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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] |
Income Taxes | INCOME TAXES We generated losses of $115.1 million, profits of $6.3 million and losses of $151.6 million from continuing operations before income taxes in the U.S. and losses of $423.8 million and $202.3 million and profits of $1.1 billion from continuing operations before income taxes in non-U.S. jurisdictions for the years ended December 31, 2018, 2017 and 2016, respectively. The following table summarizes components of our provision for income taxes from continuing operations for each of the years in the three-year period ended December 31, 2018 (in millions):
| 2018 |  | 2017 |  | 2016
Current income tax (benefit) expense: |  |  |  |  |  |  |  |
U.S. | $ | (19.9 | ) |  | $ | (2.2 | ) |  | $ | (6.6 | )
Non-U.S. | 52.9 |  |  | 56.4 |  |  | 86.4 |
| 33.0 |  |  | 54.2 |  |  | 79.8 |
Deferred income tax expense: |  |  |  |  |  |  |  |
U.S. | 52.9 |  |  | 36.0 |  |  | 15.9 |
Non-U.S. | 3.7 |  |  | 19.0 |  |  | 12.8 |
| 56.6 |  |  | 55.0 |  |  | 28.7 |
Total income tax expense | $ | 89.6 |  |  | $ | 109.2 |  |  | $ | 108.5 |
U.S. Tax Reform U.S. tax reform was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law, including a reduction in the statutory income tax rate from 35% to 21% effective January 1, 2018, a one-time transition tax on deemed repatriation of deferred foreign income, a base erosion anti-abuse tax that effectively imposes a minimum tax on certain payments to non-U.S. affiliates, new and revised rules relating to the current taxation of certain income of foreign subsidiaries and revised rules associated with limitations on the deduction of interest. Due to the timing of the enactment of U.S. tax reform and the complexity involved in applying its provisions, we made reasonable estimates of its effects and recorded such amounts in our consolidated financial statements as of December 31, 2017 on a provisional basis. Throughout 2018, we continued to analyze applicable information and data, interpret rules and guidance issued by the U.S. Treasury Department and Internal Revenue Service, and make adjustments to the provisional amounts as provided for in Staff Accounting Bulletin No. 118. The U.S. Treasury Department is expected to continue finalizing rules associated with U.S. tax reform during 2019 and, when issued, these rules may have a material impact on our consolidated financial statements. During 2018, we recognized a tax benefit of $11.7 million associated with the one-time transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries. We recognized a net tax expense of $16.5 million during the fourth quarter of 2017 in connection with enactment of U.S. tax reform, consisting of a $38.5 million tax expense associated with the one-time transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries, a $17.3 million tax expense associated with revisions to rules over the taxation of income of foreign subsidiaries, a $20.0 million tax benefit resulting from the re-measurement of our deferred tax assets and liabilities as of December 31, 2017 to reflect the reduced tax rate and a $19.3 million tax benefit resulting from adjustments to the valuation allowance on deferred tax assets. Deferred Taxes The following table summarizes significant components of deferred income tax assets and liabilities as of December 31, 2018 and 2017 (in millions):
|  | 2018 |  | 2017
Deferred tax assets: |  |  |  |  |
Net operating loss carryforwards |  | $ | 148.4 |  |  | $ | 187.1 |
Foreign tax credits |  | 123.6 |  |  | 132.3 |
Interest limitation carryforwards |  | 40.2 |  |  | — |
Premiums on long-term debt |  | 23.8 |  |  | 36.1 |
Employee benefits, including share-based compensation |  | 15.4 |  |  | 20.7 |
Deferred revenue |  | 10.3 |  |  | 26.0 |
Other |  | 14.5 |  |  | 12.8 |
Total deferred tax assets |  | 376.2 |  |  | 415.0 |
Valuation allowance |  | (316.0 | ) |  | (278.8 | )
Net deferred tax assets |  | 60.2 |  |  | 136.2 |
Deferred tax liabilities: |  |  |  |  |  |
Property and equipment |  | (54.5 | ) |  | (51.5 | )
Deferred U.S. tax on foreign income |  | (31.5 | ) |  | (24.8 | )
Deferred costs |  | (5.3 | ) |  | (9.1 | )
Deferred transition tax |  | — |  |  | (13.7 | )
Other |  | (3.7 | ) |  | (8.7 | )
Total deferred tax liabilities |  | (95.0 | ) |  | (107.8 | )
Net deferred tax asset (liability) |  | $ | (34.8 | ) |  | $ | 28.4 |
The realization of substantially all of our deferred tax assets is dependent upon generating sufficient taxable income during future periods in various jurisdictions in which we operate. Realization of certain of our deferred tax assets is not assured. We recognize a valuation allowance for deferred tax assets when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The amount of deferred tax assets considered realizable could increase or decrease in the near-term if our estimates of future taxable income change. As of December 31, 2018, we had deferred tax assets of $123.6 million for U.S. foreign tax credits (“FTCs”), $148.4 million related to $784.2 million of net operating loss (“NOL”) carryforwards and $40.2 million for U.S. interest limitation carryforwards, which can be used to reduce our income taxes payable in future years. The FTCs expire between 2022 and 2028. NOL carryforwards, which were generated in various jurisdictions worldwide, include $449.8 million that do not expire and $334.4 million that will expire, if not utilized, between 2019 and 2037. U.S. interest limitation carryforwards do not expire. Due to the uncertainty of realization, we have a $271.8 million valuation allowance on FTC, NOL carryforwards and U.S. interest limitation carryforwards. Effective Tax Rate Ensco plc, our parent company, is domiciled and resident in the U.K. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-U.K. subsidiaries is generally not subject to U.K. taxation. Income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws, rather than to net income. Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Further, we may continue to incur income tax expense in periods in which we operate at a loss. Our consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2018, differs from the U.K. statutory income tax rate as follows:
| 2018 |  | 2017 |  | 2016
U.K. statutory income tax rate | 19.0 | % |  | 19.2 | % |  | 20.0 | %
Non-U.K. taxes | (18.0 | ) |  | (40.4 | ) |  | (7.9 | )
Valuation allowance | (16.9 | ) |  | (18.0 | ) |  | 2.6 |
Debt repurchases | (1.6 | ) |  | (2.8 | ) |  | (4.1 | )
Asset impairments | (1.4 | ) |  | (17.1 | ) |  | — |
Bargain purchase gain | (.2 | ) |  | 13.8 |  |  | — |
U.S. tax reform | 2.2 |  |  | (8.4 | ) |  | — |
Tax restructuring transaction | 1.7 |  |  | — |  |  | — |
Other | (1.4 | ) |  | (2.0 | ) |  | .3 |
Effective income tax rate | (16.6 | )% |  | (55.7 | )% |  | 10.9 | %
Our 2018 consolidated effective income tax rate includes the impact of various discrete tax items, including $46.0 million of tax benefit associated with the utilization of foreign tax credits subject to a valuation allowance, the transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries and a restructuring transaction, partially offset by $21.0 million of tax expense related to recovery of certain costs associated with an ongoing legal matter, repurchase and redemption of senior notes, unrecognized tax benefits associated with tax positions taken in prior years and rig sales. Our 2017 consolidated effective income tax rate includes $32.2 million associated with the impact of various discrete tax items, including $16.5 million of tax expense associated with U.S. tax reform and $15.7 million of tax expense associated with the exchange offers and debt repurchases, rig sales, a restructuring transaction, settlement of a previously disclosed legal contingency, the effective settlement of a liability for unrecognized tax benefits associated with a tax position taken in prior years and other resolutions of prior year tax matters. Our 2016 consolidated effective income tax rate includes the impact of various discrete tax items, including a $16.9 million tax expense resulting from net gains on the repurchase of various debt during the year, the recognition of an $8.4 million net tax benefit relating to the sale of various rigs, a $5.5 million tax benefit resulting from a net reduction in the valuation allowance on U.S. foreign tax credits and a net $5.3 million tax benefit associated with liabilities for unrecognized tax benefits and other adjustments relating to prior years. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2018, 2017 and 2016 were (24.8)%, (96.0)% and 20.3%, The changes in our consolidated effective income tax rate, excluding discrete tax items, during the three-year period result primarily from U.S. tax reform and changes in the relative components of our earnings from the various taxing jurisdictions in which our drilling rigs are operated and/or owned and differences in tax rates in such taxing jurisdictions. Unrecognized Tax Benefits Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. As of December 31, 2018, we had $143.0 million of unrecognized tax benefits, of which $136.5 million was included in other liabilities on our consolidated balance sheet and the remaining $6.5 million, which is associated with a tax position taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. As of December 31, 2017, we had $147.6 million of unrecognized tax benefits, of which $139.4 million was included in other liabilities on our consolidated balance sheet and the remaining $8.2 million, which is associated with a tax position taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. If recognized, $127.4 million of the $143.0 million unrecognized tax benefits as of December 31, 2018 would impact our consolidated effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018 and 2017 is as follows (in millions):
|  | 2018 |  | 2017
Balance, beginning of year |  | $ | 147.6 |  |  | $ | 122.0 |
Increases in unrecognized tax benefits as a result of tax positions taken during the current year |  | 6.5 |  |  | 5.4 |
Impact of foreign currency exchange rates |  | (5.0 | ) |  | 8.1 |
Lapse of applicable statutes of limitations |  | (4.5 | ) |  | (.4 | )
Increase in unrecognized tax benefits as a result of tax positions taken during prior years |  | 2.5 |  |  | .7 |
Decreases in unrecognized tax benefits as a result of tax positions taken during prior years |  | (3.8 | ) |  | (.2 | )
Settlements with taxing authorities |  | (.3 | ) |  | (10.2 | )
Increases in unrecognized tax benefits as a result of the Atwood Merger |  | — |  |  | 22.2 |
Balance, end of year |  | $ | 143.0 |  |  | $ | 147.6 |
Accrued interest and penalties totaled $40.5 million and $38.6 million as of December 31, 2018 and 2017, respectively, and were included in other liabilities on our consolidated balance sheets. We recognized a net expense of $1.9 million and $4.4 million and a net benefit of $3.8 million associated with interest and penalties during the years ended December 31, 2018, 2017 and 2016, respectively. Interest and penalties are included in current income tax expense in our consolidated statements of operations. Our 2014 and subsequent years remain subject to examination for U.S. federal tax returns. Tax years as early as 2005 remain subject to examination in the other major tax jurisdictions in which we operated. Statutes of limitations applicable to certain of our tax positions lapsed during 2018, 2017 and 2016, resulting in net income tax benefits, inclusive of interest and penalties, of $5.3 million, $1.1 million and $600,000, respectively. Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2019. Therefore, it is reasonably possible that our unrecognized tax benefits will decline during the next 12 months by $500,000, inclusive of $300,000 of accrued interest and penalties, all of which would impact our consolidated effective income tax rate if recognized. Intercompany Transfer of Drilling Rigs In October 2016, the FASB issued Accounting Standards Update 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“Update 2016-16”), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. We adopted Update 2016-16 on a modified retrospective basis effective January 1, 2017. As a result of modified retrospective application, we reduced prepaid taxes on intercompany transfers of property and related deferred tax liabilities resulting in the recognition of a cumulative-effect reduction in retained earnings of $14.1 million on our consolidated balance sheet as of January 1, 2017. We did not recognize any income tax benefit or expense from the intercompany transfer of drilling rigs during the years ended December 31, 2018 and 2017, respectively. Undistributed Earnings Dividend income received by Ensco plc from its subsidiaries is exempt from U.K. taxation. We do not provide deferred taxes on undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Each of the subsidiaries for which we maintain such policy has sufficient net assets, liquidity, contract backlog and/or other financial resources available to meet operational and capital investment requirements, which allows us to continue to maintain our policy of reinvesting the undistributed earnings indefinitely. As of December 31, 2018, the aggregate undistributed earnings of the subsidiaries for which we maintain a policy and intention to reinvest earnings indefinitely totaled $386.7 million. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we would be subject to additional income taxes. The unrecognized deferred tax liability related to these undistributed earnings was not practicable to estimate as of December 31, 2018.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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