12. INCOME TAXES

2017 Tax Cuts and Jobs Act

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law. The new legislation contained several key tax provisions, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate to 21%. The Corporation will also generally be eligible for a 100% dividends received exemption on its foreign earnings. The Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Corporation has applied an accounting policy election to provide for the tax expense related to GILTI in the year in which the tax is incurred.

The Corporation has summarized the most significant impacts from the Tax Act below:

Reduction of the U.S. Corporate Income Tax Rate

The Corporation measures deferred tax assets and liabilities using enacted tax rates that are applicable in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Corporation’s deferred tax assets and liabilities were remeasured to reflect the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a provisional $13.4 million decrease in income tax expense for the year ended December 31, 2017 and a corresponding $13.4 million decrease in net deferred tax liabilities as of December 31, 2017.

Transition Tax on Foreign Earnings

The Corporation recorded provisional income tax expense of $18.2 million for the year ended December 31, 2017 related to the one-time transition tax on certain foreign earnings. Prior to assessing the impact of the Tax Act, the Corporation had a deferred tax liability of $5.5 million for certain foreign subsidiaries whose earnings were not considered permanently reinvested. As of December 31, 2017, the Corporation’s provisional income tax liability related to the transition tax was $23.7 million. The finalized transition tax of $23.6 million was to be paid over eight years pursuant to the Tax Act, with $1.9 million paid in 2018. An additional $12.7 million carryforward from the 2017 income tax return further reduced the transition tax liability to $9.0 million, which will be paid in 2024 and 2025. Given that foreign undistributed earnings are no longer considered permanently reinvested, the Corporation also recorded provisional income tax expense of $3.8 million for the year ended December 31, 2017 for withholding taxes that would arise upon distribution of the Corporation’s foreign undistributed earnings.

During the year ended December 31, 2018, the Corporation recorded additional tax expense of $9.3 million for foreign withholding taxes associated with the Tax Act, $6.5 million of which related to the prior period. The Corporation is considered permanently reinvested to the extent of any outside basis differences in its foreign subsidiaries in excess of the amount of undistributed earnings.

Earnings before income taxes for the years ended December 31 consist of:



(In thousands)	2018		2017		2016
Domestic	$	217,374	$	179,006	$	154,571
Foreign	138,865		120,613		113,390
	$	356,239	$	299,619	$	267,961

The provision for income taxes for the years ended December 31 consists of:



(In thousands)	2018			2017			2016
Current:
Federal	$	37,648		$	54,963		$	45,523
State	9,228			2,648			8,002
Foreign	25,285			23,162			20,861
Total current	72,161			80,773			74,386

Deferred:
Federal	8,518			2,595			4,267
State	(1,047		)	4,282			73
Foreign	858			(2,922		)	(147		)
Total deferred	8,329			3,955			4,193
Provision for income taxes	$	80,490		$	84,728		$	78,579

The effective tax rate varies from the U.S. federal statutory tax rate for the years ended December 31, principally:



	2018		2017		2016
U.S. federal statutory tax rate	21.0	%	35.0	%	35.0	%
Add (deduct):
State and local taxes, net of federal benefit	2.2		1.8		1.1
R&D tax credits	(1.0	)	(1.3	)	(0.9	)
Foreign earnings ⁽¹⁾	0.9		(6.0	)	(5.8	)
Stock compensation - excess tax benefits	(1.3	)	(2.6	)	—
Impacts related to the Tax Act	1.8		3.4		—
All other, net	(1.0	)	(2.0	)	(0.1	)
Effective tax rate	22.6	%	28.3	%	29.3	%

⁽¹⁾ Foreign earnings primarily include the net impact of differences between local statutory rates and the U.S. Federal statutory rate, the cost of repatriating foreign earnings, and the impact of changes to foreign valuation allowances.

The components of the Corporation’s deferred tax assets and liabilities as of December 31 are as follows:



(In thousands)	2018		2017
Deferred tax assets:
Pension plans	$	28,020	$	18,903
Environmental reserves	8,613		7,109
Inventories	14,154		15,116
Postretirement/postemployment benefits	7,636		8,241
Incentive compensation	8,472		7,721
Net operating loss	9,868		10,908
Capital loss carryover	6,972		7,047
Other	27,795		28,775
Total deferred tax assets	111,530		103,820
Deferred tax liabilities:
Depreciation	24,983		19,586
Goodwill amortization	70,850		67,779
Other intangible amortization	33,600		38,252
Withholding taxes	10,300		3,800
Other	5,345		8,836
Total deferred tax liabilities	145,078		138,253
Valuation allowance	11,646		12,322
Net deferred tax liabilities	$	45,194	$	46,755

Deferred tax assets and liabilities are reflected on the Corporation’s consolidated balance sheet as of December 31 as follows:



(In thousands)	2018		2017
Net noncurrent deferred tax assets	1,927		2,605
Net noncurrent deferred tax liabilities	47,121		49,360
Net deferred tax liabilities	$	45,194	$	46,755

The Corporation has income tax net operating loss carryforwards related to international operations of $19.2 million, of which $16.4 million have an indefinite life and $2.8 million which expire through 2027. The Corporation has federal and state income tax net loss carryforwards of $102.2 million, of which $71.1 million are net operating losses which expire through 2037 and $31.1 million are capital loss carryforwards which expire through 2020. The Corporation has recorded a deferred tax asset of $16.8 million reflecting the benefit of the loss carryforwards.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2018 in certain of the Corporation’s foreign locations. Such objective evidence limits the ability to consider other subjective evidence such as projections for future growth. The Corporation provisionally decreased its valuation allowance by $0.7 million to $11.6 million, as of December 31, 2018, in order to measure only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth.

Income tax payments, net of refunds, of $79.1 million, $92.1 million, and $54.5 million were made in 2018, 2017, and 2016, respectively.

The Corporation has recognized a liability in Other liabilities for interest of $3.2 million and penalties of $1.7 million as of December 31, 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(In thousands)	2018			2017			2016
Balance as of January 1,	$	13,174		$	11,454		$	12,414
Additions for tax positions of prior periods	88			1,069			32
Reductions for tax positions of prior periods	(290		)	(194		)	(1,679		)
Additions for tax positions related to the current year	1,036			1,273			789
Settlements	(445		)	(428		)	(102		)
Balance as of December 31,	$	13,563		$	13,174		$	11,454

In many cases, the Corporation’s uncertain tax positions are related to tax years that remain subject to examination by tax authorities.

The following describes the open tax years, by major tax jurisdiction, as of December 31, 2018:



United States (Federal)	2015	-	present
United States (Various states)	2007	-	present
United Kingdom	2011	-	present
Canada	2012	-	present

The Corporation does not expect any significant changes to the estimated amount of liability associated with its uncertain tax positions through the next twelve months. Included in total unrecognized tax benefits as of December 31, 2018, 2017, and 2016 is $11.0 million, $10.1 million, and $7.7 million, respectively, which if recognized, would favorably impact the effective income tax rate.