Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

Note 6—Income Taxes

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

	Year Ended December 31,
	2020		2019		2018
Income before income taxes:
United States	$	310.3	$	318.6	$	194.1
Foreign		1,216.3		1,177.3		1,394.3
	$	1,526.6	$	1,495.9	$	1,588.4
Current tax provision (benefit):
United States	$	(5.7)	$	22.9	$	37.8
Foreign		288.2		293.8		345.7
		282.5		316.7		383.5
Deferred tax provision (benefit):
United States		43.0		35.8		27.8
Foreign		(12.2)		(20.6)		(39.8)
		30.8		15.2		(12.0)
Total provision for income taxes	$	313.3	$	331.9	$	371.5

The United States federal government enacted the Tax Cuts and Jobs Act (“Tax Act”) in 2017. Consistent with the requirements of ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, the Company recorded a provisional charge (“Tax Act Charge”) in 2017 and completed its

accounting for the Tax Act within the one-year measurement period. As such, the Company recorded an income tax benefit of $14.5 in 2018. In addition, in 2017, the Company recorded a transition tax (“Transition Tax”) of $259.4 related to the deemed repatriation of the accumulated unremitted earnings and profits of the Company’s foreign subsidiaries. In the third quarter of 2020, the Company paid the third annual installment of the Transition Tax, net of applicable tax credits and deductions. The Company will pay the balance of the Transition Tax, net of applicable tax credits and deductions, over the remainder of the eight-year period ending 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, 2020 and 2019. In addition, as a result of the Tax Act, the Company also recorded a tax charge, in 2017, related to changes in the Company’s permanent reinvestment assertion, 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, 2020, the Company had $165.0 of foreign tax loss carryforwards, $78.6 of U.S. state tax loss carryforwards and $8.2 of U.S. federal tax loss carryforwards, of which $126.1, $78.6 and $8.2, respectively, will either expire or be refunded at various dates through 2040 and the balance can be carried forward indefinitely.  The Company had $3.2 of foreign tax credit carryforwards, $15.4 of U.S. state tax credit carryforwards, and $0.4 of U.S. federal tax credit carryforwards, of which $3.2, $9.6, and $0.4, respectively, will either expire or be refunded at various dates through 2040 and the balance can be carried forward indefinitely.

A valuation allowance of $40.1 and $35.2 at December 31, 2020 and 2019, respectively, has been recorded which relates primarily to the U.S. 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 2020 was an increase of $4.9, which related primarily to U.S. state and foreign net operating loss carryforwards. The net change in the valuation allowance for deferred tax assets in 2019 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,
	2020		2019		2018
U.S. statutory federal tax rate	21.0	%	21.0	%	21.0	%
State and local taxes	0.8		0.7		0.6
Foreign earnings and dividends taxed at different rates	2.1		1.4		2.3
U.S. tax on foreign income	0.8		1.2		1.8
Tax Act - transition tax	—		—		0.7
Tax Act - change in indefinite reinvestment assertion	—		—		(1.6)
Excess tax benefits related to stock-based compensation	(2.8)		(2.5)		(1.2)
Settlements of refund claims in foreign jurisdictions including related deferred taxes	(1.3)		—		—
Other, net	(0.1)		0.4		(0.2)
Effective tax rate	20.5	%	22.2	%	23.4	%

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

	December 31,
	2020		2019
Deferred tax assets relating to:
Accrued liabilities and reserves	$	54.2	$	41.8
Operating lease liabilities		52.7		45.7
Operating loss and tax credit carryforwards		62.8		81.3
Pensions		36.4		26.2
Inventories		49.0		39.3
Employee benefits		35.2		36.0
Total deferred tax assets		290.3		270.3
Valuation allowance		(40.1)		(35.2)
Total deferred tax assets, net of valuation allowances		250.2		235.1
Deferred tax liabilities relating to:
Goodwill		202.1		179.5
Depreciation and amortization		81.5		74.1
Operating lease right-of-use assets		52.7		45.7
Unremitted foreign earnings		114.9		115.8
Total deferred tax liabilities		451.2		415.1
Net deferred tax liability	$	201.0	$	180.0
Classification of deferred tax assets and liabilities, as reflected on the Consolidated Balance Sheets:
Other long-term assets	$	98.1	$	80.4
Deferred income taxes		299.1		260.4
Net deferred tax liability, long-term	$	201.0	$	180.0

A tabular reconciliation of the gross amounts of unrecognized tax benefits excluding interest and penalties at the beginning and end of the year for 2020, 2019 and 2018 is shown below.

	2020		2019		2018
Unrecognized tax benefits as of January 1	$	159.1	$	130.5	$	127.3
Gross increases for tax positions in prior periods		5.4		20.9		18.9
Gross increases for tax positions in current period		16.4		9.0		2.0
Settlements		(38.8)		—		(14.1)
Lapse of statutes of limitations		(6.8)		(1.3)		(3.6)
Unrecognized tax benefits as of December 31	$	135.3	$	159.1	$	130.5

The Company includes estimated interest and penalties related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2020, 2019 and 2018, the provision for income taxes included a net expense of $2.8, $4.4 and $1.1, respectively, in estimated interest and penalties. As of December 31, 2020, 2019 and 2018, the liability for unrecognized tax benefits included $39.2, $42.2 and $40.5, 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 2017 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, 2020 and 2019, the amount of unrecognized tax benefits, including penalties and interest, which if recognized would impact the effective tax rate, was approximately $169.3 and $171.0, respectively. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the 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 $24.6.