INCOME TAXES

12 Months Ended

Dec. 31, 2018

The sources of income before taxes, classified between domestic and foreign entities are as follows:



	2019		2018		2017
Domestic	$	784.4	$	937.7	$	838.8
Foreign	320.5		330.6		238.7
Total pre-tax income	$	1,104.9	$	1,268.3	$	1,077.5

The provisions (benefits) for income taxes in the accompanying consolidated statements of operations consist of the following:



	Years Ended December 31,
	2019			2018			2017
Current:
Federal	$	126.7		$	225.8		$	300.8
State	40.2			61.2			32.9
Foreign	83.9			64.3			53.0
	$	250.8		$	351.3		$	386.7
Deferred:
Federal	$	38.2		$	(2.5	)	$	(547.8	)
State	2.5			30.0			11.4
Foreign	(11.5		)	5.6			(5.7		)
	29.2			33.1			(542.1		)
	$	280.0		$	384.4		$	(155.4	)

A net benefit of $1.6, $10.2 and $16.9 in excess stock-based compensation was recorded directly to income tax expense in the years ended December 31, 2019, 2018 and 2017 respectively. The gross benefit was reduced by the Internal Revenue Code Section 162(m) disallowance for non-deductible stock compensation of $30.0, $5.9 and $2.0 for the years ended December 31, 2019, 2018, and 2017, respectively. The 2019 Section 162(m) disallowance includes the accelerated expensing of stock-based compensation for executive retirement.

The effective tax rates on earnings before income taxes are reconciled to statutory U.S. income tax rates as follows:



	Years Ended December 31,
	2019		2018		2017
Statutory U.S. rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net of U.S. Federal income tax effect	3.2		3.4		2.6
Foreign earnings taxed at lower rates than the statutory U.S. rate	(0.1	)	(0.3	)	(3.7	)
Restructuring and acquisition items	0.7		1.9		0.6
Share-based compensation	(0.1	)	(0.8	)	(1.6	)
Re-measurement of deferred taxes	—		2.4		(36.9	)
Deferred taxes on unremitted foreign earnings	—		—		(16.6	)
Repatriation tax	—		1.2		5.3
GILTI	1.1		1.0		—
Other	(0.5	)	0.5		0.9
Effective rate	25.3	%	30.3	%	(14.4	)%

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA), which made widespread changes to the Internal Revenue Code. The TCJA, among other things, reduced the U.S. federal corporate tax rate from 35.0% to 21.0% beginning January 1, 2018, requires companies to pay a repatriation tax on earnings of certain foreign subsidiaries that were previously not subject to U.S. tax, and created new income taxes on certain foreign sourced earnings. Also on December 22, 2017, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118 (SAB 118), which provided companies with additional guidance on how to account for the TCJA in its financial statements, allowing companies utilize a one year measurement period. At December 31, 2017, the Company had not completed the accounting for the tax effects of enactment of the TCJA; however, a reasonable estimate on the re-measurement of the Company's existing deferred tax balances, the deferred tax revaluation for unremitted foreign earnings, and the one-time repatriation tax was made. For these items, in accordance with SAB 118, a provisional net benefit was recognized, totaling $519.0, which is included as a component of income tax expense from continuing operations. The Company continued to assess the impact of TCJA throughout the 2018 calendar year and finalized the SAB 118 provisional estimate in the fourth quarter of 2018. For 2018, the Company recorded a total tax expense of $45.0, $14.8 related to the repatriation tax and $30.1 for the remeasurement of deferred taxes. Overall a net benefit of $474.0 was recorded for TCJA tax provisions effective as of the end of 2018. As additional regulations or guidance in relation to the TCJA are issued, the Company will analyze and record the necessary impacts during the quarter in which this occurs.

The TCJA includes provisions relating to global low-taxed intangible income (GILTI). The Company finalized its decision on accounting policy during the fourth quarter of 2018. The Company will account for GILTI as a periodic charge in the period it arises. The Company recorded $11.8 and $13.0 in 2019 and 2018 for GILTI, which is included as a component of income tax expense from continuing operations.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:



	December 31, 2019			December 31, 2018
Deferred tax assets:
Accounts receivable	$	16.9		$	13.9
Employee compensation and benefits	105.1			104.4
Operating lease liability	191.4			—
Acquisition and restructuring reserves	9.9			16.8
Tax loss carryforwards	207.1			209.0
Other	62.9			34.5
	593.3			378.6
Less: valuation allowance	(145.4		)	(156.9		)
Deferred tax assets, net of valuation allowance	$	447.9		$	221.7

Deferred tax liabilities:
Right of use asset	$	(177.3	)	$	—
Intangible assets	(910.5		)	(891.8		)
Property, plant and equipment	(194.6		)	(182.8		)
Other	(57.4		)	(31.4		)
Total gross deferred tax liabilities	(1,339.8		)	(1,106.0		)
Net deferred tax liabilities	$	(891.9	)	$	(884.3	)

The table below provides a rollforward of the valuation allowance.



	December 31, 2019			December 31, 2018		December 31, 2017
Beginning balance	$	156.9		$	153.5	$	31.3
Additions charged to expense	—			3.4		11.5
Reductions and other adjustments	(11.5		)	—		110.7
Ending balance	$	145.4		$	156.9	$	153.5

The Company has U.S. federal tax loss carryforwards of approximately $209.5, which expire periodically through 2036, as well as post 2017 carryovers of $6.1 that are limited to 80% of taxable income and have an indefinite carryover. The utilization of tax loss carryforwards is limited due to change of ownership rules; however, at this time, the Company expects to fully utilize substantially all U.S. federal tax loss carryforwards with the exception of approximately $3.9 for which a full valuation allowance has been provided. The Company has U.S. state tax loss carryforwards of $594.1, which also expire periodically through 2038, and on which a valuation allowance of $311.4 has been provided. In addition to federal and state tax loss carryforwards, the Company has other federal and state attribute carryforwards of $252.5. These attribute carryforwards have indefinite lives and a valuation allowance of $209.6. The Company has foreign tax loss carryforwards of $116.9 which have an indefinite life and on which a valuation allowance of $26.7 has been provided, as well as foreign tax loss carryforwards of $443.8 which expire in 2034 that have a full valuation allowance. In addition to the foreign net operating losses, the Company has a foreign capital loss carryforward of $6.9. The foreign capital loss carryforward has an indefinite life and has a full valuation allowance.

The valuation allowance decreased from $156.9 in 2018 to $145.4 in 2019 primarily due to issuance of final guidance for tax laws affecting anticipated utilization of state NOLs.

Unrecognized income tax benefits were $31.7 and $18.0 at December 31, 2019, and 2018, respectively. It is anticipated that the amount of the unrecognized income tax benefits will change within the next 12 months; however, these changes are not expected to have a significant impact on the results of operations, cash flows or the financial position of the Company.

The Company recognizes interest and penalties related to unrecognized income tax benefits in income tax expense. Accrued interest and penalties related to uncertain tax positions totaled $5.5 and $8.7 as of December 31, 2019, and 2018, respectively. During the years ended December 31, 2019, 2018 and 2017, the Company recognized $2.0, $1.8 and $2.3, respectively, in interest and penalties expense, which was offset by a benefit from reversing previous accruals for interest and penalties of $5.8, $0.5 and $4.3, respectively. During 2019, the Company paid interest of $0.2, and $0.8 was added to the accrued interest from the opening balance sheet of an acquisition.

The following table shows a reconciliation of the unrecognized income tax benefits, excluding interest and penalties, from uncertain tax positions for the years ended December 31, 2019, 2018 and 2017:



	2019			2018			2017
Balance as of January 1	$	18.0		$	19.5		$	18.4
Increase in reserve for tax positions taken in the current year	10.3			3.1			7.3
Increase in reserve from an acquisition's opening balance sheet	8.4			—			—
Decrease in reserve as a result of payments	(0.8		)	(4.6		)	—
Decrease in reserve as a result of lapses in the statute of limitations	(4.2		)	—			(6.2		)
Balance as of December 31	$	31.7		$	18.0		$	19.5

As of December 31, 2019, and 2018, $31.7 and $18.0, respectively, are the approximate amounts of unrecognized income tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.

The Company has substantially concluded all U.S. federal income tax matters for years through 2015. Substantially all material state and local and foreign income tax matters have been concluded through 2013 and 2010, respectively.

The Internal Revenue Service concluded the examination of Covance Inc.'s 2013 federal consolidated income tax return in the third quarter of 2018. There were no material changes as a result of the audit. The Company is appealing a Canada Revenue Agency assessment related to the 2014 income tax return. The Company believes adequate reserves have been established for the assessment. The Company has various state and foreign income tax examinations ongoing throughout the year. The Company believes adequate provisions have been recorded related to all open tax years.

As a result of the TCJA, the Company was effectively taxed on all of its previously unremitted foreign earnings. The TCJA also enacts a territorial tax system that allows, for the most part, tax-free repatriation of foreign earnings. The Company still considers the earnings of its foreign subsidiaries to be permanently reinvested, but if repatriation were to occur the Company would be required to accrue U.S. taxes, if any, and applicable withholding taxes as appropriate. The Company has unremitted earnings and profits of $601.4 and $490.1 that are permanently reinvested in its foreign subsidiaries as of December 31, 2019, and 2018, respectively. A determination of the amount of the unrecognized deferred tax liability related to these undistributed earnings is not practicable due to the complexity and variety of assumptions necessary based on the manner in which the undistributed earnings would be repatriated.