Income Taxes (Notes)

12 Months Ended

Dec. 31, 2019

We and our subsidiaries file a consolidated federal income tax return that includes all domestic companies owned 80% or more by us and the proportionate share of our interest in equity method investments. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to us and our domestic subsidiaries.

Components of income (loss) before income taxes for the years ended December 31, 2019, 2018 and 2017, are presented below:



	2019			2018		2017
United States	$	(9.3	)	$	168.3	$	91.6
Foreign	26.7			11.5		9.7
Noncontrolling interests	51.8			58.1		61.4
Income before income taxes	$	69.2		$	237.9	$	162.7

Significant components of deferred tax assets and liabilities at December 31, 2019 and 2018 are presented below:



	2019			2018
Deferred tax assets:
Net operating and capital loss and tax credit carryforwards	$	496.2		$	516.7
Postretirement benefits	87.9			81.8
Pension benefits	84.2			114.1
Leases	63.3			—
Inventories	23.4			38.5
Other assets	78.9			65.1
Valuation allowance	(659.4		)	(693.5		)
Total deferred tax assets	174.5			122.7
Deferred tax liabilities:
Depreciable assets	(106.3		)	(108.3		)
Leases	(60.0		)	—
Other liabilities	(27.9		)	(33.4		)
Total deferred tax liabilities	(194.2		)	(141.7		)
Net deferred tax liabilities	$	(19.7	)	$	(19.0	)

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize future deferred tax assets. We assess the valuation allowance each reporting period and reflect any additions or adjustments in earnings in the same period. At December 31, 2019, we considered the existence of recent cumulative income from U.S. operations as a source of positive evidence. We have generated losses from U.S. operations for several of our recent periods through 2016 and for

2019 and accordingly have generated significant cumulative losses in those periods, which is a significant source of objective negative evidence. Despite the recent income reported in 2017 and 2018 from U.S. operations, the following forms of negative evidence concerning our ability to realize our domestic deferred tax assets were considered:


•	we have historical evidence that the steel industry we operate within has business cycles of longer than a few years and therefore attribute significant weight to our cumulative losses over longer business cycles in evaluating our ability to generate future taxable income;


•	the global steel industry has been experiencing global overcapacity and periods of increased foreign steel imports into the U.S., which have created volatile economic conditions and uncertainty relative to predictions of future income;


•	while we have changed our business model to de-emphasize sales of commodity products and believe that this model will generate improved financial results throughout an industry cycle, we have not experienced all parts of the cycle since we made these changes and therefore we do not know what results our business model will produce in all circumstances;

•

our U.S. operations have generated significant losses in prior years and the competitive landscape in the steel industry reflects shifting domestic and international political priorities, an uncertain global trade landscape, and continued intense competition from domestic and foreign steel competitors, all of which present significant uncertainty regarding our ability to routinely generate U.S. income in the near term;


•	there has been significant recent volatility in spot market selling prices for carbon and stainless steel; and


•	a substantial portion of our U.S. deferred tax assets consists of tax carryforwards with expiration dates that may prevent us from using them prior to expiration.

As of December 31, 2019 and 2018, we concluded that the negative evidence outweighed the positive evidence and we maintained a valuation allowance for our net deferred tax assets in the U.S. To determine the appropriate valuation allowance, we considered the timing of future reversal of our taxable temporary differences that supports realizing a portion of our federal and state deferred tax assets. This accounting treatment has no effect on our ability to use the loss carryforwards and tax credits to reduce future cash tax payments.

Changes in the valuation allowance for the years ended December 31, 2019, 2018 and 2017, are presented below:



	2019			2018			2017
Balance at beginning of year	$	693.5		$	735.7		$	1,189.7
Change in valuation allowance:
Included in income tax expense (benefit)	(26.2		)	(52.8		)	(62.3		)
Change in deferred assets in other comprehensive income	(7.9		)	10.6			8.5
Effect of tax rate changes	—			—			(400.2		)
Balance at end of year	$	659.4		$	693.5		$	735.7

At December 31, 2019, we had $2,081.6 in federal regular net operating loss carryforwards, which will expire between 2030 and 2037. Our net operating loss carryovers were generated in years prior to 2018, retain the original 20-year carryover periods, and can be used to offset future taxable income without limitation. At December 31, 2019, we had research and development (“R&D”) credit carryforwards of $1.2 that we may use to offset future income tax liabilities. The R&D credits expire between 2027 and 2028. At December 31, 2019, we had $76.3 in deferred tax assets for state net operating loss carryforwards and tax credit carryforwards, before considering valuation allowances, which will expire between 2020 and 2039.

Significant components of income tax expense (benefit) are presented below:



	2019			2018			2017
Current:
Federal	$	0.2		$	(0.5	)	$	(4.5	)
State	(0.1		)	(0.3		)	0.3
Foreign	5.1			2.1			2.4
Deferred:
Federal	(0.1		)	(5.3		)	0.7
State	—			—			0.1
Foreign	2.5			(2.2		)	(0.4		)
Amount allocated to other comprehensive income	(1.4		)	—			—
Change in valuation allowance on beginning-of-the-year deferred tax assets	—			—			(0.8		)
Income tax expense (benefit)	$	6.2		$	(6.2	)	$	(2.2	)

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), signed into law on December 22, 2017, reduced the corporate income tax rate to 21% beginning in 2018, among other provisions. We recognized the effects of changes in tax rates and laws on deferred tax balances in 2017, the period in which the legislation was enacted. At December 31, 2017, we remeasured our deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, which is generally 21% at the U.S. federal level. As a result, our income tax expense for the fourth quarter of 2017 included a non-cash credit of $4.3 for the decrease in the value of our net deferred tax liabilities.

The Tax Act also introduced a one-time transition tax on the cumulative undistributed earnings of our foreign subsidiaries as of December 31, 2017. As a result, our taxable income for 2017 included $24.3 as our gross transition tax obligation. We did not incur a cash tax liability for the transition tax due to the availability of existing net operating loss carryforwards. At December 31, 2019 we had $11.4 of accumulated undistributed earnings of our foreign subsidiaries that has not been subject to U.S. income tax as they are considered indefinitely reinvested. Substantially all of the earnings as of December 31, 2017 were subject to U.S. taxation as a result of the transition tax inclusion provided for by the Tax Act. The Tax Act also establishes a broad exemption from U.S. taxation for dividends paid from our foreign affiliates after 2017. Consequently, there will generally be no incremental U.S. taxable income generated if we repatriate these foreign earnings in the future. However, foreign withholding taxes on dividend distributions could apply, unless they are eliminated by a treaty between the United States and the country where our foreign affiliate is located. Since we consider these earnings to be permanently invested in our foreign subsidiaries, we did not record any withholding taxes that would be assessed if the earnings were repatriated by payment of a dividend. If we repatriated the earnings, we estimate that the withholding tax liability would not be material at December 31, 2019.

Staff Accounting Bulletin No. 118 established a one-year period from the date of enactment in which to account for the impact of the Tax Act. During 2018, we reduced our valuation allowance and recorded an income tax benefit of $5.3 as a result of changes to the tax net operating carryover rules included in the Tax Act that allow us to use certain indefinite-lived deferred tax liabilities as a source of future income to realize deferred tax assets. As of December 31, 2018, we had accounted for the material aspects of the Tax Act.

The reconciliation of income tax on income before income taxes computed at the U.S. federal statutory tax rates to actual income tax expense is presented below:



	2019			2018			2017
Income tax expense at U.S. federal statutory rate	$	14.5		$	50.0		$	57.2
Income tax expense calculated on noncontrolling interests	(10.9		)	(12.2		)	(21.5		)
State and foreign tax expense, net of federal tax	12.9			(2.3		)	6.3
Increase (decrease) in deferred tax asset valuation allowance	(26.2		)	(52.8		)	(51.8		)
Amount allocated to other comprehensive income	(1.4		)	—			—
Remeasurement of deferred taxes for U.S. tax legislation	—			—			(4.3		)
Transition tax on foreign earnings	—			—			7.9
Non-deductible compensation	4.7			8.1			—
Other permanent differences	7.3			2.3			2.4
Other differences	5.3			0.7			1.6
Income tax expense (benefit)	$	6.2		$	(6.2	)	$	(2.2	)

Our federal, state and local tax returns are subject to examination by various taxing authorities. Federal returns and most state returns for periods beginning in 2016 are open for examination, while certain state and local returns are open for examination for periods beginning in 2015. However, taxing authorities have the ability to adjust net operating loss carryforwards generated in years before these periods. We have not recognized certain tax benefits because of the uncertainty of realizing the entire value of the tax position taken on income tax returns until taxing authorities review them. We have established appropriate income tax accruals, and believe that the outcomes of future federal examinations, as well as ongoing and future state and local examinations, will not have a material adverse impact on our financial position, results of operations or cash flows. When statutes of limitations expire or taxing authorities resolve uncertain tax positions, we will adjust income tax expense for the unrecognized tax benefits. We have no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change within twelve months of December 31, 2019.

A reconciliation of the change in unrecognized tax benefits for 2019, 2018 and 2017 is presented below:



	2019			2018			2017
Balance at beginning of year	$	87.2		$	89.4		$	124.2
Decreases for prior year tax positions	(12.2		)	(2.2		)	(0.5		)
Increases (decreases) for current year tax positions	0.3			—			0.3
Increases (decreases) related to tax rate changes (a)	—			—			(34.6		)
Balance at end of year	$	75.3		$	87.2		$	89.4


(a)	As a result of the Tax Act, the value of unrecognized tax benefits associated with net operating loss carryforwards and other temporary differences was reduced to reflect the lower tax rates that will apply if the uncertainties related to these deferred tax assets materialize in the future.

Included in the balance of unrecognized tax benefits at December 31, 2019 and 2018, are $72.3 and $72.8 of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2019 and 2018, are $3.0 and $14.5 of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.