Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, requires a current inclusion in U.S. federal taxable income of certain earnings of foreign corporations, and creates a new limitation on deductible interest expense. Consequently, we recorded a $22.5 net favorable tax benefit during the fourth quarter of 2017 related to the Tax Act. This benefit mainly consisted of a one-time, provisional benefit of $26.9 related to the remeasurement of certain of our deferred tax liabilities using the lower U.S. federal corporate tax rate of 21%. This was partially offset by (i) a one-time, provisional charge of $8.7 related to the deemed repatriation transition tax, which is a tax on previously untaxed accumulated earnings and profits of certain of our foreign subsidiaries, and (ii) a one-time tax expense and tax benefit of $4.5 and $8.7, respectively, related to our intent to amend pre-acquisition Hudson U.S. federal tax returns. The measurement period for purposes of SAB 118 ended on December 22, 2018. We have completed our analysis to determine the effect of the Tax Act, and as such, we have recorded an additional tax benefit $1.8 during the year ended December 31, 2018.

Reduction of U.S. federal corporate tax rate: The Tax Act reduces the U.S. federal corporate tax rate to 21% effective January 1, 2018. For certain of our deferred tax liabilities, we have recorded a provisional decrease of $26.9, with a corresponding adjustment to deferred income tax benefit $26.9 for the year ended December 31, 2017. We have finalized our calculations related to the U.S. federal corporate rate change and recorded an additional deferred tax benefit of $3.1 for certain of our deferred tax liabilities during the year ended December 31, 2018.

Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on total post-1986 earnings and profits (E&P) of certain of our foreign subsidiaries. We were able to make a reasonable estimate of the Transition Tax and recorded (i) a one-time, provisional charge of $8.7 related to the deemed repatriation transition tax, and (ii) a one-time tax expense and tax benefit of $4.5 and $8.7, respectively, related to our intent to amend pre-acquisition Hudson U.S. federal tax returns. Upon further analysis of the Tax Act, Notices and Regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, we have finalized our calculation of the Transition Tax liability in 2018. We increased our December 2017 provisional expense by $1.3 as a result of (i) an increase to Transition Tax of $3.8, offset by (ii) a reduction to tax expense associated with our amended pre-acquisition Hudson U.S. federal tax returns of $2.5 during the year ended December 31, 2018. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the Transition Tax, or any additional outside basis difference inherent in these entities since these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liabilities related to any remaining undistributed foreign earnings not subject to the Transition Tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time Transition Tax) is not practicable.

Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion and Anti-Abuse Tax (“BEAT”), and IRC Section 163(j) interest limitation (“Interest Limitation”): For our calendar year beginning January 1, 2018, we became subject to several provisions of the Tax Act including computations under GILTI, FDII, BEAT and the Interest Limitation rules. For the GILTI and FDII computations, we recorded an estimate in our effective tax rate for the year ended December 31, 2018. For the BEAT and Interest Limitation computations, we have not recorded any amounts in our effective tax rate for the year ended December 31, 2018 because we currently estimate that these provisions of the Tax Act will not apply in 2018.

Valuation allowances: We assessed whether our valuation allowance analyses are affected by various aspects of the Tax Act (e.g. deemed repatriation of deferred foreign income, GILTI inclusions, FDII deductions and new categories of foreign tax credits). The GILTI provisions require us in our U.S. income tax return, to include foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We determined that we will be subject to incremental U.S. tax on GILTI income beginning in 2018. We have elected to account for GILTI tax in the period in which it is incurred, and therefore, we have not provided any provisional deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2018.

Income Before Income Taxes

Income (loss) before income taxes consists of the following:



	Year Ended December 31,
	2018		2017		2016
United States	$	32.0	$	5.5	$	30.1
Foreign	37.0		5.6		(6.0		)
Income before income taxes	$	69.0	$	11.1	$	24.1

Provision

Significant components of income tax expense (benefit) are as follows:



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	1.5		$	8.7		$	9.7
State and local	0.5			0.2			0.6
Foreign	6.4			5.9			(14.7		)
Total current	8.4			14.8			(4.4		)
Deferred:
Federal	3.8			(30.7		)	14.0
State and local	1.5			(0.2		)	(0.1		)
Foreign	(0.3		)	(0.5		)	1.1
Total deferred	5.0			(31.4		)	15.0
Total income tax expense (benefit)	$	13.4		$	(16.6	)	$	10.6

Effective Tax Rate Reconciliation

The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense (benefit) is as follows:



	Year Ended December 31,
	2018			2017			2016
Income tax expense at U.S. statutory rate	$	14.1		$	3.6		$	7.9
State income taxes, net of federal tax benefit	1.7			0.2			0.4
Foreign income, net of credit on foreign taxes	0.7			8.5			—
Effective tax rate differential of earnings outside of U.S.	2.6			(0.3		)	0.5
Change in valuation allowance	38.4			7.6			6.8
Research & experimentation credits	(0.9		)	(0.5		)	(0.7		)
Non-deductible items	0.4			0.7			0.7
Change in uncertain tax positions	0.2			0.1			(0.2		)
Share-based compensation	(3.3		)	—			—
Domestic production activities deduction	—			(0.4		)	(1.2		)
Tax effect of insurance proceeds	—			—			(6.0		)
Capital loss carryover	(29.7		)	—			—
Tax effect of 2017 tax reform federal rate change	(11.3		)	(26.7		)	—
Tax effect of carryforward foreign tax credits	(0.6		)	(9.4		)	—
Other items	1.1			—			2.4
Income tax expense (benefit)	$	13.4		$	(16.6	)	$	10.6

Deferred Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:



	December 31,
	2018			2017
Deferred tax assets:
Accruals and reserves	$	15.9		$	11.7
Pensions	3.3			2.0
Inventory	2.2			4.1
Share-based compensation	6.5			6.6
Tax credit carryforwards	16.2			16.4
Foreign net operating loss carryforwards	11.2			11.7
State net operating loss carryforwards	0.6			2.0
Capital loss carryover	29.7			—
Other – net	13.5			0.2
Total deferred tax assets before valuation allowances	99.1			54.7
Valuation allowances	(65.2		)	(26.8		)
Total deferred tax assets, net of valuation allowances	$	33.9		$	27.9
Deferred tax liabilities:
Property, plant and equipment	$	15.4		$	15.0
Goodwill and intangible assets	88.9			71.4
Convertible notes	(0.4		)	(0.5		)
Other – net	1.6			4.1
Total deferred tax liabilities	$	105.5		$	90.0
Net deferred tax liabilities	$	71.6		$	62.1
The net deferred tax liability is classified as follows:
Other assets	$	(4.8	)	$	—
Long-term deferred tax liabilities	76.4			62.1
Net deferred tax liabilities	$	71.6		$	62.1

Federal, State and Local Net Operating Loss Carryforwards: We have state net operating losses in various states which begin to expire in 2018. The gross deferred tax asset for the state net operating losses of $1.1 is substantially offset by a valuation allowance of $0.6.

Foreign Net Operating Loss and Tax Credit Carryforwards: As of December 31, 2018, cumulative foreign operating losses of $44.8 generated by Chart were available to reduce future taxable income. Approximately $44.8 of these operating losses expire between 2019 and 2028. The deferred tax asset for the foreign operating losses of $11.2 is substantially offset by a valuation allowance of $11.1. As of December 31, 2018, we have $1.0 of investment tax credits available to reduce our future tax liability. The gross deferred tax asset of $1.0 is fully offset by a valuation allowance due to uncertainties relating to our ability to fully use these credits prior to expiration.

Other Tax Information

We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As of December 31, 2017, we had undistributed foreign earnings of approximately $206.9. While the Tax Act subjected approximately $200.0 of undistributed foreign earnings to tax, an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We estimate that no previously unaccrued withholding taxes would be incurred if these undistributed earnings were distributed. The liability that arises from the amount of unrecognized U.S. state taxes is estimated to be insignificant. We have analyzed our global working capital and cash requirements as of December 31, 2018 and have determined that we do not plan to repatriate any earnings at this time.

Cash paid for income taxes during the years ended December 31, 2018, 2017 and 2016 was $13.2, $15.4, and $16.9, respectively.

Unrecognized Income Tax Benefits

The reconciliation of beginning to ending unrecognized tax benefits is as follows:



	Year Ended December 31,
	2018			2017			2016
Unrecognized tax benefits at beginning of the year	$	0.8		$	0.8		$	1.0
Additions for tax positions of prior years	0.9			0.1			—
Additions for tax positions acquired	1.4			—			—
Reductions for tax positions of prior years	(0.8		)	(0.1		)	—
Lapse of statutes of limitation	—			—			(0.2		)
Unrecognized tax benefits at end of the year	$	2.3		$	0.8		$	0.8

Included in the balance of unrecognized tax benefits at December 31, 2018 and 2017 were $0.1 and $0.6 of income tax benefits, respectively, which, if ultimately recognized, would impact our annual effective tax rate.

We accrued approximately $0.1 for the payment of interest and penalties at both December 31, 2018 and 2017.

We are subject to income taxes in the U.S. federal jurisdiction and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2013.

Due to the expiration of various statutes of limitation, it is reasonably possible our unrecognized tax benefits at December 31, 2018 may decrease within the next twelve months, the amount by which was insignificant for disclosure.