Taxes on Income

12 Months Ended

Dec. 31, 2021

Taxes on Income [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 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, 2021, $

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, 2021, the Company has a deferred tax liability of $

8.4

 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, 2021, 2020 and 2019 are

as follows:

2021

2020

2019

Current:

Federal

$

955

$

(1,359)

$

(239)

State

2,115

1,171

352

Foreign

44,375

33,173

26,213

47,445

32,985

26,326

Deferred:

Federal

(3,863)

(28,437)

(9,267)

State

(3,117)

(3,087)

(396)

Foreign

(5,526)

(6,757)

(14,579)

Total

$

34,939

$

(5,296)

$

2,084

The components of earnings before income taxes for the years ended December 31, 2021, 2020 and 2019 are as follows:

2021

2020

2019

U.S.

$

7,263

$

(66,585)

$

(46,697)

Foreign

139,728

93,724

75,601

Total

$

146,991

$

27,139

$

28,904

Total deferred tax assets and liabilities are composed of the following as of December 31, 2021 and 2020:

2021

2020

Retirement benefits

$

11,860

$

15,237

Allowance for doubtful accounts

2,155

2,316

Insurance and litigation reserves

675

842

Performance incentives

2,881

5,914

Equity-based compensation

1,920

1,282

Prepaid expense

460

756

Operating loss carryforward

18,544

16,693

Foreign tax credit and other credits

16,285

24,873

Interest

9,940

16,812

Restructuring reserves

631

1,121

Right of use lease assets

8,322

9,346

Inventory reserves

2,941

2,225

Research and development

8,832

7,974

Other

2,846

3,005

88,292

108,396

Valuation allowance

(17,400)

(21,511)

Total deferred tax assets, net

$

70,892

$

86,885

Depreciation

11,580

15,473

Foreign pension and other

2,332

1,807

Intangibles

197,066

222,794

Lease liabilities

8,421

9,151

Outside basis in equity investment

5,999

7,938

Unremitted Earnings

8,381

5,919

Total deferred tax liabilities

$

233,779

$

263,082

The Company has $

10.6

 million of deferred tax assets related to state net operating losses. A partial valuation allowance of $

8.0

million has been established against this amount resulting in a net $

2.6

 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 $

2.6

 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. An additional $

0.5

 million of valuation allowance was established for other net state deferred tax assets.

The Company has $

8.0

 million of deferred tax assets related to foreign net operating loss carryforwards. A partial valuation

allowance of $

2.5

 million has been established against the $

8.0

 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. An additional partial valuation allowance of $

0.6

 million has been established against certain other

foreign deferred tax assets.

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 foreign tax credits based on certain assumptions such as projected U.S. taxable income, overall domestic loss recapture,

and annual limitations due to the ownership change under the Internal Revenue Code. The Company had a foreign tax credit carry

forward of $15.9 million and $

24.9

 million as of December 31, 2021 and 2020, respectively, with a $5.8 million and $

10.2

 million

valuation allowance as of December 31, 2021 and 2020, respectively, reflecting the amount of credits that are not expected to be

utilized before expiration. 

The Company also acquired disallowed interest deferred tax assets of $

14.0

 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, 2021, the Company had a net realizable disallowed interest carryforward of $

9.4

 million on its balance

sheet.

As of December 31, 2021, the Company had deferred tax liabilities of $

178.0

 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 $

6.0

 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, 2021,

2020 and 2019:

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, 2021

$

21,511

$

-

$

29

$

(4,470)

$

330

$

17,400

Year ended December 31, 2020

$

13,834

$

7,148

$

2,738

$

(2,153)

$

(56)

$

21,511

Year ended December 31, 2019

$

7,520

$

13,752

$

832

$

(8,227)

$

(43)

$

13,834

The Company’s net deferred tax assets and liabilities are classified in the Consolidated Balance Sheets as of December 31, 2021

and 2020 as follows:

2021

2020

Non-current deferred tax assets

$

16,138

$

16,566

Non-current deferred tax liabilities

179,025

192,763

Net deferred tax liability

$

(162,887)

$

(176,197)

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, 2021, 2020 and 2019. Certain immaterial reclassifications within the presentation of the reconciliation of

income taxes have been made to the years ended December 31, 2020 and 2019:

2021

2020

2019

Income tax provision at the Federal statutory tax rate

$

30,868

$

5,699

$

6,070

Unremitted earnings

1,841

(2,308)

(4,383)

Tax law changes / reform

1,955

(1,059)

(416)

U.S. tax on foreign operations

10,479

5,140

574

Pension settlement

-

(2,247)

-

Foreign derived intangible income

(8,698)

(7,339)

(1,699)

Non-deductible acquisition expenses

129

131

1,743

Withholding taxes

6,584

7,809

8,621

Foreign tax credits

(14,725)

(4,699)

(3,787)

Share-based compensation

600

335

(540)

Foreign tax rate differential

3,090

1,139

1,444

Research and development credit

(1,685)

(1,018)

(830)

Uncertain tax positions

519

1,990

899

State income tax provisions, net

(1,446)

(2,245)

(117)

Non-deductible meals and entertainment

426

290

318

Intercompany transfer of intangible assets

4,347

(4,384)

(5,318)

Miscellaneous items, net

655

(2,530)

(495)

Taxes on income before equity in net income of associated companies

$

34,939

$

(5,296)

$

2,084

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, 2021, the Company has a deferred tax liability $

8.4

 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, 2021 was

approximately $

377.4

 million. Any tax liability which might result from ultimate remittance of these earnings is expected to be

substantially offset by foreign tax credits (subject to certain limitations). It is currently impractical to estimate any such incremental

tax expense.

As of December 31, 2021, the Company’s cumulative liability for gross unrecognized tax benefits was $

22.5

 million. The

Company had accrued approximately $

3.1

 million for cumulative penalties and $

3.1

 million for cumulative interest as of December

31, 2021. As of December 31, 2020, the Company’s cumulative liability for gross unrecognized tax benefits was $

22.2

 million. The

Company had accrued approximately $

3.9

 million for cumulative penalties and $

3.0

 million for cumulative interest as of December

31, 2020.

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

benefit of $

0.5

 million for penalties and an expense of $

0.3

 million for interest (net of expirations and settlements) in its Consolidated

Statement of Income for the year ended December 31, 2021, an expense of less than $

0.1

 million for penalties and $

0.6

 million for

interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2020, and 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, 201 9.

The Company estimates that during the year ending December 31, 2022, it will reduce its cumulative liability for gross

unrecognized tax benefits by approximately $

2.3

 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, 2022. 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2021, 2020

and 2019, respectively, is as follows:

2021

2020

2019

Unrecognized tax benefits as of January 1

$

22,152

$

19,097

$

7,050

Increase (decrease) in unrecognized tax benefits taken in prior periods

1,002

2,025

(28)

Increase in unrecognized tax benefits taken in current period

2,915

3,095

1,935

Decrease in unrecognized tax benefits due to lapse of statute of limitations

(2,631)

(3,659)

(1,029)

Increase in unrecognized tax benefits due to acquisition

-

597

11,301

(Decrease) increase due to foreign exchange rates

(974)

997

(132)

Unrecognized tax benefits as of December 31

$

22,464

$

22,152

$

19,097

The amount of net unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax

rate is $

15.2

 million, $

14.7

 million and $

13.3

 million for the years ended December 31, 2021, 2020 and 2019, 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 Italy from 2007, Brazil from

2011

,

the Netherlands, Mexico and China from

2016

, Mexico, Canada, Germany, Spain, U.S. and the United Kingdom from

2017

, India

from fiscal year beginning April 1,

2019

 and ending March 31, 2020, and various U.S. state tax jurisdictions from

2011

.

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 2015. 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. In 2020, the respective tax authorities in Italy, Spain, and Netherland reached agreement with respect to the MAP proceedings,

which the Company has accepted. As of December 31, 2021, the Company has received $

1.6

 million in refunds from the Netherlands

and Spain and has an accrual for $

2.4

 million due to Italy. In February 2022, the Company received a settlement notice from the

Italian taxing authorities confirming the amount due of $

2.6

 million, having granted the Company’s request to utilize its remaining net

operating losses to partially offset the liability. This amendment to the tax assessment is expected to result in the Company

recognizing tax expense of $

0.6

 million in Q1 2022.

Houghton Italia, S.r.l is also involved in a corporate income tax audit with the Italian tax authorities covering tax years 2014

through 2018. As of December 31, 2021, the Company has a $

5.0

 million reserve for uncertain tax positions relating to matters

related to this audit. Because the reserve relates to the tax periods prior to August 1, 2019, the tax liability was established through

purchase accounting related to the Combination. The Company has also submitted an indemnification claim against funds held in

escrow by Houghton’s former owners and as a result, a corresponding $

5.9

 million indemnification receivable has also been

established through purchase accounting.

During the fourth quarter of 2021, the Company settled a portion of the Houghton Italia,

S.r.l. corporate income tax audit with the Italian tax authorities for the tax years 2014 and 2015. The Company remains under audit

for tax years 2016 through 2018 and believes it has adequate reverses for the remaining uncertain tax positions.

Houghton Deutschland GmbH is also under audit by the German tax authorities for tax years 2015 through 2017. Based on

preliminary audit findings, primarily related to transfer pricing, the Company has recorded a reserve for $

0.4

 million as of December

31, 2021. Of this amount, $

0.3

 million relates to tax periods prior to the Combination and therefore the Company has submitted an

indemnification claim with Houghton’s former owners for any tax liabilities arising pre-Combination. As a result, a corresponding

indemnification receivable has also been established.