Income Taxes

The components of earnings from continuing operations before income taxes are as follows:



	Year Ended December 31
	2018		2017		2016
Domestic	$	149.1	$	188.6	$	267.7
Foreign	235.3		243.4		219.4
	$	384.4	$	432.0	$	487.1

Income tax expense from continuing operations is comprised of the following components:



	Year Ended December 31
	2018			2017			2016
Current
Federal	$	21.2		$	76.0		$	55.7
State and local	4.9			3.8			4.1
Foreign	55.6			43.2			42.5
	81.7			123.0			102.3
Deferred
Federal	8.8			5.8			13.1
State and local	(12.0		)	(2.6		)	2.3
Foreign	(.2		)	12.2			2.3
	(3.4		)	15.4			17.7
	$	78.3		$	138.4		$	120.0

The U.S. statutory federal income tax rate was significantly impacted by the enactment of TCJA in the fourth quarter of 2017, which reduced our U.S. federal corporate income tax rate from 35% in 2017 and 2016, to 21% in 2018. Income tax expense from continuing operations, as a percentage of earnings before income taxes, differs from these statutory federal income tax rates as follows:



	Year Ended December 31
	2018		2017		2016
Statutory federal income tax rate	21.0	%	35.0	%	35.0	%
Increases (decreases) in rate resulting from:
State taxes, net of federal benefit	.9		.9		.9
Tax effect of foreign operations	—		(8.8	)	(6.4	)
Current and deferred foreign withholding taxes	3.8		3.6		.9
Deemed repatriation of foreign earnings	(.3	)	15.6		—
Deferred tax revaluation	(.1	)	(6.0	)	—
Stock-based compensation	(.8	)	(2.0	)	(3.4	)
Tax benefit for outside basis in subsidiary	—		(1.8	)	—
Change in valuation allowance	(2.0	)	(.4	)	.2
Change in uncertain tax positions, net	(.3	)	(.6	)	(.6	)
Domestic production activities deduction	—		(1.2	)	(1.2	)
Other permanent differences, net	(1.4	)	(1.6	)	(.6	)
Other, net	(.4	)	(.7	)	(.2	)
Effective tax rate	20.4	%	32.0	%	24.6	%

In 2017, we recognized a provisional net tax expense totaling $50.4 from the impact of TCJA related to the one-time deemed repatriation tax ($67.3), additional foreign withholding taxes recorded for expected foreign cash repatriations ($9.0) and other items ($.2), offset by the revaluation of our U.S. deferred taxes ($26.1). We refined these provisional amounts under SAB 118 in the third quarter of 2018 and recorded measurement period adjustment benefits related to the deemed repatriation tax and our deferred tax revaluation of $1.3 and $.5, respectively. In addition, in 2018, the United States Internal Revenue Service (IRS) applied our prepaid income taxes and taxes receivable of $28.4 against the December 31, 2017 deemed repatriation tax liability. The deemed repatriation tax outstanding as of December 31, 2018, was $32.2 and will be paid on a graduated scale beginning in 2022 over a four-year period. As of December 31, 2018, our accounting was finalized with respect to the SAB 118 provisional amounts recorded at December 31, 2017. In aggregate, these adjustment items decreased our effective tax rate by .4% in 2018.

Our 2018 rate benefited by $2.3, primarily related to the net reduction of valuation allowances of $7.8 and other net benefits totaling $9.1, including measurement period adjustments discussed in the previous paragraph. These benefits were offset by tax detriments recorded in 2018 totaling $14.6 related to current and deferred foreign withholding taxes.

In 2017, we recognized net tax benefits totaling $25.2, including those associated with tax attributes from a divested business and the impact of stock-based compensation.

In 2016, we recognized net tax benefits totaling $19.3, including a tax benefit related to stock-based compensation from the first year adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting".

In both 2017 and 2016, prior to TCJA, the tax rate benefited from income earned in various foreign jurisdictions at rates lower than the U.S. federal statutory rate, primarily related to China, Croatia, and Luxembourg.

We file tax returns in each jurisdiction where we are required to do so. In these jurisdictions, a statute of limitations period exists. After a statute period expires, the tax authorities can no longer assess additional income tax for the expired period. In addition, once the statute expires we are no longer eligible to file claims for refund for any tax that we may have overpaid.

Unrecognized Tax Benefits

The total amount of our gross unrecognized tax benefits at December 31, 2018 was $11.0, of which $7.9 would impact our effective tax rate, if recognized. A reconciliation of the beginning and ending balance of our gross unrecognized tax benefits for the periods presented is as follows:



	2018			2017			2016
Gross unrecognized tax benefits, January 1	$	10.1		$	12.1		$	15.5
Gross increases—tax positions in prior periods	—			.1			.3
Gross decreases—tax positions in prior periods	(.5		)	(.4		)	(1.0		)
Gross increases—current period tax positions	1.3			1.5			1.1
Change due to exchange rate fluctuations	(.2		)	.3			—
Settlements	—			(.9		)	(.9		)
Lapse of statute of limitations	(2.5		)	(2.6		)	(2.9		)
Gross unrecognized tax benefits, December 31	8.2			10.1			12.1
Interest	2.4			3.0			4.0
Penalties	.4			.5			.6
Total gross unrecognized tax benefits, December 31	$	11.0		$	13.6		$	16.7

We recognize interest and penalties related to unrecognized tax benefits as part of income tax expense in the Consolidated Statements of Operations, which is consistent with prior reporting periods.

As of December 31, 2018, four tax years were subject to audit by the IRS, covering the years 2015 through 2018. In 2017, the IRS examined our 2015 tax returns for a U.S. non-consolidated filing entity, L&P Financial Services Co., and the audit concluded with no adjustments. There are no current IRS examinations in process, nor are we aware of any forthcoming.

Additionally, at December 31, 2018, eight tax years were either subject to or undergoing audit by the Canada Revenue Agency, covering the periods 2011 through 2018. The examinations in process are at various stages of completion, but to date we are not aware of any likely material adjustments. In 2016, we settled an appeal with the Canada Revenue Agency relative to our 2007 and 2008 tax years related to transfer pricing issues. The net impact of this settlement on our financial statements was not material.

Various state and other foreign jurisdiction tax years also remain open to examination, though we believe any assessments would not be material to our Consolidated Financial Statements.

It is reasonably possible that the resolution of certain tax audits could reduce our unrecognized tax benefits within the next 12 months, as certain tax positions may either be sustained on audit or we may agree to certain adjustments, or resulting from the expiration of statutes of limitations in various jurisdictions. It is not expected that any change would have a material impact on our Consolidated Financial Statements.

Deferred Income Taxes

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The major temporary differences and their associated deferred tax assets or liabilities are as follows:



	December 31
	2018						2017
	Assets			Liabilities			Assets			Liabilities
Property, plant and equipment	$	19.7		$	(67.8	)	$	19.8		$	(53.5	)
Inventories	2.1			(10.3		)	1.9			(14.0		)
Accrued expenses	60.3			(.1		)	59.1			(.2		)
Net operating losses and other tax carryforwards	27.2			—			35.0			—
Pension cost and other post-retirement benefits	13.4			(.6		)	11.9			(.6		)
Intangible assets	.4			(84.6		)	1.2			(77.3		)
Derivative financial instruments	5.0			(1.3		)	5.3			(1.7		)
Tax on undistributed earnings (primarily from Canada and China)	—			(18.8		)	—			(21.4		)
Uncertain tax positions	2.4			—			3.5			—
Other	6.9			(6.1		)	.7			(7.1		)
Gross deferred tax assets (liabilities)	137.4			(189.6		)	138.4			(175.8		)
Valuation allowance	(13.2		)	—			(24.2		)	—
Total deferred taxes	$	124.2		$	(189.6	)	$	114.2		$	(175.8	)
Net deferred tax (liability) asset				$	(65.4	)				$	(61.6	)

Deferred tax assets (liabilities) included in the consolidated balance sheets are as follows:



	December 31
	2018			2017
Sundry	$	20.2		$	21.4
Deferred income taxes	(85.6		)	(83.0		)
	$	(65.4	)	$	(61.6	)

Significant fluctuations in our deferred taxes from 2017 to 2018 relate to the following:


•	The reduction of $7.8 in our "Net operating losses and other tax carryforwards" deferred tax asset relates primarily to the 2018 anticipated utilization of U.S. state and Canadian net operating losses during the year;


•	The decrease of $11.0 in our valuation allowance relates primarily to the anticipated future utilization of U.S. state net operating losses; and


•	The increase of $14.3 in our deferred tax liability associated with property, plant, and equipment relates primarily to accelerated bonus depreciation resulting from TCJA.

The valuation allowance recorded by the Company primarily relates to net operating loss, tax credit, and capital loss carryforwards for which utilization is uncertain. Cumulative tax losses in certain state and foreign jurisdictions during recent years, limited carryforward periods in certain jurisdictions, future reversals of existing taxable temporary differences, and reasonable tax planning strategies were among the factors considered in determining the valuation allowance. Individually, none of these tax carryforwards presents a material exposure.

Most of our tax carryforwards have expiration dates that vary generally over the next 20 years, with no amount greater than $10.0 expiring in any one year.

TCJA subjects a U.S. corporation to tax on global intangible low-taxed income (GILTI). Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into the measurement of our deferred taxes. In the third quarter of 2018, we completed our evaluation and finalized our accounting policy, electing to treat taxes due on the GILTI inclusion as a period expense. There was no impact to our Consolidated Statements of Operations or Consolidated Balance Sheets resulting from this policy election.

Deferred withholding taxes (tax on undistributed earnings) have been provided on the earnings of our foreign subsidiaries to the extent it is anticipated that the earnings will be remitted in the future as dividends. Due to TCJA, we have no longer asserted permanent reinvestment on $733.9 of our earnings, and have accrued incremental tax on these undistributed earnings as presented in the table above.

Foreign withholding taxes have not been provided on certain foreign earnings which are indefinitely reinvested outside the U.S. The cumulative undistributed earnings which are indefinitely reinvested as of December 31, 2018, are $314.0. If such earnings were repatriated to the U.S. through dividends, the resulting incremental tax expense would approximate $19.5, based on present income tax laws and after consideration of the tax recorded for the mandatory deemed repatriation of our foreign earnings in connection with TCJA.