INCOME TAXES

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Act”), which significantly changed U.S. tax law. The Act, among other things, lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while imposing a deemed repatriation tax on deferred foreign income and implementing a modified territorial tax system. While the Act provides for a territorial tax system, beginning in 2018, it provides for two new anti-base erosion provisions, the global intangible low-taxed income (“GILTI”) provision and the base-erosion and anti-abuse tax (“BEAT”) provision which effectively creates a new minimum tax on certain future foreign earnings.

The Company included reasonable estimates of the income tax effects in applying the provisions of the Act in accordance with Accounting Standards Codification Topic 740, Income Taxes (ASC Topic 740) and following the guidance in SEC Staff Accounting Bulletin No. 118 (“SAB 118”). As a result, the impacts from the Act may differ, primarily related to deemed repatriated earnings and associated withholding taxes, from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes from interpretations enacted and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Act. Due to the timing of the Act and the substantial changes it brings, SAB 118 provides registrants a measurement period to report the impact of the new US tax law. The financial reporting impact of the Act is expected to be completed no later than the fourth quarter of 2018. The Company has elected to account for the GILTI provision in the period in which it is incurred.

The impacts of these changes are reflected in the 2017 provisional tax expense which resulted in a net provisional charge of $115.3 million. The charge is comprised of $120.5 million of tax expense related to the deemed repatriation of unremitted earnings of foreign subsidiaries as well as associated local withholding taxes, partially offset by $5.2 million of tax benefit relating to other changes pursuant to the Act.

The provision for income taxes consists of the following:



	Year Ended December 31,
	2017		2016			2015
	(Amounts in thousands)
Current:
U.S. federal	$	59,292	$	20,569		$	62,032
Non-U.S.	22,442		75,227			78,489
State and local	5,537		2,612			4,947
Total current	87,271		98,408			145,468
Deferred:
U.S. federal	135,294		22,249			(3,509		)
Non-U.S.	34,626		(45,577		)	4,972
State and local	1,488		2,300			1,420
Total deferred	171,408		(21,028		)	2,883
Total provision	$	258,679	$	77,380		$	148,351

The provision for income taxes differs from the statutory corporate rate due to the following:



	Year Ended December 31,
	2017			2016			2015
	(Amounts in millions)
Statutory federal income tax at 35%	$	92.1		$	74.5		$	144.3
Foreign impact, net	(36.4		)	(13.9		)	(22.1		)
Impact of U.S. Tax Cuts and Jobs Act of 2017	115.3			—			—
Change in valuation allowances	73.6			14.2			11.6
State and local income taxes, net	4.9			4.9			6.4
Other, net	9.2			(2.3		)	8.2
Total	$	258.7		$	77.4		$	148.4
Effective tax rate	98.4		%	36.3		%	36.0		%

The 2017 tax rate differed from the federal statutory rate of 35% primarily due to the impacts pursuant to enactment of the Act, the net impact of foreign operations, the establishment of valuation allowances against our deferred tax assets in various foreign jurisdictions, primarily Mexico, and taxes related to the sales of the Gestra and Vogt businesses. Our effective tax rate of 98.4% for the year ended December 31, 2017 increased from 36.3% in 2016 due to the tax impacts described above. The 2016 tax rate differed from the federal statutory rate of 35% primarily due to the net impact of foreign operations, tax impacts from our Realignment Programs and losses in certain foreign jurisdictions for which no tax benefit was provided. The 2015 tax rate differed from the federal statutory rate of 35% primarily due to tax impacts of the realignment programs, the non-deductible Venezuelan exchange rate remeasurement loss, and the establishment of a valuation allowance against our deferred tax assets in Brazil in the amount of $12.6 million, partially offset by the net impact of foreign operations, which included the impacts of lower foreign tax rates and changes in our reserves established for uncertain tax positions.

In connection with the Act and as of December 31, 2017, we do not assert permanent reinvestment on any of our foreign subsidiaries. Prior to this time, we asserted permanent reinvestment on the majority of invested capital and unremitted foreign earnings in our foreign subsidiaries. However, we did not assert permanent reinvestment on a limited number of foreign subsidiaries where future distributions may occur. During each of the two years reported in the period ended December 31, 2016, we did not recognize any net deferred tax assets attributable to excess foreign tax credits on unremitted earnings or foreign currency translation adjustments in our foreign subsidiaries with excess financial reporting basis.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities were:



	December 31,
	2017			2016
	(Amounts in thousands)
Deferred tax assets related to:
Retirement benefits	$	28,519		$	39,644
Net operating loss carryforwards	73,465			48,180
Compensation accruals	24,030			30,299
Inventories	30,870			43,445
Credit carryforwards	8,910			64,251
Warranty and accrued liabilities	16,005			30,612
Bad debt reserve	30,698			27,857
Other	40,859			40,806
Total deferred tax assets	253,356			325,094
Valuation allowances	(119,309		)	(36,191		)
Net deferred tax assets	134,047			288,903
Deferred tax liabilities related to:
Property, plant and equipment	(24,204		)	(47,616		)
Goodwill and intangibles	(123,036		)	(176,935		)
Non-U.S. undistributed earnings taxes	(75,442		)	—
Other	(15,667		)	(716		)
Total deferred tax liabilities	(238,349		)	(225,267		)
Deferred tax (liabilities) assets, net	$	(104,302	)	$	63,636

We have $323.9 million of U.S. and foreign net operating loss carryforwards at December 31, 2017. Of this total, $32.4 million are state net operating losses. Net operating losses generated in the U.S., if unused, will expire in 2017 through 2027. The majority of our non-U.S. net operating losses carry forward without expiration. Additionally, we have $7.5 million of foreign tax credit carryforwards at December 31, 2017, expiring in 2026 and 2027, for which a valuation allowance of $7.5 million has been recorded.

Earnings before income taxes comprised:



	Year Ended December 31,
	2017		2016		2015
	(Amounts in thousands)
U.S.	$	102,372	$	170,681	$	215,719
Non-U.S.	160,635		42,231		196,647
Total	$	263,007	$	212,912	$	412,366

A tabular reconciliation of the total gross amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):



	2017			2016			2015
Balance — January 1	$	59.3		$	56.1		$	51.5
Gross amount of (decrease) increase in unrecognized tax benefits resulting from tax positions taken:
During a prior year	(3.5		)	1.9			9.8
During the current period	5.5			14.3			8.6
Decreases in unrecognized tax benefits relating to:
Settlements with taxing authorities	(10.8		)	(4.0		)	(1.1		)
Lapse of the applicable statute of limitations	(3.1		)	(7.3		)	(7.4		)
Increase (decrease) in unrecognized tax benefits relating to foreign currency translation adjustments	4.1			(1.7		)	(5.3		)
Balance — December 31	$	51.5		$	59.3		$	56.1

The amount of gross unrecognized tax benefits at December 31, 2017 was $66.1 million, which includes $14.6 million of accrued interest and penalties. Of this amount $65.5 million, if recognized, would favorably impact our effective tax rate.

With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2015, state and local income tax audits for years through 2011 or non-U.S. income tax audits for years through 2010. We are currently under examination for various years in Austria, Canada, France, Germany, India, Indonesia, Italy, Mexico, Saudi Arabia, Singapore, the U.S. and Venezuela.

It is reasonably possible that within the next 12 months the effective tax rate will be impacted by the resolution of some or all of the matters audited by various taxing authorities. It is also reasonably possible that we will have the statute of limitations close in various taxing jurisdictions within the next 12 months. As such, we estimate we could record a reduction in our tax expense up to approximately $8 million within the next 12 months.