Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Income tax expense represented 9.5 percent, 12.4 percent and 28.7 percent of income from continuing operations before income taxes for the years ended December 31, 2018, 2017 and 2016, respectively.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation in the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act significantly revised the U.S. corporate income tax by, among other things, reducing the statutory corporate tax rate from 35% to 21% effective January 1, 2018, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes and changing how foreign earnings are subject to U.S. tax. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. In conjunction with the tax law changes, the Securities and Exchange Commission ("SEC") in Staff Accounting Bulletin No. 118 ("SAB 118") provided for a measurement period of one year from the enactment date to finalize the accounting for effects of the Tax Act. As of December 31, 2017, the Company provisionally recorded an income tax benefit of $6.5 million related to the Tax Act. This amount was comprised of a $10.3 million tax benefit from the remeasurement of federal net deferred income tax liabilities resulting from the reduction in the U.S. statutory corporate tax rate to 21% from 35%, less $3.8 million of tax expense from the mandatory one-time tax on the previously untaxed accumulated earnings and profits ("E&P") of its foreign subsidiaries. Also, as of December 31, 2017, the Company early adopted ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income (Topic 740) and reclassified $10.9 million from AOCI to retained earnings to address the stranded tax effects resulting from the effect of lower tax rates in the Tax Act on items within AOCI.

In June 2017, as part of the annual strategic plan review, the Company reassessed its intentions regarding the indefinite reinvestment of undistributed earnings of the German operations and asserted its intent to indefinitely reinvest them. As a result, effective in the second quarter of 2017, the Company did not provide deferred income taxes on 2017 unremitted earnings of the German operations. In addition, in that quarter the deferred income tax liability of $4.1 million which was recorded in 2016 on unremitted German earnings was eliminated with a reduction to 2017 income tax expense. As noted above, the Tax Act included a mandatory one-time tax on previously untaxed accumulated E&P of its foreign subsidiaries, and as a result, previously unremitted E&P from all foreign countries were subject to this U.S. tax and a liability of $3.8 million was recorded thereon as of December 31, 2017.

During 2018, the Company completed its analysis of the Tax Act and interpreted additional guidance issued by the U.S. Treasury Department. In addition, legislative actions by the various U.S. states related to application of the Tax Act provisions on state tax returns was considered. The Company recorded additional adjustments throughout 2018 to reflect a measurement-period tax benefit of $0.9 million related to the effects of the statutory corporate tax rate reduction and a measurement-period tax expense of $0.8 million from U.S. federal and state taxes on accumulated E&P of its foreign subsidiaries. As of December 31, 2018, a cumulative net tax benefit of $6.6 million related to the Tax Act was reflected, comprised of a $11.2 million tax benefit from the remeasurement of federal net deferred income tax liabilities resulting from the reduction in the U.S. statutory corporate tax rate, less $4.6 million of tax expense from the mandatory one-time U.S. federal tax on certain previously untaxed accumulated E&P of its foreign subsidiaries and related state income tax impacts. As of December 31, 2018, the measurement period for purposes of SAB 118 has ended and the Company has completed the accounting for all of the impacts of the Tax Act.

As of December 31, 2017, the Company was not yet able to reasonably estimate the effects for the Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Act, therefore no provisional effects were recorded. Also, at that time, the Company had not made a policy decision regarding whether to record deferred income taxes on GILTI or use the period cost method. During the three months ended March 31, 2018, the Company elected an accounting policy to record GILTI tax expense as a period cost, if and when incurred. Also, beginning in that quarter, the Company was able to reasonably estimate the annual effects of GILTI and ultimately recorded in its effective tax rate for 2018 an annual impact of GILTI of $0.6 million of tax expense, plus $0.1 million of state taxation of foreign earnings.

During the three months ended March 31, 2018, the Company completed an assessment of its existing accounting assertion with regard to the indefinite reinvestment of undistributed foreign earnings, considering the effects of the Tax Act and U.S. state and foreign tax legislation on future repatriations. After consideration of the effects of the mandatory one-time U.S. federal tax and GILTI provisions and its foreign investment strategy, the Company is no longer asserting indefinite reinvestment of its unrepatriated German E&P. Except for immaterial foreign exchange considerations, the Company will be able to repatriate its foreign earnings without U.S. federal taxation due to the previously taxed income generated from the mandatory one-time U.S. federal tax and GILTI provisions.

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,
	2018		2018			2017		2017			2016		2016
U.S. federal statutory income tax rate	21.0	%	$	8.6		35.0	%	$	32.1		35.0	%	$	36.1
U.S. state income taxes, net of federal income tax benefit	(1.0	)%	(0.4		)	1.9	%	1.7			1.9	%	2.0
Foreign tax rate differences (a)	6.8	%	2.8			(3.4	)%	(3.1		)	(2.7	)%	(2.8		)
Tax on foreign dividends (b)	3.6	%	1.5			(0.3	)%	(0.3		)	4.5	%	4.6
Foreign financing structure (c)	(5.1	)%	(2.1		)	(2.2	)%	(2.0		)	(1.6	)%	(1.7		)
Change in statutory tax rates (d)	(3.9	)%	(1.6		)	(10.6	)%	(9.7		)	—	%	—
Research and development and other tax credits	(10.5	)%	(4.3		)	(3.3	)%	(3.0		)	(2.8	)%	(2.9		)
Excess tax benefits from stock compensation	(2.9	)%	(1.2		)	(4.9	)%	(4.5		)	(3.0	)%	(3.1		)
Uncertain income tax positions	2.0	%	0.8			0.8	%	0.7			(0.4	)%	(0.4		)
Domestic production activities deduction	—	%	—			(0.6	)%	(0.5		)	(1.5	)%	(1.5		)
Other differences — net	(0.5	)%	(0.2		)	—	%	—			(0.7	)%	(0.7		)
Effective income tax rate	9.5	%	$	3.9		12.4	%	$	11.4		28.7	%	$	29.6

_______________________


(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. In 2018, the U.S. tax rate is now lower than the tax rate in Germany and the Netherlands.

(b)

For 2017, the amount reflects the net benefit of the indefinite reinvestment assertion of $4.1 million, less the $3.8 million mandatory one-time tax on the accumulated E&P of foreign subsidiaries from the Tax Act. For 2018, the amount reflects a measurement-period adjustment of $0.8 million to the mandatory one-time tax on the accumulated E&P of foreign subsidiaries and $0.7 million of federal GILTI and state taxation of foreign E&P for 2018.


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

(d)

Represents the net benefit from remeasurement of the net deferred income tax liabilities from tax rate changes. For 2017, the amount reflects a tax benefit of $10.3 million from the Tax Act, less $0.6 million of tax expense from a state tax rate change in Germany. For 2018, the amount reflects an additional measurement-period tax benefit adjustment of $0.9 million from the Tax Act, plus $0.7 million of tax benefit from a federal tax rate change in the Netherlands.

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 impact of research and development tax credits ("R&D Credits"), changes in tax laws, changes in corporate structure as a result of business acquisitions and dispositions, changes in the valuation of deferred income tax assets and liabilities and the results of audit examinations of previously filed tax returns. In addition to the impact of the reduction in the U.S. federal statutory tax rate from 35% to 21%, the 2018 effective income tax rate was significantly reduced by the effects of the $31.1 million impairment loss of the Brattleboro mill and associated research and office facilities (see Note 14), as similar sized reconciling items had a larger percentage impact on lower pre-tax book income.

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



	Year Ended December 31,
	2018			2017		2016
Income (loss) from continuing operations before income taxes:
U.S.	$	(1.7	)	$	53.6	$	68.3
Foreign	42.8			38.1		34.7
Total	$	41.1		$	91.7	$	103.0

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



	Year Ended December 31,
	2018			2017			2016
Provision (benefit) for income taxes:
Current:
Federal	$	(3.0	)	$	4.7		$	7.1
State	0.1			0.5			(0.5		)
Foreign	8.7			6.4			5.9
Total current income tax provision	5.8			11.6			12.5
Deferred:
Federal	(0.6		)	(1.8		)	14.8
State	(0.2		)	(0.1		)	1.8
Foreign	(1.1		)	1.7			0.5
Total deferred income tax provision	(1.9		)	(0.2		)	17.1
Total provision for income taxes	$	3.9		$	11.4		$	29.6

The current federal and state tax provisions were reduced in 2018 as a result of incremental pension contributions which could be applied to the 2017 tax year at the 35% federal rate and from refund of half of the Alternative Minimum Tax credits. The 2018 federal and state deferred income tax provision was reduced by the effects of the book impairment loss of the Brattleboro mill in excess of the write-off of its tax basis. In 2017, the federal deferred income tax provision was reduced by a net $8.1 million as a result of the Tax Act and the German tax rate increase. This amount included $10.3 million of tax rate reduction from the Tax Act, less $0.6 million from the German tax rate increase, less $1.6 million of impact of the mandatory one-time tax on the accumulated earnings of foreign subsidiaries from the Tax Act. The 2017 federal current tax provision was increased by $2.2 million due to the mandatory one-time tax on foreign earnings.

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 income 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 income tax assets and liabilities, net of reserves for uncertain tax positions and valuation allowances, are as follows:



	December 31,
	2018			2017
Deferred income tax assets (liabilities)
Research and development tax credits	$	20.0		$	6.6
Employee benefits	16.5			1.1
Net operating losses and other tax credits	7.4			4.2
Accrued liabilities	2.3			0.1
Interest limitation	1.7			—
Inventories	1.0			0.2
Intangibles	(4.2		)	(0.5		)
Accelerated depreciation	(28.8		)	(1.6		)
Other	0.5			—
Net deferred income tax assets	$	16.4		$	10.1

Deferred income tax assets (liabilities)
Accelerated depreciation	$	(16.6	)	$	(45.1	)
Intangibles	(3.2		)	(11.4		)
Inventories	(1.0		)	1.8
Accrued liabilities	—			1.9
Research and development tax credits	—			8.6
Net operating losses	0.2			5.0
Employee benefits	6.3			22.9
Other	(0.1		)	1.3
Net deferred income tax liabilities	$	(14.4	)	$	(15.0	)

The presentation as of December 31, 2018 reflected net deferred income tax assets of U.S. federal and state jurisdictions and the net deferred income tax liabilities related to operations of Germany, the Netherlands and the U.K. As of December 31, 2017, the net deferred income tax assets relate to the state of Wisconsin and the net deferred income tax liabilities relate to U.S. federal and all other U.S. state jurisdictions, and operations of Germany, the Netherlands and the U.K.

On January 1, 2018, the Company implemented ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other Than Inventory. The standard requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For the Company, the tax effects related to a 2017 transfer of intellectual property were affected by this standard. The standard was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of January 1, 2018. The Company recorded a $2.9 million deferred income tax asset in the U.S. and eliminated a $3.7 million prepaid tax asset in Germany, each with offsets to retained earnings.

As of December 31, 2018, the Company had $58.4 million of undistributed earnings (net of foreign taxes) of foreign subsidiaries. There were $37.3 million undistributed earnings (net of foreign taxes) of foreign subsidiaries as of December 31, 2017.

As of December 31, 2018, the Company had $20.4 million of U.S. federal and $7.2 million of U.S. state R&D Credits which, if not used, will expire between 2029 and 2038 for the U.S. federal R&D Credits and between 2020 and 2033 for the state R&D Credits. As of December 31, 2018, the Company had $47.6 million of state net operating losses (NOLs) which may be used to offset state taxable income. The NOLs are reflected in the consolidated financial statements as a deferred income tax asset of $3.0 million. If not used, substantially all of the NOLs will expire in various amounts between 2019 and 2038. The Company also had pre-acquisition and recognized built-in loss carryovers of $8.5 million, reflected as a deferred income tax asset of $1.8 million. In addition, the Company had $1.4 million of federal Alternative Minimum Tax Credit carryovers, which under the Tax Act are fully refundable by no later than 2021

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 2015, to state and local examinations for years before 2014 and to non-U.S. income tax examinations for years before 2012. The following is a tabular reconciliation of the total amounts of uncertain tax positions as of and for the years ended December 31, 2018, 2017 and 2016:



	For the Years Ended December 31,
	2018			2017			2016
Balance at January 1,	$	10.0		$	10.3		$	12.9
Increases in prior period tax positions	0.1			0.4			—
Decreases in prior period tax positions	—			(1.0		)	(2.6		)
Increases in current period tax positions	0.8			0.7			0.6
Decreases due to lapse of statute of limitations	(0.6		)	(1.0		)	(0.3		)
Increases due to change in tax rates	0.1			0.4			—
Decreases due to settlements	(0.2		)	—			—
Increases (decreases) from foreign exchange rate changes	(0.1		)	0.2			(0.3		)
Balance at December 31,	$	10.1		$	10.0		$	10.3

The $10.1 million of reserves for uncertain tax positions as of December 31, 2018 were reflected on the consolidated balance sheets as follows: $7.9 million netted against deferred income tax assets and $2.2 million in other noncurrent obligations. The $10.0 million of reserves for uncertain tax positions as of December 31, 2017 were reflected on the consolidated balance sheets as follows: $2.3 million netted against deferred income tax assets, $5.3 million netted against (added to) deferred income tax liabilities and $2.4 million in other noncurrent obligations. The $10.3 million of reserves for uncertain tax positions as of December 31, 2016 were reflected on the consolidated balances as follows: $7.6 million netted against deferred income tax assets, $1.2 million netted against (added to) deferred income tax liabilities and $1.5 million in other noncurrent obligations.

If recognized, $10.0 million of the benefit for uncertain tax positions at December 31, 2018 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, 2018.

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, 2018 and 2017, the Company had $0.1 million and $0.1 million, respectively, accrued for interest and penalties related to uncertain income tax positions.

As a result of the Tax Act, the Company recorded $2.2 million of foreign tax credits during 2018, which the Company believes will expire unutilized. Therefore, as of December 31, 2018, the Company recorded a valuation allowance of an equal amount against this deferred income tax asset. As of December 31, 2018 and 2017, the Company also had a valuation allowance of $0.5 million and $0.4 million, respectively, against its state tax credits and 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.