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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | INCOME TAXES For each of the years ended December 31, 2017, 2016, and 2015 the tax data related to continuing operations is as follows:
| 2017 |  |  | 2016 |  |  | 2015 |
Income components: |  |  |  |  |
United States | $ | 89.2 |  |  | $ | 87.5 |  |  | $ | 159.3 |
International | 220.2 |  |  | 170.9 |  |  | 223.0 |
Income from continuing operations before income tax | 309.4 |  |  | 258.4 |  |  | 382.3 |
Income tax expense components: |  |  |  |  |
Current income tax expense (benefit): |  |  |  |  |
United States – federal | 7.7 |  |  | 4.3 |  |  | (8.5 | )
United States – state and local | 1.3 |  |  | (0.3 | ) |  | 0.1 |
International | 38.6 |  |  | 51.1 |  |  | 52.9 |
Total current income tax expense | 47.6 |  |  | 55.1 |  |  | 44.5 |
Deferred income tax expense components: |  |  |  |  |
United States – federal | 105.9 |  |  | 26.4 |  |  | 31.9 |
United States – state and local | 4.4 |  |  | (2.1 | ) |  | 6.0 |
International | 36.7 |  |  | (3.4 | ) |  | (12.3 | )
Total deferred income tax expense | 147.0 |  |  | 20.9 |  |  | 25.6 |
Income tax expense | $ | 194.6 |  |  | $ | 76.0 |  |  | $ | 70.1 |
Effective income tax rate | 62.9 | % |  | 29.4 | % |  | 18.3 | %
A reconciliation of the income tax expense for continuing operations from the U.S. statutory income tax rate to the effective income tax rate is as follows for each of the years ended December 31, 2017, 2016, and 2015:
| 2017 |  |  | 2016 |  |  | 2015 |
Tax provision at U.S. statutory rate | 35.0 | % |  | 35.0 | % |  | 35.0 | %
Federal deferred taxes remeasurement - Tax Act | 27.8 | % |  | — | % |  | — | %
One-time tax on foreign earnings - Tax Act | 18.8 | % |  | — | % |  | — | %
Foreign tax rate differential | (8.6 | )% |  | (3.5 | )% |  | (4.7 | )%
Tax exempt interest | (7.8 | )% |  | (5.2 | )% |  | (6.7 | )%
Valuation allowance on deferred tax assets | 7.2 | % |  | 1.4 | % |  | 3.3 | %
Tax on undistributed foreign earnings | (4.8 | )% |  | 4.9 | % |  | (5.6 | )%
U.S. permanent items | (2.2 | )% |  | (1.9 | )% |  | (1.0 | )%
Italy patent box prior year benefit | (1.1 | )% |  | — | % |  | — | %
Audit settlements and unrecognized tax benefits | (0.8 | )% |  | (5.2 | )% |  | (5.0 | )%
U.S. tax on foreign earnings | 0.3 | % |  | 4.7 | % |  | 3.8 | %
State and local income tax | 0.3 | % |  | (0.1 | )% |  | 1.0 | %
Foreign tax holiday | — | % |  | — | % |  | (1.1 | )%
Other adjustments | (1.2 | )% |  | (0.7 | )% |  | (0.7 | )%
Effective income tax rate | 62.9 | % |  | 29.4 | % |  | 18.3 | %
Our effective tax rate in 2017 includes the significant impact related to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) that was approved by Congress on December 20, 2017 and signed into law by the U.S. President on December 22, 2017. The Tax Act significantly changes the U.S. corporate income tax rules most of which are effective January 1, 2018. On December 22, 2017 the SEC issued guidance under Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions a company has made, additional regulatory guidance that may be issued, and actions a company may take as a result of the Tax Act. Quantifying the impact of the Tax Act is subject to guidance and regulations to be issued by the U.S. Treasury and possible changes to state tax laws. The Company is unable to compute with certainty the impact of the Tax Act on its financial statements. The Company has performed provisional computations of the impact of the Tax Act and has recorded the provisional amounts in its financial statements. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date. The Tax Act adopts a new system of taxation for taxing foreign source income by providing a 100% dividend received deduction for dividends received from foreign subsidiaries; however, it imposes a one-time tax on existing post-1986 earnings albeit at reduced tax rates. The Company has recognized the following provisional tax impacts related to deemed repatriated post-1986 foreign earnings and future distribution of these earnings to the U.S.
• | The Company’s provisional computations show that approximately $1.2 billion of the Company’s existing post-1986 foreign earnings to be subject to a one-time US tax.
• | The Company recorded one-time provisional U.S. tax expense of $57.9 on existing post-1986 foreign earnings, tax expense of $37.6 on undistributed foreign earnings, reflecting foreign withholding taxes, foreign and U.S. state income taxes on future distributions of such earnings.
• | The Company also reversed a previously recorded tax liability of $52.3 on undistributed foreign earnings that were previously considered not permanently reinvested in foreign countries.
The Company intends to distribute all post-1986 earnings to the U.S. in future years, and therefore is no longer asserting permanent reinvestment of these earnings outside the U.S. Further, the Company will provide for any U.S. state and foreign taxes on distributions of future earnings of its foreign subsidiaries as these earnings will not be considered permanently reinvested in the foreign countries. The Company has performed provisional computations and has not provided deferred taxes on its remaining excess of financial reporting over tax bases of investments in its foreign subsidiaries of approximately $218 that it intends to permanently reinvest outside the U.S. The Company anticipates that foreign earnings of $1.2 billion and future earnings of its foreign subsidiaries that are considered not permanently reinvested will be sufficient to meet its U.S. cash needs. In the event additional foreign funds are needed to support U.S. operations, and if U.S. tax has not already been previously provided, we would be required to accrue and pay additional U.S. taxes. The Tax Act reduced the U.S. corporate income tax rate to 21% from 35%. The Company has recorded tax expense of $86.0 in its consolidated financial statements for the year ended December 31, 2017 resulting from a decrease in its U.S. net deferred tax assets. The Tax Act limits deductibility of net interest expense and officer compensation, adopts certain additional rules to tax low-taxed foreign earnings and provides reduced tax rates for certain earnings from intangibles and export activities. The company continues to maintain approximately $3.6 of deferred tax assets on its books that may not be realizable due to new limitations under the Tax Act on the deductibility of officer’s compensation. The Company will wait for further guidance from the Internal Revenue Service before deciding on the realizability of these deferred tax assets. These new rules are applicable to the tax year 2018 and forward and the Company is in the process of evaluating their impact on its financial statements. We anticipate that negative impacts of the Tax Act will reduce the tax benefit resulting from the reduced U.S. corporate income tax rate. The Tax Act adopts a new rule “Global Intangible Low Taxed Income” (GILTI) that requires certain income of controlled foreign corporations to be subject to U.S. taxation. We are allowed under ASC 740 to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or (2) factoring such amounts into the Company’s measurement of its deferred taxes. Because of the complexity of these rules, and anticipated guidance from U.S. Treasury we will continue to evaluate the impact on the Company’s financial statements. Therefore, we have not recorded any deferred taxes related to GILTI and have not made a policy decision regarding whether to record deferred taxes on GILTI. Deferred tax assets and liabilities include the following:
| 2017 |  |  | 2016 |
Deferred Tax Assets: |  |  |
Loss carryforwards | $ | 165.5 |  |  | $ | 112.3 |
Asbestos | 118.7 |  |  | 209.8 |
Employee benefits | 70.8 |  |  | 98.9 |
Accruals | 51.3 |  |  | 74.8 |
Credit carryforwards | 5.7 |  |  | 50.7 |
Other | 23.1 |  |  | 21.2 |
Gross deferred tax assets | 435.1 |  |  | 567.7 |
Less: Valuation allowance | 170.0 |  |  | 113.3 |
Net deferred tax assets | $ | 265.1 |  |  | $ | 454.4 |
Deferred Tax Liabilities: |  |  |
Intangibles | $ | (45.4 | ) |  | $ | (68.3 | )
Undistributed earnings | (39.0 | ) |  | (52.3 | )
Accelerated depreciation | (31.8 | ) |  | (36.5 | )
Investment | (0.2 | ) |  | (0.4 | )
Total deferred tax liabilities | $ | (116.4 | ) |  | $ | (157.5 | )
Net deferred tax assets | $ | 148.7 |  |  | $ | 296.9 |
Deferred taxes are presented in the Consolidated Balance Sheets as follows:
| 2017 |  |  | 2016 |
Non-current assets | $ | 149.9 |  |  | $ | 297.4 |
Other non-current liabilities | (1.2 | ) |  | (0.5 | )
Net deferred tax assets | $ | 148.7 |  |  | $ | 296.9 |
The table included below provides a rollforward of our valuation allowance on net deferred income tax assets from December 31, 2014 to December 31, 2017.
| Federal |  |  | State |  |  | Foreign |  |  | Total |
DTA valuation allowance - December 31, 2014 | $ | — |  |  | $ | 45.0 |  |  | $ | 102.1 |  |  | $ | 147.1 |
Change in assessment | — |  |  | — |  |  | (7.4 | ) |  | (7.4 | )
Current year operations | — |  |  | (3.5 | ) |  | (0.5 | ) |  | (4.0 | )
DTA valuation allowance - December 31, 2015 | — |  |  | 41.5 |  |  | 94.2 |  |  | 135.7 |
Change in assessment | — |  |  | — |  |  | (0.3 | ) |  | (0.3 | )
Current year operations | — |  |  | 4.4 |  |  | (26.5 | ) |  | (22.1 | )
DTA valuation allowance - December 31, 2016 | — |  |  | 45.9 |  |  | 67.4 |  |  | 113.3 |
Current year operations | — |  |  | 26.5 |  |  | 30.2 |  |  | 56.7 |
DTA valuation allowance - December 31, 2017 | $ | — |  |  | $ | 72.4 |  |  | $ | 97.6 |  |  | $ | 170.0 |
The Company continues to maintain a valuation allowance against certain deferred tax assets attributable to state net operating losses and tax credits, and certain foreign net deferred tax assets primarily in Luxembourg, Germany, China and India which are not expected to be realized. We have the following tax attributes available for utilization at December 31, 2017:
Attribute | Amount |  |  | First Year of Expiration
U.S. federal net operating losses | $ | 0.1 |  |  | 12/31/2033
U.S. state net operating losses | $ | 1,326.2 |  |  | 12/31/2018
U.S. federal tax credits | $ | 0.2 |  |  | 12/31/2021
U.S. state tax credits | $ | 5.5 |  |  | 12/31/2020
Foreign net operating losses(a) | $ | 350.0 |  |  | 12/31/2018
(a) Included are approximately $228.1 of net operating loss carryforwards in Luxembourg as of December 31, 2017 that do not expire. Excess tax benefits related to stock-based compensation of $2.7 for 2017 were recorded as an income tax benefit in the statement of operations, whereas the 2016 and 2015 amounts of $3.2 and $3.4, respectively, were recorded as an adjustment to retained earnings in the balance sheet. The change in presentation is due to the January 1, 2017 adoption of ASU 2016-09 that simplified several aspects of the accounting for employee share-based payment transactions. The 2017 income tax benefit has been reflected in the caption “U.S. permanent items” within the effective tax rate reconciliation table. Uncertain Tax Positions We recognize income tax benefits from uncertain tax positions only if, based on the technical merits of the position, it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the Consolidated Financial Statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for each of the years ended December 31, 2017, 2016, and 2015 is as follows:
| 2017 |  |  | 2016 |  |  | 2015 |
Unrecognized tax benefits – January 1 | $ | 69.5 |  |  | $ | 87.6 |  |  | $ | 160.1 |
Additions for: |  |  |  |  |
Current year tax positions | 1.1 |  |  | 1.2 |  |  | 3.4 |
Prior year tax positions | — |  |  | 0.2 |  |  | 1.8 |
Assumed in acquisition | — |  |  | 0.2 |  |  | 1.9 |
Reductions for: |  |  |  |  |
Prior year tax positions | (12.7 | ) |  | (3.8 | ) |  | (56.6 | )
Expiration of statute of limitations | (5.8 | ) |  | (5.0 | ) |  | (4.0 | )
Settlements | (0.2 | ) |  | (10.9 | ) |  | (19.0 | )
Unrecognized tax benefits – December 31 | $ | 51.9 |  |  | $ | 69.5 |  |  | $ | 87.6 |
As of December 31, 2017, $24.7 and $2.5 of the unrecognized tax benefits would affect the effective tax rate for continuing operations and discontinued operations respectively, if realized. The Company operates in various tax jurisdictions and is subject to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including Canada, China, Germany, Hong Kong, Italy, Korea, Mexico, the U.S. and Venezuela. The calculation of our tax liability for unrecognized tax benefits includes dealing with uncertainties in the application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit. Over the next 12 months, the net amount of the tax liability for unrecognized tax benefits in foreign and domestic jurisdictions could change by approximately $16 due to changes in audit status, expiration of statutes of limitations and other events. The settlement of any future examinations could result in changes in the amounts attributable to the Company under its existing Tax Matters Agreement with Exelis and Xylem. The following table summarizes the earliest open tax years by major jurisdiction as of December 31, 2017:
Jurisdiction | Earliest Open Year
China | 2012
Czech Republic | 2011
Germany | 2010
Italy | 2005
Korea | 2012
Luxembourg | 2012
Mexico | 2012
United States | 2014
We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated Statements of Operations. During 2017, 2016, and 2015 we recognized a net interest benefit of $2.4, $2.9, and $5.7, respectively, related to tax matters. We had $4.1, $6.8, and $9.8 of interest expense accrued from continuing and discontinued operations related to tax matters as of December 31, 2017, 2016, and 2015, respectively. Tax Matters Agreement On October 25, 2011, we entered into a Tax Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of the companies after the 2011 spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. Exelis and Xylem have liability with ITT to the U.S. Internal Revenue Service (IRS) for the consolidated U.S. Federal income taxes of the ITT consolidated group relating to the taxable periods in which Exelis and Xylem were part of that group. During 2015, the Company settled the U.S. income tax audit for tax years 2009 to 2011. Pursuant to the Tax Matters Agreement, the Company was entitled to reimbursement for a portion of the tax liability and recorded an aggregate receivable of $14.8 from Exelis and Xylem as of December 31, 2015. During 2016, ITT collected the receivables from Exelis and Xylem. Exelis reimbursed ITT for an additional $1.5 of Tax Matters Agreement balances related to compliance and audit service fees and U.S. state refunds. The settlement of future examinations in state or foreign jurisdictions and additional audit service fees may result in changes in amounts attributable to us through the Tax Matters Agreement entered into with Exelis and Xylem. Currently we cannot reasonably estimate the amount of such changes.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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