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Income Taxes

12 Months Ended

Dec. 31, 2019

Note 6—Income Taxes

The components of income before income taxes and the provision for income taxes are as follows:


	Year Ended December 31,
	2019		2018		2017
Income before income taxes:
United States	$	318.6	$	194.1	$	153.0
Foreign		1,177.3		1,394.3		1,199.4
	$	1,495.9	$	1,588.4	$	1,352.4
Current tax provision:
United States	$	22.9	$	37.8	$	200.0
Foreign		293.8		345.7		305.4
		316.7		383.5		505.4
Deferred tax provision (benefit):
United States		35.8		27.8		51.0
Foreign		(20.6)		(39.8)		135.3
		15.2		(12.0)		186.3
Total provision for income taxes	$	331.9	$	371.5	$	691.7

As described in Note 1 herein, the United States federal government enacted the Tax Act in 2017. The Tax Act provides for a transition tax on the accumulated unremitted foreign earnings and profits of the Company’s foreign subsidiaries (“Transition Tax”) and a reduction of the U.S. federal corporate income tax rate from 35% to 21%, among other changes. In 2017, the Company recorded a provisional income tax charge of $398.5 (“Tax Act Charge”) that was comprised of (i) the Transition Tax of $259.4, (ii) a charge of $176.6 related to changes in the Company’s permanent reinvestment assertion with regards to prior accumulated unremitted earnings from certain foreign subsidiaries, partially offset by (iii) a tax benefit of $37.5 associated with the remeasurement of the Company’s U.S. net deferred tax liabilities due to the U.S. federal corporate tax rate reduction, all of which was included in the 2017 provision and reflected the then estimated impacts of the Tax Act as previously disclosed. The Company analyzed guidance and technical interpretations issued in 2018 related to the provisions of the Tax Act, and refined, analyzed and updated the underlying data, computations and assumptions used to prepare the Tax Act Charge. As a result, the Company completed its accounting within the one-year measurement period and recorded an income tax benefit of $14.5 in 2018.

The Company paid its second annual installment of the Transition Tax in the second quarter of 2019. The Company will pay the Transition Tax, net of applicable tax credits and deductions, over an eight-year period until 2025, as permitted under the Tax Act. The current and long-term portions of the Transition Tax are recorded in Accrued income taxes and Other long-term liabilities, respectively, on the Consolidated Balance Sheets as of December 31, 2019 and 2018. The Company also recorded a tax charge, related to changes in the Company’s permanent reinvestment assertion, in 2017 due to our intention to repatriate prior accumulated unremitted earnings from certain foreign subsidiaries over time. We will pay such taxes when those respective earnings are repatriated.

At December 31, 2019, the Company had $146.4 of foreign tax loss carryforwards, $56.0 of U.S. state tax loss carryforwards and $0.7 of U.S. federal tax loss carryforwards, of which $95.8, $56.0 and $0.7, respectively, will either expire or be refunded at various dates through 2039 and the balance can be carried forward indefinitely. The Company had $3.8 of foreign tax credit carryforwards and $13.7 of U.S. state tax credit carryforwards, of which $3.8 and $7.9, respectively, will either expire or be refunded at various dates through 2039 and the balance can be carried forward indefinitely.

A valuation allowance of $35.2 and $34.7 at December 31, 2019 and 2018, respectively, has been recorded which relates primarily to the U.S. federal and state and foreign net operating loss carryforwards and U.S. state tax credits. The net change in the valuation allowance for deferred tax assets in both 2019 and 2018 was not material.

Differences between the U.S. statutory federal tax rate and the Company’s effective income tax rate are analyzed below:


	Year Ended December 31,
	2019		2018		2017
U.S. statutory federal tax rate	21.0	%	21.0	%	35.0	%
State and local taxes	0.7		0.6		0.2
Foreign earnings and dividends taxed at different rates	1.4		2.3		(9.1)
U.S. tax on foreign income	1.2		1.8		—
Tax Act - transition tax	—		0.7		19.2
Tax Act - remeasurement of deferred tax liabilities, net	—		—		(2.8)
Tax Act - change in indefinite reinvestment assertion	—		(1.6)		13.1
Excess tax benefits related to stock-based compensation	(2.5)		(1.2)		(4.9)
Other, net	0.4		(0.2)		0.4
Effective tax rate	22.2	%	23.4	%	51.1	%

The components of the Company’s deferred tax assets and liabilities are comprised of the following:


	December 31,
	2019		2018
Deferred tax assets relating to:
Accrued liabilities and reserves	$	41.8	$	39.1
Operating lease liabilities		45.7		—
Operating loss and tax credit carryforwards		81.3		81.5
Pensions		26.2		29.0
Inventories		39.3		40.4
Employee benefits		36.0		34.0
Total deferred tax assets		270.3		224.0
Valuation allowance		(35.2)		(34.7)
Total deferred tax assets, net of valuation allowances		235.1		189.3

Deferred tax liabilities relating to:
Goodwill		175.2		152.2
Depreciation and amortization		74.1		68.5
Operating lease right-of-use assets		45.7		—
Unremitted foreign earnings		115.8		141.3
Contingent consideration		4.3		4.3
Total deferred tax liabilities		415.1		366.3

Net deferred tax liability	$	180.0	$	177.0

Classification of deferred tax assets and liabilities, as reflected on the Consolidated Balance Sheets:
Other long-term assets	$	80.4	$	78.6
Deferred income taxes		260.4		255.6
Net deferred tax liability, long-term	$	180.0	$	177.0

A tabular reconciliation of the gross amounts of unrecognized tax benefits excluding interest and penalties at the beginning and end of the year for 2019, 2018 and 2017 is shown below.


	2019		2018		2017
Unrecognized tax benefits as of January 1	$	130.5	$	127.3	$	106.2
Gross increases for tax positions in prior periods		20.9		18.9		32.7
Gross increases for tax positions in current period		9.0		2.0		2.4
Settlements		—		(14.1)		(11.0)
Lapse of statutes of limitations		(1.3)		(3.6)		(3.0)
Unrecognized tax benefits as of December 31	$	159.1	$	130.5	$	127.3

The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2019, 2018 and 2017, the provision for income taxes included a net expense of $4.4, $1.1 and $3.7, respectively, in estimated interest and penalties. As of December 31, 2019, 2018 and 2017, the liability for unrecognized tax benefits included $42.2, $40.5 and $39.3, respectively, for tax-related interest and penalties.

The Company operates in the U.S. and numerous foreign taxable jurisdictions, and at any point in time has numerous audits underway at various stages of completion. With few exceptions, the Company is subject to income tax examinations by tax authorities for the years 2014 and after. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities and may not be fully sustained, despite the Company’s belief that the underlying tax positions are fully supportable. As of December 31, 2019 and 2018, the amount of unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $171.0 and $141.8, respectively. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and the closing of statutes of limitations. Based on information currently available, management anticipates that over the next twelve-month

period, audit activity could be completed and statutes of limitations may close relating to existing unrecognized tax benefits of approximately $42.3.