Income Taxes

Provision for Income Taxes

The Company’s income before taxes is as follows:



(in millions) For year ended December 31,	2016		2015		2014
U.S. operations	$	63.5	$	261.9	$	141.8
Non-U.S. operations	100.6		74.6		139.4
Total	$	164.1	$	336.5	$	281.2

The Company’s provision (benefit) for income taxes consists of:



(in millions) For year ended December 31,	2016			2015			2014
Current:
U.S. federal tax	$	38.7		$	43.0		$	14.0
U.S. state and local tax	5.1			5.4			2.6
Non-U.S. tax	21.6			18.4			33.1
Total current	65.4			66.8			49.7
Deferred:
U.S. federal tax	(28.0		)	36.5			30.1
U.S. state and local tax	1.5			(0.4		)	1.3
Non-U.S. tax	1.4			3.6			6.5
Total deferred	(25.1		)	39.7			37.9
Total provision for income taxes	$	40.3		$	106.5		$	87.6

A reconciliation of the statutory U.S. federal tax rate to the Company’s effective tax rate is as follows:



(in millions) For year ended December 31,	2016		2015		2014
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Increase (reduction) from:
Income taxed at non-U.S. rates	(7.4	)%	(2.0	)%	(4.0	)%
Non-U.S. income inclusion, net of tax credits	(1.0	)%	—	%	0.1	%
State and local taxes, net of federal benefit	3.1	%	1.3	%	1.3	%
U.S. research and development tax credit	(3.2	)%	(0.9	)%	(1.0	)%
U.S. domestic manufacturing deduction	(3.2	)%	(1.3	)%	(0.7	)%
Other	1.3	%	(0.4	)%	0.5	%
Effective tax rate	24.6	%	31.7	%	31.2	%

As of December 31, 2016, deferred taxes have not been provided on $725 million of non-U.S. subsidiaries' undistributed earnings because the Company intends to permanently reinvest these earnings outside the U.S. Determination of U.S. income taxes and non-U.S. withholding taxes due upon repatriation of this $725 million of earnings is not practicable because the amount of such taxes depends upon circumstances existing in numerous taxing jurisdictions when the remittance occurs.

The Company’s non-U.S. subsidiaries held cash of $464 million and $358 million as of December 31, 2016 and 2015, respectively, and these balances are generally subject to U.S. income and non-U.S. withholding taxation upon repatriation.

The Company’s income taxes payable has been reduced by excess tax benefits from share-based compensation. For stock options, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and exercise. For restricted share units, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and vesting. During the fourth quarter of 2016, the Company adopted the FASB's amended guidance related to employee share-based payment accounting. The primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes rather than capital surplus. The Company had excess tax benefits from share-based compensation of $0.4 million, $1.6 million and $7.7 million in 2016, 2015 and 2014, respectively, which were reflected as a reduction in the Company's provision for income taxes in 2016 and increases to the Company's capital surplus in 2015 and 2014, respectively.

During 2016, 2015 and 2014, tax (benefit) provision of $(8.4) million, $4.6 million, and $(61.1) million, respectively, related to changes in pension and post-retirement plan assets and benefit obligations, were recorded to accumulated other comprehensive income.

Deferred Taxes and Valuation Allowances

The components of deferred tax assets and liabilities included on the Company’s Consolidated Balance Sheets are as follows:



(in millions) December 31,	2016			2015
Deferred tax assets:
Asbestos-related liabilities	$	215.4		$	162.7
Tax loss and credit carryforwards	101.3			105.6
Pension and post-retirement benefits	74.3			69.1
Inventories	25.0			23.5
Accrued bonus and stock-based compensation	16.9			17.1
Environmental reserves	12.3			16.0
Other	36.7			55.3
Total	481.9			449.3
Less: valuation allowance	148.2			145.9
Total deferred tax assets, net of valuation allowance	333.7			303.4
Deferred tax liabilities:
Basis difference in intangible assets	(147.2		)	(142.2		)
Basis difference in fixed assets	(17.6		)	(21.5		)
Total deferred tax liabilities	(164.8		)	(163.7		)
Net deferred tax asset	$	168.9		$	139.7
Balance sheet classification:
Current deferred tax assets	$	29.6		$	27.5
Long-term deferred tax assets	181.8			162.4
Accrued liabilities	(0.1		)	(0.2		)
Long-term deferred tax liability	(42.4		)	(50.0		)
Net deferred tax asset	$	168.9		$	139.7

As of December 31, 2016, the Company had U.S. federal, U.S. state and non-U.S. tax loss and credit carryforwards that will expire, if unused, as follows:



(in millions) Year of expiration	U.S. Federal Tax Credits			U.S. Federal Tax Losses			U.S. State Tax Credits			U.S. State Tax Losses			Non- U.S. Tax Losses			Total
2017-2021	$	18.5		$	0.2		$	4.0		$	33.5		$	49.8
After 2021	1.5			1.0			2.0			824.5			9.2
Indefinite	—			—			20.0			—			89.9
Total tax carryforwards	$	20.0		$	1.2		$	26.0		$	858.0		$	148.9
Deferred tax asset on tax carryforwards	$	20.0		$	0.5		$	17.0		$	38.1		$	25.7		$	101.3
Valuation allowance on tax carryforwards	(20.0		)	(0.4		)	(16.3		)	(37.5		)	(22.3		)	(96.5		)
Net deferred tax asset on tax carryforwards	$	—		$	0.1		$	0.7		$	0.6		$	3.4		$	4.8

As of December 31, 2016 and 2015, the Company determined that it was more likely than not that $96.5 million and $98.7 million, respectively, of its deferred tax assets related to tax loss and credit carryforwards will not be realized. As a result, the Company recorded a valuation allowance against these deferred tax assets. The Company also determined that it is more likely than not that a portion of the benefit related to U.S. state and non-U.S. deferred tax assets other than tax loss and credit carryforwards will be not realized. Accordingly, as of December 31, 2016 and 2015, a valuation allowance of $51.7 million and $47.2 million, respectively, was established against these U.S. state and non-U.S. deferred tax assets. The Company’s total valuation allowance as of December 31, 2016 and 2015 was $148.2 million and $145.9 million, respectively.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of the Company’s gross unrecognized tax benefits, excluding interest and penalties, is as follows:



(in millions)	2016			2015			2014
Balance of liability as of January 1	$	45.2		$	40.7		$	31.4
Increase as a result of tax positions taken during a prior year	0.5			1.5			2.0
Decrease as a result of tax positions taken during a prior year	(7.3		)	(2.1		)	(1.2		)
Increase as a result of tax positions taken during the current year	10.3			9.2			11.2
Decrease as a result of settlements with taxing authorities	(1.2		)	—			(1.1		)
Reduction as a result of a lapse of the statute of limitations	(1.0		)	(4.1		)	(1.6		)
Balance of liability as of December 31	$	46.5		$	45.2		$	40.7

As of December 31, 2016, 2015 and 2014, the amount of the Company’s unrecognized tax benefits that, if recognized, would affect its effective tax rate was $47.6 million, $46.6 million, and $42.2 million, respectively. The difference between these amounts and those reflected in the table above relates to (1) offsetting tax effects from other tax jurisdictions, and (2) interest expense, net of deferred taxes.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. During the years ended December 31, 2016, 2015 and 2014, the Company recognized interest and penalty expense of $0.4 million, $1.1 million, and $0.7 million, respectively, in its Consolidated Statements of Operations. As of December 31, 2016 and 2015, the Company had accrued $6.2 million and $5.8 million, respectively, of interest and penalties related to unrecognized tax benefits in its Consolidated Balance Sheets.

During the next twelve months, it is reasonably possible that the Company's unrecognized tax benefits could change by $7.8 million due to settlements of income tax examinations, the expiration of statutes of limitations or other resolution of uncertainties. However, if the ultimate resolution of income tax examinations results in amounts that differ from this estimate, the Company will record additional income tax expense or benefit in the period in which such matters are effectively settled.

Income Tax Examinations

The Company's income tax returns are subject to examination by U.S. federal, U.S. state and local, and non-U.S. tax authorities.

During 2016, the Internal Revenue Service completed its examinations of the Company's consolidated income tax returns for 2010 through 2012 and an acquired subsidiary's consolidated income tax return for the short period ended December 2013. These examinations resulted in assessments for which accruals were previously established. The Company's consolidated federal income tax returns for 2013 through 2015 remain subject to examination.

With few exceptions, the Company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2010. As of December 31, 2016, the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2010 through 2012), Canada (2013 and 2014), and California (2012 and 2013). During the year, various U.S. state and non-U.S. income tax examinations were completed, resulting in minimal assessments for which accruals were previously established.