Income Taxes

3 Months Ended

Apr. 03, 2021

A summary of the provision for income taxes and the corresponding effective tax rate for the three months ended April 3, 2021 and April 4, 2020, is shown below (in millions, except effective tax rates):


	Three Months Ended
	April 3, 2021			April 4, 2020
Provision for income taxes	$	58.9		$	26.5
Pretax income before equity in net income of affiliates	$	278.8		$	108.5
Effective tax rate	21.1		%	24.4		%

For the three months ended April 3, 2021, the Company estimated its annual effective tax rate utilizing the annualized effective tax rate method under Accounting Standards Codification ("ASC") 740, "Income Taxes," to calculate its interim income tax provision. For the three months ended April 4, 2020, the Company utilized the discrete effective tax rate method, as allowed under ASC 740, to calculate its interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. At the time, it was not possible to reliably estimate the annual effective tax rate for the year due to uncertainty created by the COVID-19 pandemic.

The Company’s provision for income taxes is impacted by the level and mix of earnings among tax jurisdictions. Pretax income before equity in net income of affiliates was significantly higher in the first three months of 2021, as compared to the first three months of 2020, primarily due to the COVID-19 pandemic. As a result, relatively small changes in the provision for income taxes in 2020 caused disproportionate changes in the effective tax rate, as compared to 2021. The effective tax rate in the first three months of 2021 was lower than the effective tax rate in the first three months of 2020 due to a more favorable forecasted mix of earnings for the full year of 2021 under the annualized effective tax rate method, as compared to the actual mix of earnings in the first three months of 2020 under the discrete effective tax rate method.

The Company's discrete tax benefit (expense) on significant items is shown below (in millions):


	Three Months Ended
	April 3, 2021		April 4, 2020
Restructuring charges and various other items	$	5.2	$	10.0
Valuation allowances on deferred tax assets	0.2		0.8
Share-based compensation	0.1		(0.2)




	$	5.5	$	10.6

Excluding the items above, the effective tax rate for the first three months of 2021 and 2020 approximated the U.S. federal statutory income tax rate of 21%, adjusted for income taxes on foreign earnings, losses and remittances, valuation allowances, tax credits, income tax incentives and other permanent items.

The Company’s current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. The Company’s future provision for income taxes will include no tax benefit with respect to losses incurred and, except for certain jurisdictions, no tax expense with respect to income generated in these countries until the respective valuation allowances are eliminated. Accordingly, income taxes are impacted by changes in valuation allowances and the mix of earnings among jurisdictions. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. In completing this evaluation, the Company considers all available evidence in order to determine whether, based on the weight of the evidence, a valuation allowance for its deferred tax assets is necessary. Such evidence includes historical results, future reversals of existing taxable temporary differences and expectations for future taxable income (exclusive of the reversal of temporary differences and carryforwards), as well as the implementation of feasible and prudent tax planning strategies. If, based on the weight of the evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a valuation allowance is recorded. If operating results improve or decline on a continual basis in a particular jurisdiction, the Company’s decision regarding the need for a valuation allowance could change, resulting in either the initial recognition or reversal of a valuation allowance in that jurisdiction, which could have a significant impact on income tax expense in the period recognized and subsequent periods. In determining the provision for income taxes for financial statement purposes, the Company makes certain estimates and judgments, which affect its evaluation of the carrying value of its deferred tax assets, as well as its calculation of certain tax liabilities.

For further information related to the Company's income taxes, see Note 9, "Income Taxes," to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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