Page 84 - 2019 Annual Report
P. 84

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
           Using  these assumptions,  2020  pension expense is expected to  be approximately $31.2  million based on current
           demographics and structure of the plans. Changes in the underlying assumptions would have the following estimated impact
           on the 2020 expected expense:
                  •   A  25-basis-point change in the discount  rate would change the 2020 expected expense by approximately
                      $4.4 million.
                  •   A 25-basis-point change in the expected long-term rate of return on assets would change the 2020 expected
                      expense by approximately $2.2 million.

           The Company made pension plan contributions of $58.9 million in 2019 and $350.8 million during the five-year period ended
           December 31, 2019. Despite these contributions, the Company’s pension plans are underfunded (projected benefit obligation
           exceeds the fair value of plan assets) by $109.8 million at December 31, 2019. The Company’s projected benefit obligation
           was $977.8 million at December 31, 2019, an increase of $129.9 million versus the prior year, driven by the lower discount
           rate. The Company expects to make pension plan and SERP contributions of $60.2 million in 2020, of which $50.0 million
           are voluntary.

           Estimated Effective Income Tax Rate

           The Company uses the liability method to determine its provision for income taxes. Accordingly, the annual provision for
           income taxes reflects estimates of the current liability for income taxes, estimates of the tax effect of financial reporting
           versus tax basis differences  using statutory income tax  rates and management’s judgment with  respect to  any valuation
           allowances on deferred tax assets. The result is management’s estimate of the annual effective tax rate (the “ETR”).
           Income for tax purposes is determined through the application of the rules and regulations under the United States Internal
           Revenue Code and the statutes of various foreign, state and local tax jurisdictions in which the Company conducts business.
           Changes in the statutory tax rates and/or tax laws in these jurisdictions can have a material effect on the ETR. The effect of
           these changes, if material, is recognized when the change is enacted.
           As prescribed by these tax regulations, as well as generally accepted accounting principles, the manner in which revenues and
           expenses are recognized for financial reporting and income tax purposes is not always the same. Therefore, these differences
           between the Company’s pretax income for financial reporting purposes and the amount of taxable income for income tax
           purposes are treated as either temporary or permanent, depending on their nature.
           Temporary  differences reflect revenues or expenses that are recognized in financial reporting in one  period  and taxable
           income in a different period. An example of a temporary difference is the use of the straight-line method of depreciation of
           machinery and equipment for financial reporting purposes and the use of an accelerated method for income tax purposes.
           Temporary differences result from differences between the financial reporting basis and tax basis of assets or liabilities and
           give rise to deferred tax assets or liabilities (i.e., future tax deductions or future taxable income). Therefore, when temporary
           differences occur, they are offset by a corresponding change in a deferred tax account. As such, total income tax expense as
           reported in the Company’s consolidated statements of earnings is not changed by temporary differences.

           The Company has deferred tax liabilities, primarily for property, plant and equipment, goodwill and other intangibles, employee
           pension and postretirement benefits and partnerships and joint ventures. The deferred tax liabilities attributable to property,
           plant and equipment relate to accelerated depreciation and depletion methods used for income tax purposes as compared with
           the straight-line and units-of-production methods used for financial reporting purposes. These temporary differences will reverse
           over the remaining  useful  lives of the related  assets.  The  deferred tax liabilities  attributable to  goodwill  arise  as a result of
           amortizing goodwill for income tax purposes but not for financial reporting purposes. This temporary difference reverses when
           goodwill is written off for financial reporting purposes, either through divestitures or an impairment charge. The timing of such
           events cannot be estimated. The deferred tax liabilities attributable to employee pension and postretirement benefits relate to
           deductions as plans are funded for income tax purposes compared with deductions for financial reporting purposes based on
           accounting standards. The reversal of these differences depends on the timing of the Company’s contributions to the related
           benefit  plans  as compared  to the annual expense for financial  reporting purposes. The deferred tax  liabilities attributable to
           partnerships and joint ventures relate  to the difference between the tax basis of the investments in partnerships and joint
           ventures when compared to the basis for financial reporting purposes. The temporary difference reverses through differences
           recognized over the life of the investment or through divestiture.

           The Company has deferred tax assets, primarily for inventories, unvested stock-based compensation awards, unrecognized
           losses related to the funded status of the pension and postretirement benefit plans, valuation reserves, net operating loss
           carryforwards and tax credit carryforwards. The deferred tax assets attributable to inventories and valuation reserves relate


           Annual Report  ♦  Page 82                                            Celebrating 25 Years as a Public Company
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