6. Income Taxes

12 Months Ended

Dec. 31, 2018

6. INCOME TAXES

The U.S. and international components of income before taxes are as follows (in millions):



	Year Ended December 31,
	2018		2017		2016
U.S.	$	363.4	$	72.8	$	(38.5	)
International	149.3		25.0		80.1
Income before taxes	$	512.7	$	97.8	$	41.6

The provision for income taxes consists of the following (in millions):



	Year Ended December 31,
	2018			2017			2016
Current tax expense:
U.S. Federal	$	8.8		$	6.7		$	16.1
State	2.2			3.4			3.1
International	30.5			32.0			30.4
Current tax expense	41.5			42.1			49.6
Deferred tax expense (benefit):
U.S. Federal	114.0			(69.8		)	(42.4		)
State	6.6			4.3			(2.8		)
International	0.3			(19.3		)	(6.0		)
Deferred tax expense (benefit)	120.9			(84.8		)	(51.2		)
Non-current tax (benefit) expense	(15.4		)	18.3			17.2
Provision for (benefit from) income taxes	$	147.0		$	(24.4	)	$	15.6

The reconciliation between our effective tax rate on income before taxes and the statutory tax rate is as follows:



	Year Ended December 31,
	2018		2017		2016
U. S. statutory tax rate	21	%	35	%	35	%
Impact of foreign operations	(4	)	6		(15	)
Foreign dividends, net	—		—		(40	)
Research tax credits	(1	)	(4	)	(9	)
Nontaxable subsidies	—		(2	)	(4	)
Tax settlements and changes to unrecognized tax benefits	—		—		47
Goodwill impairment	6		1		11
Domestic manufacturing deduction	—		—		(4	)
Share-based compensation	(1	)	(5	)	3
Nondeductible executive compensation	—		2		3
Fines and penalties	—		—		2
Prior period adjustments	(1	)	—		4
U.S. taxation of foreign income	15		3		2
Acquisition-related	—		10		—
U.S. tax reform	(10	)	(71	)	—
State taxes	2		3		1
Other	2		(3	)	1
Provision for (benefit from) income taxes	29	%	(25	)%	37	%

On December 22, 2017, the U.S. enacted comprehensive tax legislation (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affect our 2017 financial statements, including the imposition of a one-time mandatory deemed repatriation tax (“Transition Tax”) on certain earnings accumulated offshore since 1986 and the reduction of the corporate tax rate from 35% to 21% for U.S. taxable income, resulting in a one-time remeasurement of U.S. federal deferred tax assets and liabilities.

Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification ("ASC") 740, "Income Taxes." We have completed our accounting for the income tax effects of the Tax Act, under SAB 118, as of December 31, 2018. As noted in our 2017 Annual Report, we were able to make reasonable estimates and provisionally recorded an income tax benefit of $70 million related to the Transition Tax and remeasurement of our U.S. federal deferred tax assets and liabilities. The final accounting for the Tax Act resulted in an additional income tax benefit of $49 million for a final income tax benefit of $119 million. This is comprised of $169 million tax benefit related to the remeasurement of U.S. federal deferred tax assets and liabilities, offset by a $50 million tax detriment for the Transition Tax. We elected to account for the tax effect of the Global Intangible Low-Taxed Income (“GILTI”) in the period in which it is incurred.

Our effective income tax rate was 29%, (25)% and 37% in 2018, 2017 and 2016, respectively. The effective tax rate for 2018 was driven by detriments due to non-deductible impairment charges and the taxation of our foreign operations, partially offset by a $49 million benefit recorded as a result of the completion of our accounting for the Tax Act under SAB 118. The effective tax rate for 2017 was driven by a $70 million benefit recorded as a provisional estimate of the accounting for the Tax Act. The effective tax rate for 2016 included additional tax liabilities for unrecognized tax benefits related to the non-deductibility of interest expense in our foreign jurisdictions.

Many jurisdictions in which we operate have statutory tax rates that differ from the U.S. statutory tax rate of 21%. Our effective tax rate is impacted, either favorably or unfavorably, by many factors including, but not limited to the jurisdictional mix of income before tax, changes to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and generation of tax credits.

Deferred tax assets and liabilities reflect the tax effects of losses, credits, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in millions):



	December 31,
	2018			2017
Deferred tax assets:
Bad debt, inventory and warranty accruals	$	21.7		$	28.6
Other post-employment benefits, vacation and other reserves	23.0			24.0
Tax credit and net operating loss carryforwards	75.3			73.3
Other	27.1			19.7
Total gross deferred tax assets	147.1			145.6
Valuation allowance	(70.8		)	(66.4		)
Total deferred tax assets	76.3			79.2
Deferred tax liabilities:
Property and equipment	40.1			33.5
Investments and intangible assets	540.6			219.1
Total deferred tax liabilities	580.7			252.6
Net deferred tax liabilities	$	(504.4	)	$	(173.4	)

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess our ability to realize our deferred tax assets and establish a valuation allowance if it is more likely than not that some portion, or all, of our deferred tax assets will not be realized. In assessing the realizability of our deferred tax assets, we weigh all available positive and negative evidence. Due to the weight of objectively verifiable negative evidence, we believe that it is more likely than not that our California and certain foreign deferred tax assets will not be realized as of December 31, 2018, and have maintained a valuation allowance on such deferred tax assets. The valuation allowance against our deferred tax assets in California and certain foreign jurisdictions increased by $4.4 million in 2018.

As of December 31, 2018, our foreign and California net operating loss carryforwards were approximately $205.0 million and $52.7 million, respectively. Of our foreign net operating losses, $118.8 million may be carried forward indefinitely. The majority of the remaining foreign net operating losses, if not utilized, will begin to expire in 2025. Our California net operating loss carryforwards, if not utilized, will begin to expire in 2029. As of December 31, 2018, our California research tax credit carryforwards were approximately $32.1 million and may be carried forward indefinitely.

Our income tax returns are audited by U.S. federal, state and foreign tax authorities. We are currently under examination by many of these tax authorities. The tax years open to examination include the years 2014 and forward for the U.S. and the years 2012 and forward for certain foreign jurisdictions including France, Germany, India and Switzerland. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We evaluate our exposures associated with our tax filing positions on a quarterly basis.

We record liabilities for unrecognized tax benefits related to uncertain tax positions. We do not believe any currently pending uncertain tax positions will have a material adverse effect on our consolidated financial statements, although an adverse resolution of one or more of these uncertain tax positions in any period may have a material impact on the results of operations for that period.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in millions):



	2018			2017			2016
Unrecognized tax benefits – January 1	$	54.9		$	21.1		$	11.9
Additions to tax positions related to prior years	0.6			1.3			10.4
Reductions to tax positions related to prior years	(20.2		)	(1.0		)	—
Additions to tax positions related to the current year	4.6			34.8			3.4
Settlements	(6.8		)	(0.2		)	(2.4		)
Lapse of statute of limitations	(1.1		)	(3.4		)	(2.3		)
Currency translation	(2.2		)	2.3			0.1
Unrecognized tax benefits – December 31	$	29.8		$	54.9		$	21.1

Bio-Rad recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. Related to the unrecognized tax benefits noted above, the cumulative amount of accrued interest and penalties as of December 31, 2018, 2017 and 2016, respectively was $9.5 million, $10.9 million and $11.8 million. Bio-Rad accrued interest and penalties of $(1.4) million, $(0.9) million, and $8.7 million in 2018, 2017, and 2016, respectively. The total unrecognized tax benefits and interest and penalties of $39.3 million in 2018 was partially offset by deferred tax assets of $1.6 million and prepaid taxes of $5.5 million, for a net amount of $32.2 million.

As of December 31, 2018, based on the expected outcome of certain examinations or as a result of the expiration of statutes of limitation for certain jurisdictions, we believe that within the next twelve months it is reasonably possible that our previously unrecognized tax benefits could decrease by approximately $3.1 million. Substantially all such amounts will impact our effective income tax rate if recognized.

It is generally our intention to repatriate certain foreign earnings to the extent that such repatriations are not restricted by local laws or accounting rules, and there are no substantial incremental costs. During the current year, we recorded approximately $6.7 million of deferred tax liability for the earnings of certain foreign jurisdictions that we may repatriate in the future. The determination of the amount of the unrecognized deferred tax liability for foreign earnings that are indefinitely reinvested is not practicable to estimate.