Income Taxes

12 Months Ended

Dec. 31, 2019

In 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted and we recorded a one-time net tax benefit of $315.9 million, which represented our provisional estimate of the impact of the Tax Act. This amount included a net benefit of $371.4 million associated with the remeasurement of our net deferred tax liability utilizing the lower U.S. tax rate. The Tax Act also imposed a one-time transitional repatriation tax of $57.2 million on certain undistributed earnings of our non-U.S. subsidiaries and affiliates. Additional guidance was issued by the Internal Revenue Service, the U.S. Department of the Treasury, and state taxing authorities during 2018 and, as a result, we recorded an adjustment to our provisional estimates. Specifically, in the fourth quarter of 2018, we recorded an additional net tax benefit of $16.5 million based on this clarifying guidance, the filing of our 2017 income tax returns, and the final determination of our foreign undistributed earnings and associated tax attributes. We do not expect to record any future material adjustments associated with the Tax Act.

Deferred income taxes are the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We expect at this time to continue reinvestment of foreign earnings outside the U.S. indefinitely. Consequently, our tax provision does not include any deferred tax costs that might arise due to book versus tax basis differences in investments in foreign subsidiaries. While the Tax Act provided an exemption from U.S. income taxation on future dividend distributions from foreign subsidiaries and affiliates, taxes may arise from withholding taxes or on foreign exchange or other gains recognized in connection with the basis differences in our investments in foreign subsidiaries. The ultimate tax cost of repatriating these earnings depends on tax laws in effect and other circumstances at the time of distribution.

The following table shows the significant components of our deferred tax liabilities and assets as of December 31 (in millions):



	2019			2018
Deferred Tax Liabilities
Book/tax basis difference due to depreciation	$	930.7		$	890.7
Right-of-use assets	103.9			—
Investments in affiliated companies	37.3			36.2
Lease accounting	39.8			12.2
Other	3.2			1.9
Total deferred tax liabilities	$	1,114.9		$	941.0
Deferred Tax Assets
Lease liability	108.6			—
Federal net operating loss	15.1			—
Alternative minimum tax credit	1.7			3.4
Foreign tax credit	0.8			0.2
Valuation allowance on foreign tax credit	(0.8		)	(0.2		)
State net operating loss	31.1			26.4
Valuation allowance on state net operating loss	(12.9		)	(12.6		)
Foreign net operating loss	2.2			2.1
Valuation allowance on foreign net operating loss	—			(0.3		)
Accruals not currently deductible for tax purposes	23.2			24.8
Allowance for losses	1.2			1.1
Pension and post-retirement benefits	16.8			17.8
Other	3.6			0.5
Total deferred tax assets	$	190.6		$	63.2
Net deferred tax liabilities	$	924.3		$	877.8

In 2019, we adopted ASU 2016-02 related to lease accounting. See "Note 2. Accounting Changes" for additional information. In accordance with this new accounting standard, we have recorded a deferred tax asset of $108.6 million related to our operating lease liabilities and a deferred tax liability of $103.9 million related to our operating lease right-of-use assets as of December 31, 2019. There was no tax-related impact to our income statement resulting from this change.

At December 31, 2019, we had a U.S. federal tax net operating loss carryforward of $72.1 million that can be carried forward indefinitely until the loss is fully recovered. Under the Tax Act, the utilization of net operating losses carried forward are limited to 80% of future taxable income. At December 31, 2019, we had an alternative minimum tax credit of $1.7 million, which may be utilized or refunded in the next year. We also had foreign tax credits of $0.8 million that expire after 2027. We have recorded a $0.8 million valuation allowance related to these credits, as we believe it is more likely than not that we will be unable to utilize them.

At December 31, 2019, we had state tax net operating losses of $31.1 million, net of federal benefits that are scheduled to expire at various times beginning in 2020. We have recorded a $12.9 million valuation allowance related to state net operating losses, as we believe it is more likely than not that we will be unable to use all of these losses. Additionally, we had foreign net operating losses of $2.2 million, which have an unlimited carryforward period. Our use of future operating losses depends on a number of variables, including the amount of taxable income and state apportionment factors for state net operating loss carryforwards.

At December 31, 2019, our gross liability for unrecognized tax benefits was $1.6 million. We recognize interest and penalties related to unrecognized tax benefits as income tax expense. We have not accrued any amounts for penalties. To the extent interest is not assessed or is otherwise reduced with respect to uncertain tax positions, we will record any required adjustment as a reduction of income tax expense.

We file one consolidated federal income tax return with our domestic subsidiaries in the U.S. jurisdiction, as well as tax returns in various state and foreign jurisdictions. As of December 31, 2019, all audits or statutes of limitations with respect to our federal tax returns for years prior to 2016 have been closed or expired. Additionally, we currently have no ongoing open federal or state income tax audits.

The following table shows the components of income before income taxes, excluding affiliates, for the years ended December 31 (in millions):



	2019		2018		2017
Domestic	$	77.0	$	108.9	$	124.5
Foreign	106.1		86.2		89.9
Total	$	183.1	$	195.1	$	214.4

The following table shows income taxes, excluding domestic and foreign affiliates, for the years ended December 31 (in millions):



	2019			2018			2017
Current
Domestic:
Federal	$	(1.7	)	$	(3.3	)	$	(1.1	)
State and local	(0.1		)	0.7			(0.1		)
	$	(1.8	)	$	(2.6	)	$	(1.2	)
Foreign	19.6			17.5			18.0
	$	17.8		$	14.9		$	16.8
Deferred
Domestic:
Federal	16.7			2.1			(270.0		)
State and local	4.0			8.7			1.2
	$	20.7		$	10.8		$	(268.8	)
Foreign	9.9			8.4			8.3
	$	30.6		$	19.2		$	(260.5	)
Income taxes	$	48.4		$	34.1		$	(243.7	)

The following table shows the differences between our effective income tax rate and the federal statutory income tax rate for the years ended December 31 (in millions):



	2019			2018			2017
Income taxes at federal statutory rate	$	38.5		$	41.0		$	75.0
Adjust for effect of:
Foreign tax credits	—			(1.4		)	—
Foreign earnings taxed at applicable statutory rates	9.8			7.8			(5.5		)
Foreign deferred tax rate change impact	(2.8		)	—			—
Corporate owned life insurance	(0.8		)	(1.0		)	(0.9		)
State income taxes	3.2			5.2			(0.5		)
State deferred tax rate change impact	—			—			5.0
Other	0.5			(1.0		)	(0.9		)
Tax Act:
Revaluation of deferred tax liabilities	—			9.4			(371.4		)
Transition tax on foreign earnings and profits	—			(23.1		)	57.2
Other	—			(2.8		)	(1.7		)
Total Tax Act impact	$	—		$	(16.5	)	$	(315.9	)
Income taxes	$	48.4		$	34.1		$	(243.7	)
Effective income tax rate	26.4		%	17.5		%	(113.7		)%

In 2019, our effective tax rate was 26.4% compared to 17.5% in 2018 and (113.7)% in 2017. The 2019 effective tax rate included a net benefit of $2.8 million associated with the reduction of the corporate income tax rate in Alberta, Canada. Excluding this item, our effective tax rate was 28.0%. The 2018 effective tax rate included a net benefit of $16.5 million associated with the finalization of the accounting for the income tax effects from the adoption of the Tax Act on our operations. This amount included a net expense of $9.4 million associated with the remeasurement of our net deferred tax liability based on the filing of our 2017 income tax returns. It also included a net benefit of $23.1 million with respect to the transitional repatriation tax, based on our final determination of all applicable tax attributes associated with the undistributed earnings of our non-U.S. subsidiaries and affiliates. The 2018 effective tax rate also reflected the net benefit of $1.4 million from the utilization of foreign tax credits. Excluding the impacts of the Tax Act adjustment and foreign tax credits, our effective tax rate was 26.7% in 2018. The 2017 effective tax rate reflected our provisional net tax benefit of $315.9 million, associated with the initial impact of the Tax Act. The 2017 effective tax rate also included an incremental deferred state income tax of $5.0 million associated with a change in our consolidated effective state tax rate. Excluding the impacts of the Tax Act adjustment and the deferred state income tax adjustment, our 2017 effective tax rate was 31.2%.

The adjustment for foreign earnings in each year reflected the impact of applicable statutory tax rates on income earned at our foreign subsidiaries. State income taxes are recognized on domestic pretax income or loss. The amount of our domestic income subject to state taxes relative to our total worldwide income impacts the effect state income tax has on our overall income tax rate.

Separately, our affiliates incurred income taxes of $18.0 million, $10.8 million, and $12.0 million respectively in 2019, 2018, and 2017.