Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Income tax expense represented 28.7 percent, 32.7 percent and 9.9 percent of income from continuing operations before income taxes for the years ended December 31, 2016, 2015 and 2014, respectively. The following table presents the principal reasons for the difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate:



	Year Ended December 31,
	2016		2016			2015		2015			2014		2014
U.S. federal statutory income tax rate	35.0	%	$	36.1		35.0	%	$	31.5		35.0	%	$	26.4
U.S. state income taxes, net of federal income tax benefit	1.9	%	2.0			2.1	%	1.9			2.1	%	1.6
Tax on foreign dividends	4.5	%	4.6			3.6	%	3.2			3.0	%	2.3
Foreign tax rate differences (a)	(2.7	)%	(2.8		)	(2.2	)%	(2.0		)	(2.8	)%	(2.1		)
Foreign financing structure (b)	(1.6	)%	(1.7		)	(1.3	)%	(1.2		)	(2.5	)%	(1.9		)
Excess tax benefits from stock compensation (c)	(3.0	)%	(3.1		)	—		—			—		—
Research and development and other tax credits (d)	(2.8	)%	(2.9		)	(3.9	)%	(3.5		)	(31.9	)%	(24.1		)
Domestic production activities deduction	(1.5	)%	(1.5		)	(2.2	)%	(2.0		)	—	%	—
Uncertain income tax positions	(0.4	)%	(0.4		)	1.3	%	1.2			6.5	%	4.9
Other differences — net	(0.7	)%	(0.7		)	0.3	%	0.3			0.5	%	0.4
Effective income tax rate	28.7	%	$	29.6		32.7	%	$	29.4		9.9	%	$	7.5

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(a)	Represents the impact on the Company's effective tax rate due to changes in the mix of earnings among taxing jurisdictions with differing statutory rates.


(b)	Represents the impact on the Company's effective tax rate of the Company's financing strategies.


(c)	In 2016, the Company adopted ASU 2016-09, Compensation — Stock Compensation (Topic 718). See Note 2, "Summary of Significant Accounting Policies — Recently Adopted Accounting Standards."


(d)	For 2015, the Company recognized a $1.4 million benefit related to research and development ("R&D") tax credits of FiberMark for the period 2012 through July 2015. For 2014, following an extensive study of the Company's R&D activities for the years 2005 through 2013 and a change in methodology, the Company recognized a $21.9 million net benefit related to R&D tax credits.

The Company's effective income tax rate can be affected by many factors, including but not limited to, changes in the mix of earnings in taxing jurisdictions with differing statutory rates, the availability of R&D and other tax credits, changes in corporate structure as a result of business acquisitions and dispositions, changes in the valuation of deferred tax assets and liabilities, the results of audit examinations of previously filed tax returns and changes in tax laws. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. The Company is no longer subject to U.S. federal examination for years before 2013, to state and local examinations for years before 2012 and to non-U.S. income tax examinations for years before 2012.

The following table presents the U.S. and foreign components of income from continuing operations before income taxes:



	Year Ended December 31,
	2016		2015		2014
Income from continuing operations before income taxes:
U.S.	$	68.3	$	62.2	$	46.5
Foreign	34.7		27.7		29.0
Total	$	103.0	$	89.9	$	75.5

The following table presents the components of the provision (benefit) for income taxes:



	Year Ended December 31,
	2016			2015		2014
Provision (benefit) for income taxes:
Current:
Federal	$	7.1		$	12.7	$	0.5
State	(0.5		)	1.3		—
Foreign	5.9			5.1		3.4
Total current tax provision	12.5			19.1		3.9
Deferred:
Federal	14.8			7.7		6.9
State	1.8			2.3		(5.9		)
Foreign	0.5			0.3		2.6
Total deferred tax provision	17.1			10.3		3.6
Total provision for income taxes	$	29.6		$	29.4	$	7.5

The Company has elected to treat its Canadian operations as a branch for U.S. income tax purposes. Therefore, the amount of income (loss) before income taxes from Canadian operations are included in the Company's consolidated U.S. income tax returns and such amounts are subject to U.S. income taxes.

The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities, net of reserves for uncertain tax positions and valuation allowances, are as follows:



	December 31,
	2016			2015
Net deferred income tax assets
Employee benefits	$	26.0		$	27.8
Research and development tax credits	15.0			20.9
Net operating losses and credits	10.5			10.7
Accrued liabilities	3.2			2.9
Inventories	(0.5		)	1.3
Accelerated depreciation	(34.0		)	(34.8		)
Intangibles	(10.8		)	(10.2		)
Undistributed foreign earnings	(4.4		)	—
Other	1.1			1.4
Net deferred income tax assets	$	6.1		$	20.0
Net deferred income tax liabilities
Accelerated depreciation	$	12.3		$	12.8
Intangibles	2.8			3.5
Employee benefits	(5.0		)	(3.9		)
Interest limitation	0.3			(0.5		)
Net operating losses	(0.3		)	(0.1		)
Net deferred income tax liabilities	$	10.1		$	11.8

The net deferred tax assets relate to U.S. federal and state jurisdictions and the net deferred tax liabilities relate to operations of Germany and the U.K. As of December 31, 2016, the Company had $12.5 million of undistributed earnings (net of foreign taxes) of foreign subsidiaries. There were no undistributed earnings of foreign subsidiaries as of December 31, 2015.

As of December 31, 2016, the Company had $25.2 million of U.S. federal and state R&D credits which, if not used, will expire between 2029 and 2036 for the U.S. federal R&D credits and between 2017 and 2031 for the state R&D credits. As of December 31, 2016, we had $48.8 million of state NOLs which may be used to offset state taxable income. The NOLs are reflected in the consolidated financial statements as a deferred tax asset of $2.3 million. If not used, substantially all of the NOLs will expire in various amounts between 2017 and 2035. The Company also had pre-acquisition and recognized built-in loss carryovers of $10.2 million, reflected as a deferred tax asset of $3.6 million. In addition, the Company had $3.4 million of federal Alternative Minimum Tax Credit carryovers, which can be carried forward indefinitely.

The following is a tabular reconciliation of the total amounts of uncertain tax positions as of and for the years ended December 31, 2016, 2015 and 2014:



	For the Years Ended December 31,
	2016			2015			2014
Balance at January 1,	$	12.9		$	7.0		$	4.3
Increases in prior period tax positions	—			0.5			—
Decreases in prior period tax positions	(2.6		)	—			(2.2		)
Increases in current period tax positions	0.6			5.5			5.3
Decreases due to lapse of statute of limitations	(0.3		)	—			—
Decreases due to settlements with tax authorities	—			—			(0.2		)
Decreases from foreign exchange rate changes	(0.3		)	(0.1		)	(0.2		)
Balance at December 31,	$	10.3		$	12.9		$	7.0

The $10.3 million of reserves for uncertain tax positions as of December 31, 2016 were reflected on the consolidated balance sheets as follows: $7.6 million netted against deferred tax assets, $1.2 million netted against (added to) deferred tax liabilities and $1.5 million in other noncurrent obligations. The $12.9 million of reserves for uncertain tax positions as of December 31, 2015 were reflected on the consolidated balance sheets as follows: $8.9 million netted against deferred tax assets, $1.2 million netted against (added to) deferred tax liabilities and $2.8 million in other noncurrent obligations.

If recognized, $9.3 million of the benefit for uncertain tax positions at December 31, 2016 would favorably affect the Company's effective tax rate in future periods. The Company does not expect that the expiration of the statute of limitations or the settlement of audits in the next 12 months will result in liabilities for uncertain income tax positions that are materially different than the amounts that were accrued as of December 31, 2016.

The Company recognizes accrued interest and penalties related to uncertain income tax positions in the Provision for income taxes on the consolidated statements of operations. As of December 31, 2016 and 2015, the Company had $0.2 million and $0.4 million, respectively, accrued for interest and penalties related to uncertain income tax positions.

As of December 31, 2016, the Company had a valuation allowance of $3.1 million against its state R&D credits and $0.4 million against its other state tax credits. As of December 31, 2015, the Company had a valuation allowance of $2.9 million against its state R&D credits and $0.1 million against its state NOLs. In determining the need for a valuation allowance, the Company considers many factors, including specific taxing jurisdictions, sources of taxable income, income tax strategies and forecasted earnings for the entities in each jurisdiction. A valuation allowance is recognized if, based on the weight of available evidence, the Company concludes that it is more likely than not that some portion or all of the deferred income tax asset will not be realized.