Taxes on Income

12 Months Ended

Dec. 31, 2019

Taxes on Income and Uncertain Tax Positions [Abstract]

Taxes on Income [Text Block]

Note 10 – Taxes on Income

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform. U.S. Tax Reform implemented a new system of taxation for non-U.S. earnings which eliminated U.S. federal income taxes on dividends from certain foreign subsidiaries and imposed a one-time transition tax on the deemed repatriation of undistributed earnings of certain foreign subsidiaries that is payable over eight years.

Following numerous regulations, notices, and other formal guidance published by the Internal Revenue Service (“I.R.S.”), U.S. Department of Treasury, and various state taxing authorities, the Company has completed its accounting for the transition tax and has elected to pay its $15.5 million transition tax in installments over eight years as permitted under U.S. Tax Reform. As of December 31, 2019, $7.0 million in installments have been paid with the remaining $8.5 million to be paid through installments in future years.

As of December 31, 2019, the Company has a deferred tax liability of $8.2 million on certain undistributed foreign earnings, which primarily represents the Company’s estimate of the non-U.S. income taxes the Company will incur to ultimately remit certain earnings to the U.S. The Company’s reinvestment assertions are further explained below.

Taxes on income before equity in net income of associated companies for the years ended December 31, 2019, 2018 and 2017 are as follows:

			2019		2018		2017
Current:
	Federal	$	(239)	$	6,583	$	21,265
	State		352		(1,844)		2,529
	Foreign		26,213		12,114		14,105
			26,326		16,853		37,899
Deferred:
	Federal		(9,267)		7,859		6,889
	State		(396)		(173)		(36)
	Foreign		(14,579)		511		(3,099)
Total		$	2,084	$	25,050	$	41,653

The components of earnings before income taxes for the years ended December 31, 2019, 2018 and 2017 are as follows:

		2019		2018		2017
U.S.	$	(46,697)	$	27,387	$	10,468
Foreign		75,601		55,711		50,200
Total	$	28,904	$	83,098	$	60,668

Total deferred tax assets and liabilities are composed of the following as of December 31, 2019 and 2018:

		2019		2018
Retirement benefits	$	15,142	$	8,185
Allowance for doubtful accounts		2,253		1,160
Insurance and litigation reserves		1,002		357
Performance incentives		7,213		4,364
Equity-based compensation		1,050		753
Prepaid expense		2,976		(6)
Insurance settlement		3,895		3,962
Operating loss carryforward		16,044		8,434
Foreign tax credit and other credits		34,384		—
Interest		11,479		614
Restructuring reserves		2,167		(802)
Right of use lease assets		10,015		—
Royalties and license fees		2,156		325
Inventory reserves		2,163		841
Research and development		2,580		(5)
Other		1,317		489
		115,836		28,671
Valuation allowance		(13,834)		(7,520)
Total deferred tax assets, net	$	102,002	$	21,151
Depreciation		17,754		4,098
Foreign pension and other		1,269		1,062
Amortization and other		254,359		11,191
Lease liabilities		9,965		—
Outside basis in equity investment		6,776		—
Unremitted Earnings		8,228		7,857
Total deferred tax liabilities	$	298,351	$	24,208

The Company has $11.9 million of deferred tax assets related to state net operating losses. A partial valuation allowance of $10.6 million has been established against this amount resulting in a net $1.3 million expected future benefit. Management analyzed the expected impact of the reversal of existing taxable temporary differences, considered expiration dates, analyzed current state tax laws, and determined that $1.3 million of state net operating loss carryforwards will be realized based on the reversal of deferred tax liabilities. These state net operating losses are subject to various carryforward periods of 5 years to 20 years or an indefinite carryforward period.

The Company has $4.2 million of deferred tax assets related to foreign net operating loss carryforwards. A partial valuation allowance of $2.2 million has been established against the $4.2 million due to the expected expiration of these losses before they are able to be utilized. These foreign net operating losses are subject to various carryforward periods with the majority having an indefinite carryforward period.

In conjunction with the Combination, the Company acquired foreign tax credit deferred tax assets of $41.8 million expiring between 2019 and 2028. Foreign tax credits may be carried forward for 10 years. Management analyzed the expected impact of the utilization of pre-acquisition foreign tax credits based on projected US taxable income, overall domestic loss recapture, annual limitations due to the ownership change limitations provided by the Internal Revenue Code, and enacted tax law as of August 1, 2019. As of the opening balance sheet, management determined that foreign tax credits of $33.1 million will be realized prior to expiration and recorded an $8.7 million valuation allowance of which $7.7 million related to credits expected to expire at December 31, 2019. The Company analyzed the realizability of its foreign tax credit deferred tax assets as of the balance sheet date based on revised taxable income projections and expirations. As of December 31, 2019, the Company had net realizable foreign tax credits of $32.7 million on its balance sheet expected to be utilized between 2020 and 2026.

The Company also acquired disallowed interest deferred tax assets of $13.2 million as part of the Combination. Disallowed interest may be carried forward indefinitely. Management analyzed the expected impact of the utilization of disallowed interest carryforwards based on projected US taxable income and determined that the Company will utilize all expected future benefits by 2022. As of December 31, 2019, the Company had a net realizable disallowed interest carryforward of $10.9 million on its balance sheet.

As of December 31, 2019, the Company had deferred tax liabilities of $254.4 million primarily related to the step-up in intangibles resulting from the Combination and Norman Hay acquisition.

As part of the Combination, the Company acquired a 50% interest in the Korea Houghton Corporation joint venture and has recorded a $6.8 million deferred tax liability for its outside basis difference.

The following are the changes in the Company’s deferred tax asset valuation allowance for the years ended December 31, 2019, 2018 and 2017:

										Effect of
		Balance at		Purchase		Additional		Allowance		Exchange		Balance
		Beginning		Accounting		Valuation		Utilization		Rate		at End
		of Period		Adjustments		Allowance		and Other		Changes		of Period
Valuation Allowance
Year ended December 31, 2019	$	7,520	$	13,752	$	832	$	(8,227)	$	(43)	$	13,834
Year ended December 31, 2018	$	7,401	$	—	$	650	$	(471)	$	(60)	$	7,520
Year ended December 31, 2017	$	6,344	$	—	$	1,127	$	(61)	$	(9)	$	7,401

Included in the additional valuation allowance column in the table above is $13.8 million of valuation allowances established as part of purchase accounting related to the Combination.

The Company’s net deferred tax assets and liabilities are classified in the Consolidated Balance Sheets as of December 31, 2019 and 2018 as follows:

	2019		2018
Non-current deferred tax assets	$	14,745	$	6,946
Non-current deferred tax liabilities		211,094		10,003
Net deferred tax liability	$	(196,349)	$	(3,057)

The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2019, 2018 and 2017:

		2019		2018		2017
Income tax provision at the Federal statutory tax rate	$	6,070	$	17,458	$	21,229
Unremitted Earnings		1,743		7,857		—
Transition Tax		(416)		(3,118)		18,388
Revaluation of U.S. deferred tax assets and liabilities		—		—		4,470
Global intangible low taxed income		—		1,211		—
Foreign derived intangible income		(2,380)		(1,034)		—
Non-deductible acquisition expenses		1,970		1,019		4,779
Share-based compensation		(540)		259		(1,419)
Differences in tax rates on foreign earnings and remittances		920		1,081		(2,663)
Foreign tax credits		—		—		(2,761)
Research and development credit		(385)		(230)		(235)
Uncertain tax positions		899		(79)		(651)
U.S. domestic production activities deduction		—		—		(1,155)
State income tax provisions, net		(117)		196		569
Non-deductible meals and entertainment		318		415		248
Intercompany transfer of intangible assets		(5,318)		—		—
Miscellaneous items, net		(680)		15		854
Taxes on income before equity in net income of associated companies	$	2,084	$	25,050	$	41,653

Pursuant to U.S. Tax Reform, the Company recorded a $15.5 million transition tax liability for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries. However, the Company may also be subject to other taxes, such as withholding taxes and dividend distribution taxes, if these undistributed earnings are ultimately remitted to the U.S. As a result of the Combination, additional third-party debt was incurred resulting in the Company re-evaluating its global cash strategy in order to meet its goal of reducing leverage in upcoming years. As of December 31, 2019, the Company has a deferred tax liability $8.2 million, which primarily represents the estimate of the non-U.S. taxes the Company will incur to ultimately remit these earnings to the U.S. It is the Company’s current intention to reinvest its additional undistributed earnings of non-U.S. subsidiaries to support working capital needs and certain other growth initiatives outside of the U.S. The amount of such undistributed earnings at December 31, 2019 was approximately $255.3 million. It is currently impractical to estimate any such incremental tax expense.

As of December 31, 2019, the Company’s cumulative liability for gross unrecognized tax benefits was $19.1 million. The Company had accrued approximately $3.1 million for cumulative penalties and $2.3 million for cumulative interest as of December 31, 2019. As of December 31, 2018, the Company’s cumulative liability for gross unrecognized tax benefits was $7.1 million. The Company had accrued approximately $0.8 million for cumulative penalties and $0.6 million for cumulative interest as of December 31, 2018. The December 31, 2019 gross unrecognized tax benefits, cumulative penalties and cumulative interest includes the gross unrecognized tax benefits, cumulative penalties and cumulative interest of Houghton International.

The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of tax expense on income before equity in net income of associated companies in its Consolidated Statements of Income. The Company recognized a credit of $0.2 million for penalties and an expense of $0.2 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2019, a credit of $0.2 million for penalties and an expense of $0.1 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2018, and a credit of $0.7 million for penalties and a credit of $0.2 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2017.

The Company estimates that during the year ending December 31, 2020, it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $3.9 million due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2020. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017, respectively, is as follows:

			2019		2018		2017
Unrecognized tax benefits as of January 1		$	7,050	$	6,761	$	6,240
	Increase (decrease) in unrecognized tax benefits taken in prior periods		(28)		(183)		(308)
	Increase in unrecognized tax benefits taken in current period		1,935		2,023		2,347
	Decrease in unrecognized tax benefits due to lapse of statute of limitations		(1,029)		(1,292)		(2,116)
	Increase in unrecognized tax benefits due to acquisition		11,301		—		—
	(Decrease) increase due to foreign exchange rates		(132)		(259)		598
Unrecognized tax benefits as of December 31		$	19,097	$	7,050	$	6,761

The amount of net unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax rate is $13.3 million, $2.2 million and $2.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Brazil from 2000, Italy from 2006, China from 2009, Canada from 2010, the Netherlands from 2013, the United Kingdom from 2014, Mexico, Spain, and Germany from 2015, the U.S. from 2016, India from fiscal year beginning April 1, 2017 and ending March 31, 2018, and various U.S. state tax jurisdictions from 2010.

As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2013. The Company has filed for competent authority relief from these assessments under the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except 2007. During the second quarter of 2018, the Italian tax authorities assessed additional tax due from Quaker Italia, S.r.l., relating to the tax years 2014 and 2015. The Company met with the Italian tax authorities in the fourth quarter of 2018 to discuss these assessments and no resolution was agreed upon, so the Company filed an appeal with the first level of tax court in Italy. If the appeal is not successful in materially reducing the assessed tax, then the Company will further evaluate its options including potentially filing for

competent authority relief from these assessments under MAP, consistent with the Company’s previous filings for 2008 through 2013. As of December 31, 2019, the Company believes it has adequate reserves for uncertain tax positions with respect to these and all other audits.

Houghton Italia, S.r.l is also currently involved in a corporate income tax audit with the Italian tax authorities covering tax years 2014 through 2017.As part of the purchase accounting related to the Houghton combination, the Company has established a $4.0 million reserve for uncertain tax positions. These amounts relate to the 2014 to 2017 audit period as well as 2018 and the 2019 short-period prior to the August 1, 2019 combination. Since these amounts relate to tax periods prior to the combination, the Company expects that it would file an indemnification claim with Houghton’s former owners for any tax liabilities arising pre-Combination. As a result, a corresponding $4.0 million indemnification receivable has also been established through purchase accounting that would offset the $4.0 million in tax liabilities also booked through purchase accounting.