Income Taxes

Earnings before income taxes for the years ended December 31, 2018, 2017 and 2016 consisted of the following components:



	2018		2017		2016
United States	$	924.2	$	783.6	$	721.0
Other	274.2		251.1		219.6
	$	1,198.4	$	1,034.7	$	940.6

Components of income tax expense for the years ended December 31, 2018, 2017 and 2016 were as follows:



	2018			2017			2016
Current:
Federal	$	155.4		$	316.0		$	239.2
State	56.2			29.8			21.8
Foreign	105.1			89.9			54.9
Deferred:
Federal	(24.2		)	(358.3		)	(26.8		)
State	(25.8		)	(3.7		)	0.2
Foreign	(12.7		)	(10.8		)	(7.3		)
	$	254.0		$	62.9		$	282.0

Reconciliations between the statutory federal income tax rate and the effective income tax rate for the years ended December 31, 2018, 2017 and 2016 were as follows:



	2018		2017		2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
Foreign rate differential	0.3		(2.6	)	(3.2	)
R&D tax credits	(0.9	)	(0.8	)	(0.7	)
State taxes, net of federal benefit	2.4		1.9		1.9
Section 199 deduction	—		(1.3	)	(1.5	)
Stock-based compensation	(3.1	)	(3.9	)	(1.6	)
Tax Cuts and Jobs Act of 2017 - enactment date and measurement period adjustments	(1.2	)	(20.8	)	—
Global intangible low taxed income (GILTI) inclusion	1.1		—		—
Foreign-derived intangible income (FDII) deduction	(1.2	)	—		—
Tax on planned remittances of foreign earnings	1.3		—		—
Other, net	1.5		(1.4	)	0.1
	21.2	%	6.1	%	30.0	%

The deferred income tax balance sheet accounts arise from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.

Components of the deferred tax assets and liabilities at December 31 were as follows:



	2018			2017
Deferred tax assets:
Reserves and accrued expenses	$	156.5		$	121.5
Inventories	4.5			5.1
Net operating loss carryforwards	67.9			71.8
R&D credits	6.1			9.6
Valuation allowance	(26.4		)	(25.7		)
Outside basis difference on investments held for sale	2.7			—
Total deferred tax assets	$	211.3		$	182.3
Deferred tax liabilities:
Reserves and accrued expenses	$	14.3		$	39.6
Amortizable intangible assets	1,043.0			935.9
Plant and equipment	6.6			5.7
Accrued tax on unremitted foreign earnings	16.3			—
Outside basis difference on investments held for sale	10.0			—
Total deferred tax liabilities	$	1,090.2		$	981.2

As of December 31, 2018, the Company had approximately $19.7 of tax-effected U.S. federal net operating loss carryforwards. Some of these net operating loss carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2021 if not utilized. The majority of the U.S. federal net operating loss carryforwards are subject to limitation under the Internal Revenue Code of 1986, as amended (“IRC”) Section 382; however, the Company expects to utilize such losses in their entirety prior to expiration. The U.S. federal net operating loss carryforwards decreased from 2017 to 2018 primarily due to current year utilization. The Company has approximately $32.2 of tax-effected state net operating loss carryforwards (without regard to federal benefit of state). Some of these net operating loss carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2019 if not utilized. The state net operating loss carryforwards are primarily related to Florida and New Jersey, but the Company has smaller net operating losses in various other states. The Company has approximately $22.8 of tax-effected foreign net operating loss carryforwards. Some of these net operating loss carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2019 if not utilized. Additionally, the Company has $8.0 of U.S. federal and state research and development tax credit carryforwards (without regard to federal benefit of state). Some of these research and development credit carryforwards have an indefinite carryforward period, and those that do not will begin to expire in 2019 if not utilized.

As of December 31, 2018, the Company determined that a total valuation allowance of $26.4 was necessary to reduce U.S. federal and state deferred tax assets by $9.1 and foreign deferred tax assets by $17.3, where it was more likely than not that all of such deferred tax assets will not be realized. As of December 31, 2018, the Company believes it is more likely than not that the remaining net deferred tax assets will be realized based on the Company’s estimates of future taxable income and any applicable tax-planning strategies within various tax jurisdictions.

The Company recognizes in the consolidated financial statements only those tax positions determined to be “more likely than not” of being sustained upon examination based on the technical merits of the positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2018			2017			2016
Beginning balance	$	52.2		$	38.7		$	26.1
Additions for tax positions of prior periods	2.4			24.8			3.5
Additions for tax positions of the current period	6.9			4.2			9.0
Additions due to acquisitions	4.4			—			5.1
Reductions for tax positions of prior periods	(0.4		)	(11.2		)	(1.2		)
Reductions attributable to settlements with taxing authorities	—			(1.5		)	(0.6		)
Reductions attributable to lapses of applicable statute of limitations	(1.9		)	(2.8		)	(3.2		)
Ending balance	$	63.6		$	52.2		$	38.7

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $62.0. Interest and penalties related to unrecognized tax benefits were $1.7 in 2018 and are classified as a component of income tax expense. Accrued interest and penalties were $6.9 at December 31, 2018 and $5.1 at December 31, 2017. During the next twelve months, it is reasonably possible that the unrecognized tax benefits may decrease by a net $2.3, mainly due to anticipated statute of limitations lapses in various jurisdictions.

The Company and its subsidiaries are subject to examinations for U.S. federal income tax as well as income tax in various state, city and foreign jurisdictions. The Company’s federal income tax returns for 2015 through the current period remain open to examination and the relevant state, city and foreign statutes vary. The Company does not expect the assessment of any significant additional tax in excess of amounts reserved.

The Tax Act was signed into U.S. law on December 22, 2017. The Tax Act contains provisions which impact the Company’s income taxes including a reduction in the U.S. federal corporate income tax rate from 35% to 21%, a one-time deemed mandatory repatriation tax imposed on all undistributed foreign earnings, and the introduction of a modified territorial taxation system.

The SEC released Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017 to provide guidance where the accounting under ASC 740, Income Taxes, is incomplete for certain income tax effects of the Tax Act upon issuance of financial statements for the reporting period in which the Tax Act was enacted. SAB 118 provides that if a company could determine a reasonable estimate, that estimate should be reported as a provisional amount and adjusted during a measurement period. If a company is unable to determine a reasonable estimate, no related provisional amounts would be recorded until a reasonable estimate can be determined, within the measurement period. The measurement period extends until all necessary information has been obtained, prepared, and analyzed, but no longer than 12-months from the date of enactment of the Tax Act.

As of December 22, 2018, the Company has completed the accounting for all income tax effects of the Tax Act. The total impact is a one-time benefit of $229.5, of which $215.4 benefit was recorded as a provisional amount in 2017 and $14.1 benefit was recorded during the measurement period.

The reduction in the U.S. federal corporate income tax rate from 35% to 21% and certain immaterial changes in tax basis required a remeasurement of the Company’s deferred taxes. The impact of this remeasurement was a one-time benefit of $379.0, of which the entirety was recorded as a provisional amount in 2017 with no adjustment recorded during the measurement period.

The one-time deemed mandatory repatriation tax on all undistributed foreign earnings resulted in a one-time charge of $102.4, of which $110.7 charge was recorded as a provisional amount in 2017 and $8.3 benefit was recorded during the measurement period. The Company has elected to pay this liability over 8 years.

The introduction of a modified territorial taxation system resulted in a change to the Company’s indefinite reinvestment assertion with respect to its unremitted foreign earnings, including those unremitted foreign earnings that were taxed in the U.S. as part of the one-time deemed mandatory repatriation tax. The Company now intends to distribute all historical unremitted foreign earnings up to the amount of excess foreign cash, as well as all future foreign earnings that can be repatriated without incremental U.S. federal tax cost. Any remaining outside basis differences relating to the Company’s investments in foreign subsidiaries are no longer expected to be material and will be indefinitely reinvested. As a result of this change in assertion, the Company recorded a one-time charge of $22.8, of which $28.7 charge was recorded as a provisional amount in 2017 and $5.8 benefit was recorded during the measurement period. This charge represents the future U.S. state and foreign tax cost of repatriation. The Company also incurred a one-time charge of $24.2 resulting from the write-off of indirect benefits associated with uncertain tax positions. The entirety of this charge was recorded as a provisional amount in 2017 with no adjustment recorded during the measurement period.

In January 2018, the FASB released guidance on accounting for taxes on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The guidance provides that a company can, subject to an accounting policy election, either record the tax impacts of GILTI inclusions as a period cost, or account for GILTI in deferred taxes. The Company has now finalized its election and will account for the tax impacts of GILTI inclusions as a period cost.