Income Taxes

12 Months Ended

Dec. 31, 2019

14. Income Taxes

Income taxes have been based on the following components of earnings before provision for income taxes and discontinued operations in the Consolidated Statements of Earnings:


	Years Ended December 31,
	2019		2018		2017
Domestic	$	448,301	$	344,793	$	544,900
Foreign	394,708		380,585		330,915
Total	$	843,009	$	725,378	$	875,815

Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2019, 2018 and 2017 is comprised of the following:


	Years Ended December 31,
	2019		2018		2017
Current:
U.S. federal	$	71,069	$	47,445	$	188,559
State and local	16,709		14,120		18,857
Foreign	102,284		86,523		43,228
Total current	190,062		148,088		250,644
Deferred:
U.S. federal	(6,033)		876		(121,879)
State and local	1,770		626		(1,247)
Foreign	(20,708)		(15,357)		1,634
Total deferred	(24,971)		(13,855)		(121,492)
Total expense	$	165,091	$	134,233	$	129,152

Differences between the effective income tax rate and the U.S. federal income statutory tax rate are as follows:


	Years Ended December 31,
	2019		2018		2017
U.S. federal income tax rate	21.0	%	21.0	%	35.0	%
State and local taxes, net of federal income tax benefit	1.7		1.6		1.0
Foreign operations tax effect	(1.3)		(1.1)		(6.2)
SAB 118	—		(0.6)		—
Domestic manufacturing deduction	—		—		(1.7)
Foreign tax credits	(0.1)		(0.3)		0.1

Share awards	(1.7)		(2.0)		(1.0)
Changes in tax law	—		—		(6.7)
Disposition of businesses	1.2		—		(4.6)
Other	(1.2)		(0.1)		(1.2)
Effective tax rate from continuing operations	19.6	%	18.5	%	14.7	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:


	December 31, 2019		December 31, 2018
Deferred Tax Assets:
Accrued compensation, principally postretirement and other employee benefits	$	62,547	$	72,795
Accrued expenses, principally for state income taxes, interest and warranty	29,736		30,159
Net operating loss and other carryforwards	269,599		290,629
Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes	17,671		19,228
Accounts receivable, principally due to allowance for doubtful accounts	3,409		3,379
Accrued insurance	2,001		1,897

Long-term liabilities, principally warranty, environmental and exit costs	3,305		4,183

Total gross deferred tax assets	388,268		422,270
Valuation allowance	(244,153)		(264,398)
Total deferred tax assets, net of valuation allowances	144,115		157,872
Deferred Tax Liabilities:
Intangible assets, principally due to different tax and financial reporting bases and amortization lives	$	(364,843)	$	(394,851)
Property, plant and equipment, principally due to differences in depreciation	(56,401)		(49,380)
Other liabilities	(18,434)		(23,533)
Total gross deferred tax liabilities	(439,678)		(467,764)
Net deferred tax liability	$	(295,563)	$	(309,892)

Classified as follows in the Consolidated Balance Sheets:

Other assets and deferred charges	$	26,473	$	29,433

Deferred income taxes	(322,036)		(339,325)
	$	(295,563)	$	(309,892)

As of December 31, 2019, the Company had non-U.S loss carryforwards of $938.5 million primarily resulting from non-operating activities. The entire balance of the non-U.S. losses as of December 31, 2019 is available to be carried forward, with $72.6 million of these losses expiring during the years 2020 through 2039. The remaining $865.9 million of such losses can be carried forward indefinitely.

The Company has $54.1 million and $62.9 million of state tax loss carryforwards as of December 31, 2019 and 2018, respectively, that are available for use by the Company between 2020 and 2039.

The Company maintains valuation allowances by jurisdiction against the deferred tax assets related to certain of these carryforwards for which it is more likely than not that some portion or all will not be realized.

On December 22, 2017, the Tax Reform Act was enacted which permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $172.0 million. The Tax Reform Act also imposed a tax for a one-time deemed repatriation of post-1986 unremitted foreign earnings and profits through the year ended December 31, 2017. As of December 31, 2017, the Company recorded provisional tax expense related to the deemed repatriation of $111.6 million payable over eight years. The GILTI provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets.

On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. In accordance with SAB 118, the Company finalized the financial reporting impact of the Tax Reform Act in the fourth

quarter of 2018. For the year ended December 31, 2018, the Company recorded a $4.2 million net tax benefit, which resulted in a 0.6% decrease in the effective tax rate, as an adjustment to the provisional estimates as a result of additional regulatory guidance and changes in interpretations and assumptions the Company has made as a result of the Tax Reform Act.

Unrecognized Tax Benefits

The Company files federal, state, local and foreign tax returns. The Company is routinely audited by the tax authorities in these jurisdictions, and a number of audits are currently underway. It is reasonably possible during the next twelve months that uncertain tax positions may be settled, which could result in a decrease in the gross amount of unrecognized tax benefits. This decrease may result in an income tax benefit. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $15.3 million. The Company is no longer subject to examinations of its federal income tax returns through 2015. All significant state, local and international matters have been concluded through 2012. The Company believes adequate provision has been made for all income tax uncertainties.

The following table is a reconciliation of the beginning and ending balances of the Company’s unrecognized tax benefits:


	Total
Unrecognized tax benefits at January 1, 2017	$	70,315
Additions based on tax positions related to the current year	14,466
Additions for tax positions of prior years	4,105
Reductions for tax positions of prior years	(9,653)
Cash settlements	(954)
Lapse of statutes	(10,245)
Unrecognized tax benefits at December 31, 2017	68,034
Additions based on tax positions related to the current year	15,580
Additions for tax positions of prior years	29,637
Reductions for tax positions of prior years	(5,226)
Cash settlements	(7,345)
Lapse of statutes	(7,219)
Unrecognized tax benefits at December 31, 2018	93,461
Additions based on tax positions related to the current year	4,493
Additions for tax positions of prior years	6,668
Reductions for tax positions of prior years	(9,217)
Cash settlements	(922)
Lapse of statutes	(11,269)
Unrecognized tax benefits at December 31, 2019 ⁽¹⁾	$	83,214

⁽¹⁾If recognized, the net amount of potential tax benefits that would impact the Company’s effective tax rate is $75.5 million. During the years ended December 31, 2019, 2018 and 2017, the Company recorded (income) expense of $(0.6) million, $2.4 million and $(0.5) million, respectively, as a component of provision for income taxes related to the accrued interest and penalties on unrecognized tax benefits. The Company had accrued interest and penalties of $17.8 million at December 31, 2019 and $18.8 million at December 31, 2018, which are not included in the above table.