Note

Income Taxes

Income from continuing operations before income taxes and income from equity method investments	2016		2015		2014
United States	$	76,199	$	97,094	$	55,567
Non-U.S.		91,226		41,251		23,745
Total	$	167,425	$	138,345	$	79,312

Components of the provision for income tax expense (benefit)	2016			2015			2014
Current:
U.S. federal	$	14,515		$	24,180		$	8,771
State		2,789			2,955			1,290
Non-U.S.		27,788			22,075			20,133
		45,092			49,210			30,194
Deferred:
U.S. federal		6,444			8,096			8,106
State		1,102			1,269			1,069
Non-U.S.		(2,202	)		(2,720	)		(5,021	)
		5,344			6,645			4,154
Total	$	50,436		$	55,855		$	34,348

Reconciliation of effective income tax	2016			2015			2014
Statutory U.S. federal income tax rate	$	58,599		$	48,421		$	27,759
State income taxes, net of federal benefit		2,135			3,281			1,534
Foreign dividend repatriation		519			388			760
Foreign operations		(3,386	)		1,547			(8,287	)
Impact of option valuation		(1,879	)		1,211			-
Interest income not taxable in the U.S.		(525	)		(1,243	)		(1,649	)
Change in valuation allowance		(2,219	)		480			3,317
Tax impact of special charges, net		173			1,678			11,773
Research & Development tax credit		(2,291	)		(71	)		(16	)
Section 199 Manufacturing Deduction		(1,658	)		(2,036	)		(757	)
Other		968			2,199			(86	)
Total	$	50,436		$	55,855		$	34,348

Deferred income tax balances at each year-end related to:	2016			2015
Deferred Tax Assets:
Employee benefit costs	$	46,249		$	50,679
Foreign tax credit carryforward		11,593			11,621
Tax loss carryforwards		19,902			21,090
Other		20,612			24,373
Gross Deferred Tax Assets		98,356			107,763
Less: Valuation Allowance		(11,929	)		(14,393	)
Total Net Deferred Tax Assets		86,427			93,370
Deferred Tax Liability:
Depreciation and amortization		(66,589	)		(61,992	)
Total Deferred Tax Liability		(66,589	)		(61,992	)
Net Deferred Tax Assets	$	19,838		$	31,378

The difference between the change in the deferred tax assets in the balance sheet and the deferred tax provision is primarily due to the defined benefit pension plan adjustment recorded in accumulated other comprehensive income (loss).

November

2015,

the FASB issued ASU No.

2015

17,

Income Taxes (Topic

740):

Balance Sheet Classification of Deferred Taxes

, which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This accounting guidance is effective for us beginning in the

first

quarter of

2018,

but we have elected to adopt this guidance prospectively as of

November

28,

2015.

As a result we have classified all deferred tax liabilities and assets as non-current in the Consolidated Balance Sheet at

December

2016.

Valuation allowances principally relate to foreign net operating loss carryforwards where the future potential benefits do not meet the more-likely-than-not realization test. The decrease in the valuation allowance of

$2,464

during

2016

is due primarily to the release of the valuation allowance of H.B. Fuller (Nanjing) Chemical Co., Ltd. and of H.B. Fuller India Adhesives Private Limited.

Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized. We believe it is more-likely-than-not that carryback potential, reversal of deferred tax liabilities and forecasted income, will be sufficient to fully recover the net deferred tax assets not already offset by a valuation allowance. In the event that all or part of the gross deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

U.S. income taxes have not been provided on approximately

$434,430

of undistributed earnings of non-U.S. subsidiaries. We intend to indefinitely reinvest these undistributed earnings. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. cash flow requirements. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that

may

be offset, at least in part, by associated foreign tax credits.

While non-U.S. operations have been profitable overall, there are cumulative tax losses of

$99,021

in various countries. These tax losses can be carried forward to offset the income tax liabilities on future income in these countries. Cumulative tax losses of

$53,938

can be carried forward indefinitely, while the remaining

$45,083

of tax losses must be utilized during

2016

2025.

The U.S. has a foreign tax credit carryforward of

$11,593

which will expire in

2022

and

2023.

Projected foreign source income in future years is sufficient to utilize these credits in the carryforward period.

The table below sets forth the changes to our gross unrecognized tax benefit as a result of uncertain tax positions, excluding accrued interest, for the fiscal years ended

December

2016

and

November

28,

2015.

We do not anticipate that the total unrecognized tax benefits will change significantly within the next

twelve

months.

	2016			2015
Balance at beginning of year	$	4,870		$	4,787
Tax positions related to the current year:
Additions		774			877

Tax positions related to prior years:
Additions		209			439
Reductions		(377	)		(557	)
Settlements		(131	)		-
Lapses in applicable statutes of limitation		(1,180	)		(676	)
Balance at end of year	$	4,165		$	4,870

Included in the balance of unrecognized tax benefits as of

December

2016,

are potential benefits of

$3,735

that, if recognized, would affect the effective tax rate.

We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the year ended

December

2016,

we recognized a net benefit for interest and penalties of

$87

relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of

$676

as of

December

2016.

For the year ended

November

28,

2015,

we recognized a net benefit for interest and penalties of

$179

relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of

$631

as of

November

28,

2015.

We are subject to U.S. federal income tax as well as income tax in numerous state and foreign jurisdictions. We are no longer subject to U.S. federal tax examination for years prior to

2011

or Swiss income tax examination for years prior to

2009.

During

2015,

the U.S. tax authorities opened an audit for the years ended

December

2012

and

November

30,

2013.

During the

first

quarter of

2015,

the Swiss tax authorities opened an audit for the years ended

December

2011

and

December

2012.

The Swiss audit was closed in the

second

quarter of

2015

with no assessment. During the

second

quarter of

2016,

H.B. Fuller (China) Adhesives, Ltd. was notified of a transfer pricing audit covering the calendar years

2005

through

2014.

We are in various stages of examination and appeal in several states and other foreign jurisdictions. Although the final outcomes of these examinations cannot currently be determined, we believe that we have recorded adequate liabilities with respect to these examinations.