Income Taxes

The Tax Cuts and Jobs Act was enacted December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% for taxable years beginning after December 31, 2017, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were not previously subject to U.S. Federal income tax and creates new taxes on certain foreign sourced earnings. In 2017 and for the nine months ended September 30, 2018, the Company recorded provisional amounts for these enactment-date effects of the Act by applying the guidance in U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118") because the Company had not yet completed its accounting for these effects. As of December 22, 2018, the Company has completed its accounting for all of the enactment-date income tax effects of the Act. As further discussed below, the Company recognized adjustments totaling $5,299 at December 31, 2018 to the provisional amounts recorded at December 31, 2017 and each interim reporting period of 2018. These adjustments are included as a component of income tax expense. The changes to 2017 enactment-date provisional amounts did not have a material effect on the effective tax rate in 2018.

Deferred tax assets and liabilities

As of December 31, 2017, the Company remeasured U.S. deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future, which is generally 21% for federal income tax purposes. The provisional amount recorded related to the remeasurement of the deferred tax balance was $13,854 at December 31, 2017. Upon further analysis of certain aspects of the Act and refinement of our calculations during the 12 month period ended December 31, 2018, the Company adjusted its provisional amount by approximately $424, which is included as a component of income tax expense.

International tax effects

The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P") which the Company has previously deferred from U.S. income taxes pursuant to the provisions of the Internal Revenue Code prior to the Act. The Company recorded a provisional U.S. tax liability for the transition tax in the amount of $37,132 at December 31, 2017. Upon further analysis of the Act and notices and regulations issued by the U.S. Department of the Treasury and the Internal Revenue Service, the Company finalized its calculations of the transition tax liability during the 12 month period ended December 31, 2018. The provisional amount increased by $4,875 at December 31, 2018, which is included as a component of income tax expense. The Company has elected to pay the tax over the eight year period provided by the Act. No additional income taxes, where applicable (i.e., U.S. Federal, U.S. State, foreign withholding, or similar taxes under foreign law), have been provided on any remaining outside basis difference inherent in the Company's foreign subsidiaries. The cumulative undistributed earnings from the Company's foreign subsidiaries continue to be indefinitely reinvested in foreign operations. The gross tax cost to the Company associated with its outside basis difference is not material. Determining the amount of net unrecognized deferred tax liability related to any additional outside basis difference in these entities (i.e., basis difference other than those subject to the one-time transition tax) is not practicable. This is due to the complexities associated with the hypothetical calculation to determine residual taxes on the undistributed earnings, including the availability of foreign tax credits, applicability of any additional local withholding tax and other indirect tax consequence that may arise due to the distribution of these earnings.

Global Intangible Low-Taxed Income ("GILTI")

The Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to account for GILTI in the year the tax is incurred as a period cost.

Significant components of the Company’s deferred tax assets and liabilities are as follows:



	2018			2017
Deferred tax assets related to:
Expenses not yet deducted for tax purposes	$	266,628		$	256,728
Pension liability not yet deducted for tax purposes	277,929			257,766
Net operating loss	29,785			31,046
	574,342			545,540
Deferred tax liabilities related to:
Employee and retiree benefits	218,124			210,429
Inventory	95,280			93,067
Other intangible assets	296,736			287,018
Property, plant, and equipment	72,463			66,727
Other	32,978			35,859
	715,581			693,100
Net deferred tax liability before valuation allowance	(141,239		)	(147,560		)
Valuation allowance	(26,095		)	(5,590		)
Total net deferred tax liability	$	(167,334	)	$	(153,150	)

The Company currently holds approximately $125,013 in net operating losses, of which approximately $89,710 will carry forward indefinitely. The remaining net operating losses of approximately $35,303 will begin to expire in 2024.

The components of income before income taxes are as follows:



	2018		2017		2016
United States	$	790,592	$	813,078	$	934,476
Foreign	285,020		196,190		139,864
Income before income taxes	$	1,075,612	$	1,009,268	$	1,074,340

The components of income tax expense are as follows:



	2018			2017			2016
Current:
Federal	$	144,615		$	252,337		$	284,199
State	39,326			29,288			41,083
Foreign	77,306			44,896			28,593
Deferred:
Federal	15,167			71,238			26,684
State	5,770			13,663			3,857
Foreign	(17,046		)	(18,911		)	2,684
	$	265,138		$	392,511		$	387,100

The reasons for the difference between total tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are as follows:



	2018			2017			2016
Statutory rate applied to income (1)	$	225,879		$	353,259		$	376,019
Plus state income taxes, net of Federal tax benefit	35,626			27,918			29,211
Taxation of foreign operations, net (2)	(7,639		)	(33,984		)	(18,057		)
U.S. tax reform - transition tax	4,875			37,132			—
U.S. tax reform - deferred tax remeasurement	424			13,854			—
Foreign rate change - deferred tax remeasurement	(1,461		)	(9,338		)	—
Book tax basis difference in investment	(11,944		)	—			—
Valuation allowance	20,505			1,273			371
Other	(1,127		)	2,397			(444		)
	$	265,138		$	392,511		$	387,100


(1)	U.S. statutory rates applied to income are as follows: 2018 at 21%, 2017 and 2016 at 35%.


(2)	The Company's effective tax rate reflects the net benefit of having operations outside of the U.S. which are taxed at statutory rates different from the U.S. statutory rate, with some income being fully or partially exempt from income taxes due to various operating and financing activities.

The Company, or one of its subsidiaries, files income tax returns in the U.S., various states, and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local tax examinations by tax authorities for years before 2014 or subject to non-United States income tax examinations for years ended prior to 2012. The Company is currently under audit in the U.S. and some of its foreign jurisdictions. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not possible to estimate the effect, if any, of the amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.

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



	2018			2017			2016
Balance at beginning of year	$	14,697		$	15,190		$	15,815
Additions based on tax positions related to the current year	2,034			2,644			2,184
Additions for tax positions of prior years	4,787			1,511			1,317
Reductions for tax positions for prior years	(725		)	(430		)	(1,369		)
Reduction for lapse in statute of limitations	(2,338		)	(3,917		)	(2,516		)
Settlements	(27		)	(301		)	(241		)
Balance at end of year	$	18,428		$	14,697		$	15,190

The amount of gross unrecognized tax benefits, including interest and penalties, as of December 31, 2018 and 2017 was approximately $20,669 and $16,919, respectively, of which approximately $14,760 and $10,847, respectively, if recognized, would affect the effective tax rate.

During the years ended December 31, 2018, 2017, and 2016, the Company paid or received refunds of interest and penalties of approximately $18, $(3,384), and $5, respectively. The Company had approximately $2,242 and $2,151 of accrued interest and penalties at December 31, 2018 and 2017, respectively. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.