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Taxes on Income | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Taxes on Income | Taxes on Income On December 22, 2017, the U.S. government enacted comprehensive tax legislation which we refer to as U.S. Tax Reform. U.S. Tax Reform implemented a new system of taxation for non-U.S. earnings which eliminated U.S. federal income taxes on dividends from certain foreign subsidiaries and imposed a one-time transition tax on the deemed repatriation of undistributed earnings of certain foreign subsidiaries that is payable over eight years. Following numerous regulations, notices, and other formal guidance published by the Internal Revenue Service (“IRS”), U.S. Department of Treasury, and various state taxing authorities, the Company completed its accounting for the transition tax and has elected to pay its $15.5 million transition tax in installments over eight years as permitted under U.S. Tax Reform. As of December 31, 2022, $6.9 million in installments have been paid with the remaining $8.6 million to be paid through installments in future years. As of December 31, 2022, the Company has a deferred tax liability of $6.8 million on certain undistributed foreign earnings, which primarily represents the Company’s estimate of the non-U.S. income taxes the Company will incur to ultimately remit certain earnings to the U.S. The Company’s reinvestment assertions as further explained below. Taxes on income before equity in net income of associated companies for the years ended December 31, 2022, 2021 and 2020 are as follows:
| 2022 |  | 2021 |  | 2020
Current: |  |  |  |  |
Federal | $ | (708) |  |  | $ | 955 |  |  | $ | (1,359) |
State | 1,450 |  |  | 2,115 |  |  | 1,171 |
Foreign | 34,735 |  |  | 44,375 |  |  | 33,173 |
| 35,477 |  |  | 47,445 |  |  | 32,985 |
Deferred: |  |  |  |  |
Federal | (2,798) |  |  | (3,863) |  |  | (28,437) |
State | (713) |  |  | (3,117) |  |  | (3,087) |
Foreign | (7,041) |  |  | (5,526) |  |  | (6,757) |
Total | $ | 24,925 |  |  | $ | 34,939 |  |  | $ | (5,296) |
The components of earnings before income taxes for the years ended December 31, 2022, 2021 and 2020 are as follows:
| 2022 |  | 2021 |  | 2020
U.S. | $ | (4,933) |  |  | $ | 7,263 |  |  | $ | (66,585) |
Foreign | 12,051 |  |  | 139,728 |  |  | 93,724 |
Total | $ | 7,118 |  |  | $ | 146,991 |  |  | $ | 27,139 |
Total deferred tax assets and liabilities are composed of the following as of December 31, 2022 and 2021:
| 2022 |  | 2021 |
Retirement benefits | $ | 8,469 |  |  | $ | 11,860 |  |
Allowance for credit losses | 2,246 |  |  | 2,155 |  |
Insurance and litigation reserves | 716 |  |  | 675 |  |
Performance incentives | 3,327 |  |  | 2,881 |  |
Equity-based compensation | 2,723 |  |  | 1,920 |  |
Prepaid expense | 486 |  |  | 460 |  |
Operating loss carryforward | 20,519 |  |  | 18,544 |  |
Foreign tax credit and other credits | 5,506 |  |  | 16,285 |  |
Interest | 9,928 |  |  | 9,940 |  |
Restructuring reserves | 791 |  |  | 631 |  |
Right of use lease assets | 8,440 |  |  | 8,322 |  |
Inventory reserves | 2,967 |  |  | 2,941 |  |
Research and development | 11,936 |  |  | 8,832 |  |
Other | 4,307 |  |  | 2,846 |  |
| 82,361 |  |  | 88,292 |  |
Valuation allowance | (11,730) |  |  | (17,400) |  |
Total deferred tax assets, net | $ | 70,631 |  |  | $ | 70,892 |  |
Depreciation | 11,935 |  |  | 11,580 |  |
Foreign pension and other | 2,691 |  |  | 2,332 |  |
Intangibles | 182,838 |  |  | 197,066 |  |
Lease liabilities | 9,590 |  |  | 8,421 |  |
Outside basis in equity investment | 5,886 |  |  | 5,999 |  |
Unremitted Earnings | 6,766 |  |  | 8,381 |  |
Total deferred tax liabilities | $ | 219,706 |  |  | $ | 233,779 |  |
The Company has $7.4 million of deferred tax assets related to state net operating losses. Management analyzed the expected impact of the reversal of existing taxable temporary differences, considered expiration dates, analyzed current state tax laws, and determined that $1.7 million of state net operating loss carryforwards is expected to be realized as a future benefit based on the reversal of deferred tax liabilities. Accordingly, a partial valuation allowance of $5.7 million has been established. These state net operating losses are subject to various carryforward periods of 5 years to 20 years or an indefinite carryforward period. An additional $0.9 million of valuation allowance was established for other net state deferred tax assets. The Company has $13.1 million of deferred tax assets related to foreign net operating loss carryforwards. A partial valuation allowance of $2.3 million has been established against this amount resulting in a net $10.8 million expected future benefit. These foreign net operating losses are subject to various carryforward periods with the majority having an indefinite carryforward period. An additional partial valuation allowance of $1.5 million has been established against certain other foreign deferred tax assets. In conjunction with the Combination, the Company acquired foreign tax credit deferred tax assets of $41.8 million expiring between 2019 and 2028. Foreign tax credits may be carried forward for 10 years. Management analyzed the expected impact of the utilization of foreign tax credits based on certain assumptions such as projected U.S. taxable income, overall domestic loss recapture, and annual limitations due to the ownership change under the Internal Revenue Code. The Company had a foreign tax credit carry forward of $5.2 million and $15.9 million as of December 31, 2022 and 2021, respectively, with a $1.3 million and $5.8 million valuation allowance as of December 31, 2022 and 2021, respectively, reflecting the amount of credits that are not expected to be utilized before expiration. The Company also acquired disallowed interest deferred tax assets of $14.0 million as part of the Combination. Disallowed interest may be carried forward indefinitely. Management analyzed the expected impact of the utilization of disallowed interest carryforwards based on projected US taxable income and determined that the Company will utilize all expected future benefits by 2028. As of December 31, 2022, the Company had a net realizable disallowed interest carryforward of $10.1 million on its balance sheet related to its US operations and $0.6 million related to non-US operations. As of December 31, 2022, the Company had deferred tax liabilities of $169.4 million primarily related to the step-up in intangibles resulting from the Combination and Norman Hay acquisition. As part of the Combination, the Company acquired a 50% interest in the Korea Houghton Corporation joint venture and has recorded a $5.9 million deferred tax liability for its outside basis difference. The following are the changes in the Company’s deferred tax asset valuation allowance for the years ended December 31, 2022, 2021 and 2020:
| Balance at Beginning of Period |  | Purchase Accounting Adjustments |  | Additional Valuation Allowance |  | Allowance Utilization and Other |  | Effect of Exchange Rate Changes |  | Balance at End of Period
Valuation Allowance |  |  |  |  |  |  |  |  |  |  |
Year ended December 31, 2022 | $ | 17,400 |  |  | $ | — |  |  | $ | 1,326 |  |  | $ | (6,789) |  |  | $ | (207) |  |  | $ | 11,730 |
Year ended December 31, 2021 | $ | 21,511 |  |  | $ | — |  |  | $ | 29 |  |  | $ | (4,470) |  |  | $ | 330 |  |  | $ | 17,400 |
Year ended December 31, 2020 | $ | 13,834 |  |  | $ | 7,148 |  |  | $ | 2,738 |  |  | $ | (2,153) |  |  | $ | (56) |  |  | $ | 21,511 |
The Company’s net deferred tax assets and liabilities are classified in the Consolidated Balance Sheets as of December 31, 2022 and 2021 as follows:
| 2022 |  | 2021
Non-current deferred tax assets | $ | 11,218 |  |  | $ | 16,138 |
Non-current deferred tax liabilities | 160,294 |  |  | 179,025 |
Net deferred tax liability | $ | (149,076) |  |  | $ | (162,887) |
The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2022, 2021 and 2020. Certain immaterial reclassifications within the presentation of the reconciliation of income taxes have been made to the years ended December 31, 2021 and 2020:
| 2022 |  | 2021 |  | 2020
Income tax provision at the Federal statutory tax rate | $ | 1,495 |  |  | $ | 30,868 |  |  | $ | 5,699 |
Unremitted earnings | (1,839) |  |  | 1,841 |  |  | (2,308) |
Tax law changes / reform | 823 |  |  | 1,955 |  |  | (1,059) |
U.S. tax on foreign operations | 4,864 |  |  | 10,479 |  |  | 5,140 |
Pension settlement | — |  |  | — |  |  | (2,247) |
Foreign derived intangible income | (917) |  |  | (8,698) |  |  | (7,339) |
Non-deductible acquisition expenses | 45 |  |  | 129 |  |  | 131 |
Withholding taxes | 7,785 |  |  | 6,584 |  |  | 7,809 |
Foreign tax credits | (5,850) |  |  | (14,725) |  |  | (4,699) |
Share-based compensation | 1,234 |  |  | 600 |  |  | 335 |
Foreign tax rate differential | 4,782 |  |  | 1,712 |  |  | 332 |
Research and development credit | (1,757) |  |  | (1,685) |  |  | (1,018) |
Audit Settlements | 2,697 |  |  | 1,378 |  |  | 807 |
Uncertain tax positions | (6,375) |  |  | 519 |  |  | 1,990 |
State income tax provisions, net | 432 |  |  | (1,446) |  |  | (2,245) |
Non-deductible meals and entertainment | 146 |  |  | 426 |  |  | 290 |
Intercompany transfer of intangible assets | (1,932) |  |  | 4,347 |  |  | (4,384) |
Goodwill Impairment | 19,550 |  |  | — |  |  | — |
Miscellaneous items, net | (258) |  |  | 655 |  |  | (2,530) |
Taxes on income before equity in net income of associated companies | $ | 24,925 |  |  | $ | 34,939 |  |  | $ | (5,296) |
Pursuant to U.S. Tax Reform, the Company recorded a $15.5 million transition tax liability for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries. However, the Company may also be subject to other taxes, such as withholding taxes and dividend distribution taxes, if these undistributed earnings are ultimately remitted to the U.S. As a result of the Combination, additional third-party debt was incurred resulting in the Company re-evaluating its global cash strategy in order to meet its goal of reducing leverage in upcoming years. As of December 31, 2022, the Company has a deferred tax liability $6.8 million, which primarily represents the estimate of the non-U.S. taxes the Company will incur to ultimately remit these earnings to the U.S. It is the Company’s current intention to reinvest its additional undistributed earnings of non-U.S. subsidiaries to support working capital needs and certain other growth initiatives outside of the U.S. The amount of such undistributed earnings at December 31, 2022 was approximately $424.7 million. Any tax liability which might result from ultimate remittance of these earnings is expected to be substantially offset by foreign tax credits (subject to certain limitations). It is currently impractical to estimate any such incremental tax expense. As of December 31, 2022, the Company’s cumulative liability for gross unrecognized tax benefits was $16.3 million. The Company had accrued approximately $1.3 million for cumulative penalties and $2.7 million for cumulative interest as of December 31, 2022. As of December 31, 2021, the Company’s cumulative liability for gross unrecognized tax benefits was $22.5 million. The Company had accrued approximately $3.1 million for cumulative penalties and $3.1 million for cumulative interest as of December 31, 2021. The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of tax expense on income before equity in net income of associated companies in its Consolidated Statements of Operations. The Company recognized a benefit of $1.7 million for penalties and a benefit of $0.3 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2022, a benefit of $0.5 million for penalties and an expense of $0.3 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2021, and an expense of less than $0.1 million for penalties and an expense of $0.6 million for interest (net of expirations and settlements) in its Consolidated Statement of Income for the year ended December 31, 2020. The Company estimates that during the year ending December 31, 2022, it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $4.9 million due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2022. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2022, 2021 and 2020, respectively, is as follows:
| 2022 |  | 2021 |  | 2020
Unrecognized tax benefits as of January 1 | $ | 22,464 |  |  | $ | 22,152 |  |  | $ | 19,097 |
(Decrease) increase in unrecognized tax benefits taken in prior periods | (1,174) |  |  | 1,002 |  |  | 2,025 |
Increase in unrecognized tax benefits taken in current period | 953 |  |  | 2,915 |  |  | 3,095 |
Decrease in unrecognized tax benefits due to lapse of statute of limitations | (2,378) |  |  | (1,527) |  |  | (2,024) |
Decrease in unrecognized tax benefits due to audit settlements | (2,509) |  |  | (1,104) |  |  | (1,635) |
Increase in unrecognized tax benefits due to acquisition | — |  |  | — |  |  | 597 |
(Decrease) increase due to foreign exchange rates | (1,016) |  |  | (974) |  |  | 997 |
Unrecognized tax benefits as of December 31 | $ | 16,340 |  |  | $ | 22,464 |  |  | $ | 22,152 |
The amount of net unrecognized tax benefits above that, if recognized, would impact the Company’s tax expense and effective tax rate is $10.2 million, $15.2 million and $14.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Italy from 2007, Brazil from 2011, the Netherlands from 2016, Canada, China, Mexico, Germany, Spain and the U.S. from 2018, the United Kingdom from 2019, India from fiscal year beginning April 1, 2017 and ending March 31, 2018, and various U.S. state tax jurisdictions from 2011. As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2015. The Company has filed for competent authority relief from these assessments under the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except 2007. In 2020, the respective tax authorities in Italy, Spain, and the Netherlands reached agreement with respect to the MAP proceedings, which the Company has accepted. As of December 31, 2022, the Company has received $1.6 million in refunds from the Netherlands and Spain. In February 2022, the Company received a settlement notice from the Italian taxing authorities confirming the amount due of $2.6 million, having granted the Company’s request to utilize its remaining net operating losses to partially offset the liability. As of December 31, 2022, the Company has paid the full settlement, of which approximately $0.2 million was refunded. Houghton Italia, S.r.l is also involved in a corporate income tax audit with the Italian tax authorities covering tax years 2014 through 2018. During the fourth quarter of 2021, the Company settled a portion of the Houghton Italia, S.r.l. corporate income tax audit with the Italian tax authorities for the tax years 2014 and 2015. During the year ended December 31, 2022, the Company settled tax years 2016 through 2018 for a total of $2.0 million. In total, the Company has now settled all years 2014 through 2018 for $3.7 million. Accordingly, the Company has released all reserves relating to this audit for the settled tax years. As a result of the settlement and reserve release the Company recognized a net benefit to the tax provision of $1.9 million during the year ended December 31, 2022. The Company has an indemnification receivable of $3.6 million in connection with its claim against the former owners of Houghton for any pre-Combination tax liabilities arising from this matter, as well as other audit settlements and tax matters. Houghton Deutschland GmbH was also under audit by the German tax authorities for tax years 2015 through 2017. In the second quarter of 2022, the Company settled the corporate tax audit for the tax years 2015-2017 with the German tax authorities for a total of $0.3 million. The Company has an indemnification receivable of $0.3 million in connection with its claim against the former owners of Houghton for any pre-Combination tax liabilities arising from this matter.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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