Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

7. Income Taxes

The following table presents components of income tax expense for the three months ended March 31, 2020 and 2019:

	Three months ended
	March 31,
(in thousands, except percentages)	2020	2019
Income tax based on income from continuing operations, at estimated tax rates of 36.5% and 29.4%, respectively	$7,309	$10,847
Income tax before discrete items	7,309	10,847
Discrete tax expense:
Exercise of U.S. stock options	-	(50)
Adjustments to prior period tax liabilities	(112)	194
Provision for/resolution of tax audits and contingencies, net	(244)	(2,232)
Out-of-period adjustments to deferred tax assets	1,830	(1,346)
Tax effect of non-deductible foreign exchange loss on intercompany loan	3,668	-
Other	3	63
Total income tax expense	$12,454	$7,476

The first-quarter estimated annual effective tax rate on continuing operations was 36.5 percent in 2020, compared to 29.4 percent for the same period in 2019.

Income tax expense for the quarter was computed 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 unusually higher estimated Q1 2020 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 $144 million of current year and prior year earnings of the Company’s foreign operations. If these earnings were distributed, the Company would be subject to foreign withholding taxes of $2.2 million and state income taxes of $2.4 million, which have already been recorded.

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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 New Hampshire, Canada and Italy. 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.

The Company’s subsidiary 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 led to a $3.7 million discrete tax charge in the first quarter of 2020.