Income Taxes

Pretax income for 2018, 2017 and 2016 was taxed in the following jurisdictions:



	2018		2017		2016
	(In thousands)
U.S.	$	357,585	$	302,515	$	265,260
Foreign	171,354		152,758		103,252
Total	$	528,939	$	455,273	$	368,512

The provision (benefit) for income taxes for 2018, 2017 and 2016 was as follows:



	2018			2017			2016
	(In thousands)
Current
U.S.	$	67,793		$	91,641		$	67,668
State and local	8,056			9,342			4,503
Foreign	46,862			50,775			42,540
Total current	122,711			151,758			114,711
Deferred
U.S.	(5,471		)	(36,390		)	(6,249		)
State and local	(17		)	3,305			(331		)
Foreign	1,143			(657		)	(10,728		)
Total deferred	(4,345		)	(33,742		)	(17,308		)
Total provision for income taxes	$	118,366		$	118,016		$	97,403

Deferred tax assets (liabilities) at December 31, 2018 and 2017 were:



	2018			2017
	(In thousands)
Employee and retiree benefit plans	$	27,615		$	31,804
Capital loss carryforwards	12,754			12,853
Depreciation and amortization	(168,485		)	(176,592		)
Inventories	5,969			8,548
Allowances and accruals	11,540			4,572
Interest rate exchange agreement	3,543			5,007
Other	(6,388		)	(8,019		)
Total gross deferred tax (liabilities)	(113,452		)	(121,827		)
Capital loss valuation allowance	(12,754		)	(12,853		)
Total deferred tax (liabilities), net of valuation allowances	$	(126,206	)	$	(134,680	)

The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets as of December 31, 2018 and 2017 were:



	2018			2017
	(In thousands)
Noncurrent deferred tax asset - Other noncurrent assets	$	1,801		$	2,958
Noncurrent deferred tax liabilities - Deferred income taxes	(128,007		)	(137,638		)
Net deferred tax liabilities	$	(126,206	)	$	(134,680	)

The Company had prepaid income taxes, recorded within Other current assets on the Consolidated Balance Sheets, of $8.3 million and $40.9 million as of December 31, 2018 and 2017, respectively.

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to pretax income. The computed amount and the differences for 2018, 2017 and 2016 are as follows:



	2018			2017			2016
	(In thousands)
Pretax income	$	528,939		$	455,273		$	368,512
Provision for income taxes:
Computed amount at statutory rate	$	111,077		$	159,346		$	128,979
State and local income tax (net of federal tax benefit)	8,280			5,841			4,070
Taxes on non-U.S. earnings-net of foreign tax credits	5,725			(24,914		)	(6,666		)
Global Intangible Lowed-Taxed Income	2,725			—			—
Foreign-Derived Intangible Income Deduction	(5,410		)	—			—
Effect of flow-through entities	1,215			192			(8,735		)
U.S. business tax credits	(3,056		)	(1,928		)	(1,665		)
Domestic activities production deduction	—			(8,516		)	(9,043		)
Capital loss on divestitures	—			(2,275		)	(23,444		)
Share-based payments	(9,348		)	(6,844		)	(6,520		)
Valuation allowance	—			(361		)	17,973
Impact of Tax Act	10,298			(100		)	—
Other	(3,140		)	(2,425		)	2,454
Total provision for income taxes	$	118,366		$	118,016		$	97,403

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included significant changes to the existing tax law, including, but not limited to, a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and the creation of a modified territorial tax system with a one-time repatriation tax on certain deferred foreign income (“Transition Tax”). The income tax effects of the Tax Act on the Company are further described below.

The Company has $18.2 million and $350 million of permanently reinvested earnings of non-U.S. subsidiaries as of December 31, 2018 and 2017, respectively. The significant decrease in permanently reinvested earnings of non-U.S. subsidiaries was due to the Company’s removal of its permanently reinvested assertion on all non-U.S. subsidiaries except for its entity in India, mainly in response to the deemed distribution and repatriation tax incurred in 2017 as a result of the Tax Act. No deferred U.S. income taxes have been provided on the $18.2 million permanently reinvested earnings, as these earnings are considered to be reinvested for an indefinite period of time. It should also be noted that the aforementioned earnings will not incur U.S. taxes when ultimately repatriated other than potentially U.S. state and local taxes and/or U.S. federal income taxes on foreign exchange gains or losses crystalized on the distribution of such earnings. Such distributions could also be subject to additional foreign withholding and foreign income taxes. The amount of unrecognized deferred income tax liabilities on currently permanently reinvested earnings is estimated to be $3.7 million as of December 31, 2018.

During the years ended December 31, 2018, 2017 and 2016, the Company repatriated $135 million, $3.3 million and $28.8 million of foreign earnings, respectively. These actual distributions resulted in no incremental income tax expense, $6.4 million of incremental income tax benefit and $2.7 million of incremental income tax expense in 2018, 2017 and 2016, respectively. These repatriations represent distributions of previously taxed income as well as distributions from liquidating subsidiaries.

Because the changes included in the Tax Act were broad and complex, on December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company was required to reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 was complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act was incomplete but it was able to determine a reasonable estimate, it was required to record a provisional estimate to be included in the financial statements. As of December 31, 2018, the Company, as required under SAB 118, has completed the accounting for all of the enactment-date income tax effects of the Tax Act. The Company’s completed accounting of the enactment-date income tax effects of the Tax Act is as follows:

Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company had to determine, in addition to other factors, the amount of post-1986 earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $30.3 million for the year ended December 31, 2017. During the first quarter, the IRS released Revenue Procedure 2018-17 and Notice 2018-26, the effects of which increased the provisional Transition Tax by $0.1 million. The Company finalized its Transaction Tax obligation in the fourth quarter 2018 recording a $3.9 million tax benefit which, together with the first quarter adjustment, resulted in a final Transition Tax obligation of $26.5 million.

Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. The Company recorded a decrease in its deferred tax liability of $40.6 million, with a corresponding adjustment to deferred income tax benefit of $40.6 million for the year ended December 31, 2017. The Company finalized the impact of the rate change on its deferred tax liability in the fourth quarter of 2018 recording an additional $1.1 million tax benefit. The total reduction to the deferred tax liability related to the rate change was $41.7 million.

Removal of Permanent Reinvestment Representation on certain undistributed foreign earnings: As a result of the enactment of the Tax Act, the Company had decided to remove the Permanent Reinvestment Representation with respect to certain of its subsidiaries in Canada, Italy and Germany as of December 31, 2017. Under the mandatory repatriation provisions of the Tax Act, post-1986 undistributed earnings were taxed in the U.S. as if they were distributed before December 31, 2017. However, with the removal of the Permanent Reinvestment Representation with respect to select subsidiaries in Canada, Italy and Germany, the non-creditable withholding taxes and any local country taxes associated with future dividends from these subsidiaries were required to be recorded as deferred tax liabilities as of the end of 2017. The Company recorded a provisional increase in its deferred tax liability of $9.2 million, with a corresponding adjustment to deferred income tax expense of $9.2 million for the year ending December 31, 2017. During the second quarter, the deferred tax liability was reduced by $1.4 million to $7.8 million. No adjustments were made to the deferred tax liability during the third quarter of 2018. The Company removed the Permanent Reinvestment Representation during the fourth quarter of 2018 for all remaining non-U.S. subsidiaries except for its entity in India. This change resulted in an additional $9.1 million increase to its deferred tax liability with a corresponding adjustment to deferred tax expense.

Global intangible low taxed income (GILTI): The Tax Act creates a new requirement that certain income (i.e. GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFC’s U.S. shareholder. GILTI is the excess of the U.S. shareholder’s “net CFC tested income” over the net deemed intangible income return, which is currently defined as the excess of (1) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. In January 2018, FASB released guidance on the accounting for the GILTI tax. The guidance indicates that either accounting for deferred taxes related to GILTI tax inclusions or treating the GILTI tax as a period cost are both acceptable methods subject to an accounting policy election. The Company will treat the GILTI tax as a period cost.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2018, 2017 and 2016 is as follows:



	2018			2017			2016
	(In thousands)
Beginning balance January 1	$	2,722		$	3,775		$	7,228
Gross increases for tax positions of prior years	2,308			537			201
Gross decreases for tax positions of prior years	(229		)	(587		)	(93		)
Settlements	(160		)	(604		)	(2,014		)
Lapse of statute of limitations	(571		)	(399		)	(1,547		)
Ending balance December 31	$	4,070		$	2,722		$	3,775

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018, 2017 and 2016, we had approximately $0.1 million, $0.1 million and $0.1 million, respectively, of accrued interest related to uncertain tax positions. As of December 31, 2018 and 2017, the Company had no accrued penalties related to uncertain tax positions, while in 2016 we had approximately $0.1 million.

The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized is $3.0 million, $0.9 million and $1.8 million as of December 31, 2018, 2017 and 2016, respectively. The tax years 2012-2017 remain open to examination by major taxing jurisdictions. Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next 12 months by a range of zero to $1 million.

The Company had net operating loss and credit carryforwards related to prior acquisitions for U.S. federal purposes at December 31, 2018 and 2017 of $1.3 million and $2.4 million, respectively. The U.S. federal net operating loss carryforwards are available for use against the Company’s consolidated U.S. federal taxable income and expire between 2021 and 2028. For non-U.S. purposes, the Company had net operating loss carryforwards at December 31, 2018 and 2017 of $29.5 million and $24.5 million, respectively, the majority of which relates to acquisitions. The entire balance of the non-U.S. net operating losses is available to be carried forward. At December 31, 2018 and 2017, the Company had U.S. state net operating loss carryforwards of approximately $15.8 million and $6.7 million, respectively. If unutilized, the U.S. state net operating loss will expire between 2019 and 2038. At December 31, 2018 and 2017, the Company recorded a valuation allowance against the deferred tax asset attributable to the U.S. state net operating loss of $0.6 million and $0.1 million, respectively.

The Company had a capital loss carryover for U.S. federal purposes at December 31, 2018 and 2017 of approximately $46.1 million and $46.0 million, respectively. U.S. federal capital loss carryovers can be carried back three years and forward five years, thus, if unutilized, the U.S. federal capital loss carryover will expire in 2021. At December 31, 2018 and 2017, the Company recorded a valuation allowance against the deferred tax asset attributable to the U.S. federal capital loss carryover of $9.7 million and $9.7 million, respectively. At December 31, 2018 and 2017, the Company had U.S. state capital loss carryovers of $62.7 million and $62.7 million, respectively. If unutilized, the U.S. state capital loss carryovers will expire between 2021 and 2031. At December 31, 2018 and 2017, the Company recorded a valuation allowance against the deferred tax assets attributable to the U.S. state capital loss carryovers of $0.8 million and $0.8 million, respectively. At December 31, 2018 and 2017, the Company had a foreign capital loss carryforward of approximately $13.4 million and $14.2 million, respectively. The foreign capital loss can be carried forward indefinitely. At both December 31, 2018 and 2017, the Company has a full valuation allowance against the deferred tax asset attributable to the foreign capital loss.