $3.6 million expire in 2025. The tax loss carryforwards expiring in 2024 are not material.

Additionally, the Company has $83.7 million of net credit carryforwards that are primarily related to U.S. foreign tax credits and various state credits. The U.S. foreign tax credit carryforwards of $74.7 million expire from 2030 to 2033. Other state and international credit carryforwards will expire from 2024 to 2038. The tax credit carryforwards expiring in 2024 are not material.

The Company has valuation allowances on certain deferred tax assets of $65.7 million and $65.2 million at December 31, 2023 and 2022, respectively. The increase in valuation allowance from year end 2022 to year end 2023 was primarily due to U.S. state tax attributes, foreign net operating losses and other deferred tax assets.

In connection with the implementation of Organization for Economic Co-operation and Development (“OECD”) global minimum tax initiative known as Pillar Two, any existing deferred taxes not disclosed in the Company’s 2023 financial statements will not be available in the future to reduce tax otherwise due under Pillar Two. Accordingly, the Company is disclosing the existence of gross tax loss carryforwards in Luxembourg of $1.3 billion. The losses are determined to have a remote possibility of realization and, therefore, are not reported in the table above.

The Company obtained tax benefits from a tax holiday in the Dominican Republic. The Company received a permit of operation, which expires in April 2036, from the National Council of Free Zones of Exportation for the Dominican Republic. Companies operating under the Free Zones are not subject to income tax in the Dominican Republic on export income. The tax reduction as the result of the tax holiday for 2023 was $6.6 million ($0.02 per diluted share), 2022 was $5.8 million ($0.02 per diluted share) and 2021 was $2.9 million ($0.01 per diluted share).

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

	2023		2022		2021
Statutory U.S. rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	1.4		1.3		0.6
Foreign operations	(0.5)		(0.8)		(0.6)
Excess stock benefits	(0.3)		(0.4)		(2.0)
R&D credit	(1.3)		(1.4)		(1.3)
Foreign derived intangible income	(1.2)		(1.8)		(1.6)
Change in valuation allowance	0.5		0.7		0.5
Legal entity rationalization	0.1		(1.5)		-
One-time transfer of intangibles	-		-		1.8
Other, net	0.9		0.4		0.7
Effective income tax rate	20.6	%	17.5	%	19.1	%

The change in the Company’s effective income tax rate includes the tax impact of special (gains) and charges and discrete tax items, which have impacted the comparability of the Company’s historical effective income tax rates, as amounts included in special (gains) and charges are derived from tax jurisdictions with rates that vary from the statutory U.S. rate, and discrete tax items are not necessarily consistent across periods. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of the Company’s effective income tax rate in the future.

The Company’s 2023 effective tax rate of 20.6% includes $24.7 million of net tax benefits on special (gains) and charges, and net tax expense of $11.2 million associated with discrete items. The net discrete tax expense was primarily related to the filing of federal, state and foreign tax returns and other income tax adjustments including the impact of changes in tax laws, audit settlements, share-based compensation excess tax benefit and other changes in estimates.

The Company’s 2022 effective tax rate of 17.5% includes $53.7 million of net tax benefits on special (gains) and charges, and net tax benefit of $11.8 million associated with discrete items. Discrete items included a deferred tax benefits of $14.6 million associated with utilization of tax attributes as a result of legal entity rationalization and share-based compensation excess tax benefits of $6.0 million. The remaining discrete tax expense of $8.8 million was primarily related to the filing of federal, state and foreign tax returns and other income tax adjustments including the impact of changes in tax laws, audit settlements and other changes in estimates.

The Company’s 2021 effective tax rate of 19.1% includes $53.3 million of net tax benefits on special (gains) and charges, and net tax expense of $5.8 million associated with discrete items. During 2021, the Company recorded a discrete tax benefit of $29.1 million related to share-based compensation excess tax benefits. Additionally, the Company recorded $34.9 million discrete tax charges including a non-cash deferred tax charge of $25.1 million associated with transferring certain intangible property between affiliates. The remaining $9.8 million tax expense primarily related to the filing of federal, state and foreign tax returns and other income tax adjustments including the impact of changes in tax laws, audit settlements and other changes in estimates.

A deferred tax liability of $2.8 million is recorded as of December 31, 2023 related to deferred tax liabilities on unremitted earnings, which are not permanently reinvested. The Company otherwise continues to assert permanent reinvestment of the undistributed earnings of international affiliates unless the earnings can be remitted in a net income tax benefit or tax-neutral manner. If there are policy changes, the Company would record the applicable taxes in the period of change. Due to the complexity of the legal entity structure, the number of legal entities and jurisdictions involved, and the complexity of the laws and regulations, the Company believes it is not practicable to estimate the amount of additional taxes which may be payable upon distribution of these undistributed earnings. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes on permanently reinvested earnings.

A reconciliation of the beginning and ending amount of gross liability for unrecognized tax benefits is as follows:

(millions)	2023		2022		2021
Balance at beginning of year		$24.9		$25.1		$20.7
Additions based on tax positions related to the current year		5.8		2.7		3.8
Additions for tax positions of prior years		1.7		3.6		3.0
Current year acquisitions		-		-		4.4
Reductions for tax positions of prior years		-		(1.5)		-
Reductions for tax positions due to statute of limitations		(2.7)		(0.7)		(3.0)
Settlements		(5.5)		(3.4)		(3.7)
Foreign currency translation		-		(0.9)		(0.1)
Balance at end of year		$24.2		$24.9		$25.1

The total amount of unrecognized tax benefits, if recognized would affect the effective tax rate by $21.6 million as of December 31, 2023, $23.1 million as of December 31, 2022 and $22.8 million as of December 31, 2021.

The Company files U.S. federal income tax returns and income tax returns in various U.S. state and non- U.S. jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2017. The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2016, and the years 2017 through 2020 are currently under audit. In addition to the U.S. federal examination, there is ongoing audit activity in several U.S. state and foreign

jurisdictions. The Company anticipates changes to unrecognized tax benefits due to closing of various audits and statutes closing on years mentioned above. The Company does not believe these changes will result in a material impact during the next twelve months. Decreases in the Company’s gross liability could result in offsets to other balance sheet accounts, cash payments, and adjustments to tax expense. The occurrence of these events and/or other events not included above within the next twelve months could change depending on a variety of factors.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had $4.0 million, $4.0 million and $3.2 million of accrued interest, including minor amounts for penalties, at December 31, 2023, 2022 and 2021, respectively.