Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.10.0.1
Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
11. Income Taxes
Income before provision for income taxes and equity income is comprised of the following:
 
Year Ended December 31,
(in millions)
2018
 
2017
 
2016
Domestic
$
69.6

 
$
77.4

 
$
40.8

Foreign
6.3

 
8.2

 
8.7

Total
$
75.9

 
$
85.6

 
$
49.5


The provision for income taxes is summarized as follows:
 
Year Ended December 31,
(in millions)
2018
 
2017
 
2016
Current tax provision
 
 
 
 
 
U.S. federal
$
7.0

 
$
11.2

 
$
8.0

State and local
3.3

 
1.8

 
1.2

Foreign
1.7

 
2.9

 
2.8

Total current
12.0

 
15.9

 
12.0

Deferred tax provision
 
 
 
 
 
U.S. federal
3.9

 
16.7

 
4.1

State and local
1.3

 
1.6

 
0.8

Foreign
0.1

 
(0.3
)
 
(0.2
)
Total deferred
5.3

 
18.0

 
4.7

Total provision
$
17.3

 
$
33.9

 
$
16.7


The effective income tax rate differs from the amount determined by applying the applicable U.S. statutory federal income tax rate to pretax results primarily as a result of the following:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Statutory provision rate
21.0
 %
 
35.0
 %
 
35.0
 %
Permanent differences and other items
 
 
 
 
 
State tax provision
4.3
 %
 
2.6
 %
 
2.4
 %
Section 199 manufacturing credit
 %
 
(2.6
)%
 
(2.0
)%
Incremental tax effects of foreign earnings
0.7
 %
 
(0.4
)%
 
(0.2
)%
Valuation allowance
(0.8
)%
 
 %
 
(2.0
)%
Stock compensation
0.4
 %
 
(3.2
)%
 
 %
Tax reform adjustment
 %
 
8.6
 %
 
 %
Return-to-provision adjustment
(2.5
)%
 
0.6
 %
 
0.3
 %
Other
(0.3
)%
 
(1.0
)%
 
0.2
 %
Effective income tax rate
22.8
 %
 
39.6
 %
 
33.7
 %

Deferred tax assets and liabilities are comprised of the following:
 
As of December 31,
(in millions)
2018
 
2017
Deferred tax assets
 
 
 
Inventory
$
26.2

 
$
27.9

Accounts receivable
1.0

 
1.4

UNICAP adjustment
2.0

 
1.9

Derivative contracts
1.5

 
0.3

Other
4.3

 
5.0

Valuation allowance

 
(0.6
)
Total deferred tax assets, net of valuation allowance
$
35.0

 
$
35.9

Deferred tax liabilities
 
 
 
Fixed assets and intangibles
$
21.0

 
$
16.8

Accruals and other reserves
0.2

 
0.2

Investments in foreign entities
1.5

 
1.3

Financing fees
1.0

 
1.5

Total deferred tax liabilities
23.7

 
19.8

Net deferred tax asset
$
11.3

 
$
16.1


At December 31, 2018 and 2017, our deferred tax assets include $15.7 million and $16.5 million, respectively, related to the impact of the purchase price allocations to LIFO inventories for tax purposes on the bargain purchase gain on the original asset acquisition from Olin Corporation on November 19, 2007.
At December 31, 2018, we had a foreign tax credit carryforward of $0.8 million which can be utilized through 2027.
Deferred tax assets are recorded for the estimated future benefit of foreign tax credits and other temporary differences to the extent we believe these assets will be realized. A valuation allowance is recorded when we cannot reach the conclusion that it is more likely than not that the deferred tax assets will be realized. In 2017, we established a valuation allowance against our foreign tax credits of $0.6 million. In 2018, we released the $0.6 million valuation allowance on foreign tax credits based on new regulations and future projections.
We have established a deferred tax liability for foreign withholding and U.S. state income taxes of $1.5 million on earnings of foreign consolidated subsidiaries expected to be repatriated. We consider any excess of the amount for financial reporting over the tax basis of our investment in our foreign subsidiaries to be indefinitely reinvested. At this time, the determination of deferred tax liabilities on this amount is not practicable.
Uncertain Tax Positions
We are subject to income taxation in several jurisdictions around the world. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, we believe we have adequately reserved for any potential tax exposures at December 31, 2018. Our U.S. federal returns for the period ended December 31, 2015 and all subsequent periods remain open for audit. The majority of state returns for the period ended December 31, 2014 and all subsequent periods remain open for audit.
At December 31, 2018 and 2017, we had $23.9 million and $25.2 million, respectively, of unrecognized tax benefits, of which $8.2 million and $8.5 million, respectively, would impact the effective tax rate, if recognized. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for income taxes in the accompanying consolidated statements of operations. There was $2.5 million and $2.1 million of accrued interest and penalties as of December 31, 2018 and 2017, respectively. Our liability for uncertain tax positions, including accrued interest and penalties, of $26.4 million and $27.3 million at December 31, 2018 and 2017, respectively, are presented in other noncurrent liabilities in the accompanying consolidated balance sheets.
A reconciliation of the summary of activity of our uncertain tax positions is summarized as follows:
(in millions)
 
Balance at January 1, 2017
$
25.2

Additions for tax positions related to prior years

Reductions for tax positions related to prior years

Reductions due to tax settlements

Reductions due to tax statute of limitations

Balance at December 31, 2017
$
25.2

Additions for tax positions related to prior years

Reductions for tax positions related to prior years
(1.3
)
Reductions due to tax settlements

Reductions due to tax statute of limitations

Balance at December 31, 2018
$
23.9


2017 Tax Act
On December 22, 2017, the Tax Act was signed into law. The Tax Act made broad and complex changes to the U.S. tax code including, but not limited to: (1) lowering of the U.S. federal corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, (2) accelerated expensing of qualified capital investments for a specific period, and (3) transition from a worldwide to a territorial tax system which will require companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries that is payable over eight years.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. We utilized the approach outlined in SAB 118 to record provisional estimates for the Deemed Repatriation Transition Tax (the “Transition Tax”) in 2017.
The Transition Tax is a tax on certain previously untaxed accumulated and current earnings and profits (“E&P”) of our foreign subsidiaries. We were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax obligation of $1.0 million, net of foreign tax credits, for the year ended December 31, 2017. After further analysis, we recognized an additional measurement-period adjustment of $0.1 million during 2018, resulting in a total Transition Tax obligation of $1.1 million.
The Act reduced the corporate tax rate to 21.0%, effective January 1, 2018. We were able to reasonably estimate a decrease to our deferred tax asset of $7.0 million for the year ended December 31, 2017. On the basis of tax accounting method changes made with the filing of the 2017 tax return, we recognized an additional return-to-provision adjustment of $(2.0) million during 2018, resulting in a decrease to our deferred tax assets of $5.0 million.
We must assess whether any Uncertain Tax Positions should be recorded as a result of the Tax Act. We have completed this assessment and did not record any Uncertain Tax Positions as a result of the Tax Act.
The Act also included changes to the foreign tax credit regulations, including the addition of new tax credit buckets for general, foreign branch, and Global Intangible Low Taxed Income (GILTI) tax credits. This included an opportunity to allocate past credit carry-forwards specifically to the foreign branch bucket. Based on the new regulations and future projections, we were able to release the valuation allowance of $0.6 million that was recorded on the books at December 31, 2017.
Beginning January 1, 2018, the Tax Reform Act amended certain aspects of Section 162(m) (Section 162(m) generally disallows a tax deduction for annual compensation paid to “covered employees” in excess of $1.0 million) including eliminating an exception to the deduction limited for “qualified performance-based compensation.” The deductibility of executive compensation, which has now been determined to be complete, resulted in recording an additional tax expense of $0.7 million.
We consider current earnings and the amount of previously taxed income (PTI), related to the deemed repatriated transition tax mentioned above, to not be permanently reinvested. As such, we have recorded a deferred tax liability for future taxes associated with a repatriation of those funds. Any outside basis difference related to our foreign investment above the PTI is treated as permanently reinvested.
The Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred.
We believe that our accounting for the income tax effects of the Act is complete as of December 31, 2018.