Income Taxes

9 Months Ended

Sep. 30, 2020

The following table presents components of income tax expense for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
(in thousands, except percentages)	2020		2019		2020		2019
Income tax based on income from continuing operations, at estimated tax rates of 32.2% and 27.5%, respectively	$	12,666	$	14,662	$	34,550	$	38,256
Provision for change in estimated tax rate	(1,196)		(692)		—		—
Income tax before discrete items	11,470		13,970		34,550		38,256
Discrete tax expense:
Exercise of U.S. stock options	(7)		(55)		(7)		(111)
Adjustments to prior period tax liabilities	(1,750)		(160)		(983)		187
Provision for/resolution of tax audits and contingencies, net	(46)		(558)		(1,779)		(2,785)
Out-of-period adjustments to deferred tax assets	—		—		1,830		(1,366)
Tax effect of non-deductible foreign exchange loss on intercompany loan	3		—		3,658		—
Changes in valuation allowance	8		(11)		230		830
Other	8		8		5		64
Total income tax expense	$	9,686	$	13,194	$	37,504	$	35,075

The third quarter estimated annual effective tax rate on continuing operations was 32.2 percent in 2020, compared to 27.5 percent for the same period in 2019.

Income tax expense for the quarter was determined in accordance with ASC 740-270, Income Taxes – Interim Reporting. Under this method, loss jurisdictions, which cannot recognize a tax benefit with regard to their generated losses, are excluded from the annual effective tax rate (AETR) calculation and their taxes will be recorded discretely in each quarter.

The Company’s tax rate is affected by recurring items such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete items in the respective quarter. The higher estimated income tax rate is primarily driven by an increase in losses in a foreign jurisdiction that is excluded in calculating the quarterly income tax provision.

The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be indefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner. The Company has targeted for repatriation $156.4 million of current year and prior year earnings of the Company’s foreign operations. If these earnings were repatriated, the Company would be subject to foreign withholding taxes of $2.8 million and state income taxes of $2.6 million which have already been recorded.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2007 to 2020. The Company is currently under audit in U.S and non-U.S. tax jurisdictions, including but not limited to Canada and

the state of Utah. In the first quarter of 2020, the Company recorded a $1.8 million out-of-period immaterial charge related to developments in ongoing tax audits, which resulted in a corresponding decrease in deferred tax assets. In the second quarter of 2020, a U.S. state tax audit was settled, resulting in a net tax benefit of $1.5 million in that quarter.

In 2020, the Company recorded a net tax benefit of $1.0 million related to the adjustment of prior period liabilities. In the third and second quarter of 2020, respectively, the Company recorded a net tax benefit of $1.8 million related to U.S. adjustments of prior period liabilities, and deferred tax expense of $1.0 million due to an adjustment of net operating losses related to settled audits. Additionally, the Company recorded a $0.2 million valuation allowance on the net deferred tax assets of one of its foreign subsidiaries in the second quarter of 2020.

One of the Company’s subsidiaries in Mexico has an intercompany loan payable in U.S. dollars. As a result of the weaker Mexican peso, the Company recorded a revaluation loss of $12.7 million in the first quarter of 2020. That foreign currency loss is not deductible under Mexican tax law, which had a $3.7 million discrete tax impact in the first quarter of 2020. This intercompany loan was designated as a long-term loan as of April 1, 2020 and, as such, the subsequent foreign currency impacts are not recorded in the income statement.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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