Income Taxes

Earnings before income taxes consisted of the following:



(In thousands)	2017			2016			2015
U.S.	$	123,229		$	100,859		$	59,898
International	(424		)	(3,535		)	5,101
Earnings before income taxes	$	122,805		$	97,324		$	64,999

The components of income tax expense (benefit) for each of the last three fiscal years was:



(In thousands)	2017			2016			2015
Current
Federal	$	35,610		$	35,888		$	7,328
State and local	2,929			2,866			1,198
International	(147		)	(636		)	1,790
Total current	38,392			38,118			10,316
Deferred
Federal	(945		)	(5,403		)	4,738
State and local	(78		)	(512		)	(363		)
International	(42		)	(224		)	(101		)
Total deferred	(1,065		)	(6,139		)	4,274
Total non-current tax (benefit) expense	(312		)	3			(107		)
Total income tax expense	$	37,015		$	31,982		$	14,483

Income tax payments, net of refunds were $47.8 million, $25.9 million and $11.3 million in fiscal 2017, 2016 and 2015, respectively.

The following table provides a reconciliation of the statutory federal income tax rate to our consolidated effective tax rates:



	2017		2016		2015
Federal income tax expense at statutory rate	35.0	%	35.0	%	35.0	%
Manufacturing deduction	(3.3	)	(3.4	)	(2.3	)
State and local income taxes, net of federal tax benefit	1.6		1.6		1.2
Foreign tax rate differential	(1.6	)	—		—
Tax credits - research & development	(0.7	)	(0.8	)	(1.1	)
Tax credits - 48C	—		—		(9.9	)
Other, net	(0.9	)	0.5		(0.6	)
Income tax expense	30.1	%	32.9	%	22.3	%

In the current year, we recorded a net tax benefit of $1.9 million on a distribution from our Brazilian operation. Additionally, in the fourth quarter, as a result of the adoption of ASU 2016-09 (see additional discussion in Note 1), we recognized tax benefits of $0.9 million within income tax expense. In fiscal 2016 and 2015, tax benefits associated with stock-based incentive plans were $3.9 million and $3.3 million, respectively. These benefits impacted additional paid-in capital and were not reflected in the determination of income tax expense or benefit.

In fiscal 2015, the Company recognized approximately $6.4 million of tax benefit from an energy-efficient investment credit under Section 48C of the U.S. Internal Revenue Code, upon successful start-up and commercial production of coatings on our new architectural glass coater. The tax credit was awarded in 2011 by the U.S. Internal Revenue Service (IRS) in cooperation with the Department of Energy as part of the American Reinvestment and Recovery Act to incent energy-efficient investments.

In the first quarter of fiscal 2017, the Company adopted ASU 2015-17, which requires deferred tax assets and liabilities to be classified as noncurrent in the financial statements. We have not elected to apply this change in accounting principle retroactively. Deferred tax assets and deferred tax liabilities at March 4, 2017 and February 27, 2016 were:



	2017			2016
(In thousands)	Noncurrent			Current			Noncurrent
Accounts receivable	$	408		$	825		$	—
Other accruals	4,254			2,968			1,281
Deferred compensation	15,189			554			12,594
Goodwill and other intangibles	(7,601		)	18			(7,615		)
Depreciation	(18,714		)	—			(17,354		)
Liability for unrecognized tax benefits	2,623			—			2,797
Net operating losses	5,790			—			2,945
Valuation allowance on net operating losses	(2,352		)	(2,194		)	(306		)
Other	403			(351		)	686
Deferred tax (liabilities) assets	$	—		$	1,820		$	(4,972	)

The Company has U.S. federal tax credits as well as state net operating loss carryforwards with a tax effect of $5.5 million. A valuation allowance of $2.4 million has been established for these net operating loss carryforwards due to the uncertainty of the use of the tax benefits in future periods.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, Canada, Brazil and other international jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years prior to fiscal 2014, or state and local income tax examinations for years prior to fiscal 2010. The Company is not currently under U.S. federal examination for years subsequent to fiscal 2013, and there is very limited audit activity of the Company’s income tax returns in U.S. state jurisdictions or international jurisdictions.

The Company considers the earnings of its non-U.S. subsidiaries to be indefinitely invested outside of the U.S. on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and specific plans for reinvestment of those subsidiary earnings. Should the Company decide to repatriate foreign earnings, it would need to adjust the income tax provision in the period it was determined that the earnings will no longer be indefinitely invested outside the U.S.

If we were to prevail on all unrecognized tax benefits recorded, $2.1 million, $2.7 million and $2.6 million for fiscal 2017, 2016 and 2015, respectively, would benefit the effective tax rate. Also included in the balance of unrecognized tax benefits for fiscal 2017, 2016 and 2015, are $2.0 million, $1.8 million and $1.9 million, respectively, of tax benefits that, if recognized, would result in adjustments to deferred taxes.

Penalties and interest related to unrecognized tax benefits are recorded in income tax expense. For fiscal 2017, we accrued penalties and interest related to unrecognized tax benefits of $0.4 million. For each of fiscal 2016 and 2015, the accrual was $0.5 million.

The following table provides a reconciliation of the total amounts of gross unrecognized tax benefits:



(In thousands)	2017			2016			2015
Gross unrecognized tax benefits at beginning of year	$	4,512		$	4,491		$	4,431
Gross increases in tax positions for prior years	54			60			261
Gross decreases in tax positions for prior years	(233		)	(158		)	(276		)
Gross increases based on tax positions related to the current year	508			526			508
Gross decreases based on tax positions related to the current year	—			(33		)	(21		)
Settlements	(23		)	—			(93		)
Statute of limitations expiration	(743		)	(374		)	(319		)
Gross unrecognized tax benefits at end of year	$	4,075		$	4,512		$	4,491

The total liability for unrecognized tax benefits is expected to decrease by approximately $0.4 million during fiscal 2018 due to lapsing of statutes.