Income taxes

12 Months Ended

Dec. 31, 2019

The provision for taxes on income for the years ended December 31 consists of the following:


	2019		2018		2017
Pretax income
Domestic	$	217,098	$	225,442	$	168,180
Foreign	163,668		153,089		146,374
Total pretax income	$	380,766	$	378,531	$	314,554
Current
Federal	$	14,933	$	37,345	$	120,398
State	2,565		6,164		5,623
Foreign	45,911		38,648		40,328
Total current	$	63,409	$	82,157	$	166,349
Deferred
Federal	$	25,064	$	(5,571)	$	(16,797)
State	8,599		$	(738)	3,499
Foreign	(3,803)		(840)		(6,462)
Total deferred	$	29,860	$	(7,149)	$	(19,760)
Total taxes	$	93,269	$	75,008	$	146,589

Deferred tax (liabilities)/assets are comprised of the following at December 31:


	2019		2018
Property, plant and equipment	$	(91,207)	$	(102,007)
Intangibles	(134,868)		(178,883)
Leases	(79,332)		—
Gross deferred tax liabilities	$	(305,407)	$	(280,890)
Retiree health benefits	$	2,405	$	2,989
Foreign loss carryforwards	58,527		57,581
U.S. Federal loss and credit carryforwards	86,748		86,655
Capital loss carryforwards	2,703		2,757
Employee benefits	87,295		114,872
Leases	79,673		—
Accrued liabilities and other	63,700		102,349
Gross deferred tax assets	$	381,051	$	367,203
Valuation allowance on deferred tax assets	$	(105,347)	$	(103,289)
Total deferred taxes, net	$	(29,703)	$	(16,976)

The Company has total federal net operating loss carryforwards of approximately $77,200 remaining at December 31, 2019. These losses are limited based upon future taxable earnings of the respective entities and expire between 2030 and 2036. U.S. foreign tax credit carryforwards of approximately $70,400 exist at December 31, 2019 and expire in 2027. The Company is evaluating the feasibility of tax planning strategies which could allow a release of valuation allowance related to its foreign tax credits. A conclusion on this matter is expected to be reached in a subsequent quarter and it is reasonably possible that a benefit material to the Company's financial statements will be recognized at that time. Foreign subsidiary loss carryforwards of approximately $238,600 remain at December 31, 2019. Their use is limited to future taxable earnings of the respective foreign subsidiaries or filing groups. Approximately $212,400 of these loss carryforwards do not have an expiration date. Of the remaining foreign subsidiary loss carryforwards, approximately $9,200 expire within the next five years and approximately $17,000 expire between 2025 and 2039. Foreign subsidiary capital loss carryforwards of approximately $15,800 exist at December 31, 2019 and do not have an expiration date. Their use is limited to future capital gains of the respective foreign subsidiaries.

Approximately $12,300 in tax value of state loss carryforwards and $17,600 of state credit carryforwards remain at December 31, 2019. These state loss and credit carryforwards are limited based upon future taxable earnings of the respective entities and expire between 2020 and 2039. State loss and credit carryforwards are reflected at their "tax" value, as opposed to the amount of expected gross deduction due to the vastly different apportionment and statutory tax rates applicable to the various entities and states in which the Company files.

A reconciliation of the U.S. federal statutory tax rate to the actual consolidated tax expense is as follows:


	2019						2018						2017
Statutory tax rate	$	79,961	21.0	%	$	79,491	21.0	%	$	110,094	35.0	%
State income taxes, net of federal tax benefit	7,767		2.0	%	7,534		2.0	%	4,780		1.5	%
Valuation allowance	3,174		0.8	%	(14,902)		(3.9)	%	(3,333)		(1.1)	%
Tax examinations including change in reserve for uncertain tax positions	(1,639)		(0.4)	%	(3,076)		(0.8)	%	4,895		1.6	%
Adjustments to prior year deferred taxes	(499)		(0.1)	%	(1,899)		(0.5)	%	(1,415)		(0.4)	%
Foreign earnings taxed at other than U.S. rates	5,083		1.3	%	8,224		2.2	%	(16,233)		(5.2)	%
Disposition of business	—		—	%	—		—	%	537		0.2	%
Effect of tax rate changes	531		0.1	%	(6,218)		(1.6)	%	(22,183)		(7.1)	%
Deduction related to qualified production activities	—		—	%	341		0.1	%	(5,384)		(1.7)	%
Transition tax	—		—	%	3,647		1.0	%	76,933		24.5	%
Tax credits	(13,310)		(3.5)	%	(10,083)		(2.7)	%	(1,197)		(0.4)	%
Global intangible low-taxed income (GILTI)	12,340		3.2	%	12,878		3.4	%	—		—	%
Foreign-derived intangible income	(1,225)		(0.3)	%	(1,174)		(0.3)	%	—		—	%
Other, net	1,086		0.3	%	245		0.1	%	(905)		(0.3)	%
Total taxes	$	93,269	24.5	%	$	75,008	19.8	%	$	146,589	46.6	%

The total amount of the one-time transition tax on certain accumulated foreign earnings as part of the Tax Cuts and Jobs Act ("Tax Act") was $80,580. Under the provisions of the Tax Act, the transition tax is payable in installments over a period of 8 years. The first two installments were paid in 2018 and 2019 with the filing of the Company's 2017 and 2018 federal income tax returns. The liability is further reduced by the deemed overpayment of federal income taxes. The remaining obligation of $46,295 is included in "Other Liabilities" in the Company's Consolidated Balance Sheet at December 31, 2019.

The change in “Tax examinations including change in reserve for uncertain tax positions” is shown net of associated deferred taxes and accrued interest. Included in the change are net increases in reserves for uncertain tax positions of approximately $1,800, $1,700 and $2,600 for uncertain items arising in 2019, 2018 and 2017, respectively, combined with adjustments related to prior year items, primarily decreases related to lapses of statutes of limitations in international, federal and state jurisdictions as well as overall changes in facts and judgment. These adjustments decreased the reserve by a total of approximately $(3,500), $(2,900) and $(2,300) in 2019, 2018 and 2017, respectively.

In many of the countries in which the Company operates, earnings are taxed at rates different than in the U.S. This difference is reflected in “Foreign earnings taxed at other than U.S. rates” along with other items, if any, that impacted taxes on foreign earnings in the periods presented.

The benefits included in “Adjustments to prior year deferred taxes” for each of the years presented consist primarily of adjustments to deferred tax assets and liabilities arising from changes in estimates. The 2017 benefit included in the "Effect of tax rate changes for the year" relates primarily to changes made as a result of the Tax Act.

The 2018 benefits included in "Valuation allowance" includes a benefit of $16,100 related to the revaluation of the valuation allowance on foreign tax credits due to the Tax Act.

Of the $13,310 of tax credits for 2019, $10,484 directly offsets the $12,340 of GILTI tax, resulting in a net GILTI tax of $1,856. This net GILTI tax includes a favorable adjustment for revising the estimate of net GILTI tax due on the 2018 tax return of $2,097.

The Company maintains its assertion that its undistributed foreign earnings are indefinitely reinvested and, accordingly, has not recorded any deferred income tax liabilities that would be due if those earnings were repatriated. As of December 31, 2019, these undistributed earnings total $916,457. While the majority of these earnings have already been taxed in the U.S., a portion would be subject to foreign withholding and U.S. income taxes and credits if distributed. Computation of the deferred tax liability associated with unremitted earnings deemed to be indefinitely reinvested is not practicable at this time.

Reserve for uncertain tax positions

The following table sets forth the reconciliation of the gross amounts of unrecognized tax benefits at the beginning and ending of the periods indicated:


	2019		2018		2017
Gross Unrecognized Tax Benefits at January 1	$	14,400	$	17,100	$	17,700
Increases in prior years’ unrecognized tax benefits	—		—		700
Decreases in prior years’ unrecognized tax benefits	(1,300)		(700)		(2,400)
Increases in current year's unrecognized tax benefits	1,300		1,200		1,600
Decreases in unrecognized tax benefits from the lapse of statutes of limitations	(2,300)		(2,600)		(300)
Settlements	100		(600)		(200)
Gross Unrecognized Tax Benefits at December 31	$	12,200	$	14,400	$	17,100

Of the unrecognized tax benefit balances at December 31, 2019 and December 31, 2018, approximately $11,400 and $13,500, respectively, would have an impact on the effective tax rate if ultimately recognized.

Interest and/or penalties related to income taxes are reported as part of income tax expense. The Company had approximately $2,000 and $2,100 accrued for interest related to uncertain tax positions at December 31, 2019 and December 31, 2018, respectively. Tax expense for the year ended December 31, 2019, includes approximately $600 of interest expense, which is comprised of an interest benefit of approximately $900 related to the adjustment of prior years' items and interest expense of $1,500 on unrecognized tax benefits. The amounts listed above for

accrued interest and interest expense do not reflect the benefit of a federal tax deduction which would be available if the interest were ultimately paid. Activity for the year also included $700 of settlements.

The Company and/or its subsidiaries file federal, state and local income tax returns in the United States and various foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2012.

The Company believes that it is reasonably possible that the amount reserved for uncertain tax positions at December 31, 2019 will decrease by approximately $900 over the next twelve months. This change includes the anticipated increase in reserves related to existing positions offset by settlements of issues currently under examination and the release of existing reserves due to the expiration of the statute of limitations. Although the Company's estimate for the potential outcome for any uncertain tax issue is highly judgmental, management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which earnings or deductions are realized may differ from current estimates. As a result, the effective tax rate may fluctuate significantly on a quarterly basis. The Company has operations in many countries outside of the United States and the taxes paid on those earnings are subject to varying rates. The Company is not dependent upon the favorable benefit of any one jurisdiction to an extent that loss of those benefits would have a material effect on the Company's overall effective tax rate.

As previously disclosed, the Company received a draft Notice of Proposed Adjustment (“NOPA”) from the Internal Revenue Service (IRS) in February 2017 proposing an adjustment to income for the 2013 tax year based on the IRS's recharacterization of a distribution of an intercompany note made in 2012, and the subsequent repayment of the note over the course of 2013, as if it were a cash distribution made in 2013. In March 2017, the Company received a draft NOPA proposing penalties of $18,000 associated with the IRS’s recharacterization, as well as an Information Document Request (“IDR”) requesting the Company’s analysis of why such penalties should not apply. The Company responded to this IDR in April 2017. On October 5, 2017, the Company received two revised draft NOPAs proposing the same adjustments and penalties as in the prior NOPAs. On November 14, 2017, the Company received two final NOPAs proposing the same adjustments and penalties as in the prior draft NOPAs. On November 20, 2017, the Company received a Revenue Agent's Report (“RAR”) that included the same adjustments and penalties as in the prior NOPAs. At the time of the distribution in 2012, it was characterized as a dividend to the extent of earnings and profits, with the remainder as a tax free return of basis and taxable capital gain. As the IRS proposes to recharacterize the distribution, the entire distribution would be characterized as a dividend. The incremental tax liability associated with the income adjustment proposed in the RAR would be approximately $89,000, excluding interest and the previously referenced penalties. On January 22, 2018, the Company filed a protest to the proposed deficiency with the IRS. The Company received a rebuttal of its protest from the IRS on July 10, 2018, and the matter has now been referred to the Appeals Division of the IRS. The Company had a pre-conference hearing with IRS Appeals during the second quarter of 2019, and has had continued discussions with IRS Appeals throughout the year. If the matter is not resolved in IRS Appeals, the next step would be to file a petition in Tax Court. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with applicable tax laws and existing Treasury regulations, and that the Company's previously reported income tax provision for the year in question is appropriate. However, there can be no assurance that this matter will be resolved in the Company's favor. Regardless of whether the matter is resolved in the Company's favor, the final resolution of this matter could be expensive and time consuming to defend and/or settle. While the Company believes that the amount of tax originally paid with respect to this distribution is correct, and accordingly has not provided additional reserve for tax uncertainty, there is still a possibility that an adverse outcome of the matter could have a material effect on its results of operations and financial condition.