Income Taxes

Following is a summary of earnings from continuing operations before income taxes for United States and foreign operations:



	2016		2015	2014
United States	$	627,567	324,210	331,553
Foreign	613,558		424,651	332,338
Earnings before income taxes	$	1,241,125	748,861	663,891

Income tax expense (benefit) from continuing operations for the years ended December 31, 2016, 2015 and 2014 consists of the following:



	2016			2015		2014
Current income taxes:
U.S. federal	$	247,917		117,602		100,826
State and local	31,939			11,175		13,686
Foreign	61,712			31,981		41,151
Total current	341,568			160,758		155,663
Deferred income taxes:
U.S. federal	(16,167		)	4,165		31,052
State and local	(22,115		)	(3,983	)	(3,473	)
Foreign	4,273			(29,065	)	(51,605	)
Total deferred	(34,009		)	(28,883	)	(24,026	)
Total	$	307,559		131,875		131,637

The geographic dispersion of earnings and losses contributes to the annual changes in the Company’s effective tax rates. Approximately 51% of the Company’s current year earnings from continuing operations before income taxes was generated in the United States at a combined federal and state effective tax rate that is higher than the Company’s overall effective tax rate. The Company is also subject to taxation in other jurisdictions where it has operations, including Australia, Belgium, Bulgaria, France, Ireland, Italy, Luxembourg, Malaysia, Mexico, the Netherlands, Russia and Spain. The effective tax rates that the Company accrues in these jurisdictions vary widely, but they are generally lower than the Company’s overall effective tax rate. The Company’s domestic effective tax rates for the years ended December 31, 2016, 2015 and 2014 were 38.5%, 39.8%, and 42.8%, respectively, and its non-U.S. effective tax rates for the years ended December 31, 2016, 2015 and 2014 were 10.8%, 0.7%, and (3.1)%, respectively. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, historical loss carry-forwards, financing arrangements, and other factors. The Company’s effective tax rate has been and will continue to be impacted by the geographical dispersion of the Company’s earnings and losses. To the extent that domestic earnings increase while the foreign earnings remain flat or decrease, or increase at a lower rate, the Company’s effective tax rate will increase.

Income tax expense (benefit) attributable to earnings from continuing operations before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings from continuing operations before income taxes as follows:



	2016			2015		2014
Income taxes at statutory rate	$	434,394		262,102		232,362
State and local income taxes, net of federal income tax benefit	6,298			4,951		9,239
Foreign income taxes^(a)	(111,217		)	(95,198	)	(89,385	)
Change in valuation allowance	(21,106		)	(14,237	)	(6,482	)
Tax contingencies and audit settlements^(b)	2,496			(23,032	)	(7,882	)
Other, net	(3,306		)	(2,711	)	(6,215	)
	$	307,559		131,875		131,637

(a) Foreign income taxes includes statutory rate differences, financing arrangements, withholding taxes, local income taxes, notional deductions, and other miscellaneous items.

(b) 2016 and 2015 include reversals of uncertain tax positions of $5,371 and $11,180, respectively.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2016 and 2015 are presented below:



	2016			2015
Deferred tax assets:
Accounts receivable	$	23,521		11,134
Inventories	48,673			42,558
Employee benefits	76,143			70,989
Accrued expenses and other	72,258			54,652
Deductible state tax and interest benefit	5,186			491
Intangibles	12,874			34,003
Federal, foreign and state net operating losses and credits	456,130			458,743
Gross deferred tax assets	694,785			672,570
Valuation allowance	(289,078		)	(287,580	)
Net deferred tax assets	405,707			384,990
Deferred tax liabilities:
Inventories	(13,099		)	(8,663	)
Plant and equipment	(426,087		)	(429,258	)
Intangibles	(243,339		)	(267,571	)
Other liabilities	(50,041		)	(30,256	)
Gross deferred tax liabilities	(732,566		)	(735,748	)
Net deferred tax liability	$	(326,859	)	(350,758	)

The Company evaluates its ability to realize the tax benefits associated with deferred tax assets by analyzing its forecasted taxable income using both historic and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. The valuation allowance as of December 31, 2016, and 2015 is $289,078 and $287,580 , respectively. The valuation allowance as of December 31, 2016 relates to the net deferred tax assets of certain of the Company’s foreign subsidiaries as well as certain state net operating losses and tax credits. The total change in the 2016 valuation allowance was an increase of $1,498 which includes ($9,364) related to foreign currency translation. The total change in the 2015 valuation allowance was a decrease of $12,892, which includes $(24,718) related to foreign currency translation.

Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of valuation allowances, based upon the expected reversal of deferred tax liabilities and the level of historic and forecasted taxable income over periods in which the deferred tax assets are deductible.

As of December 31, 2016, the Company has state net operating loss carry forwards and state tax credits with potential tax benefits of $53,874, net of federal income tax benefit; these carry forwards expire over various periods based on taxing jurisdiction. A valuation allowance totaling $26,992 has been recorded against these state deferred tax assets as of December 31, 2016. In addition, as of December 31, 2016, the Company has net operating loss carry forwards in various foreign jurisdictions with potential tax benefits of $402,255. A valuation allowance totaling $249,529 has been recorded against these deferred tax assets as of December 31, 2016.

The Company does not provide for U.S. federal and state income taxes on the cumulative undistributed earnings of its foreign subsidiaries because such earnings are deemed to be permanently reinvested. As of December 31, 2016, the Company had not provided federal income taxes on earnings of approximately $1,400,000 from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in various foreign jurisdictions. These taxes may be partially offset by U.S. foreign tax credits. Determination of the amount of the unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this hypothetical calculation.

Tax Uncertainties

In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing jurisdictions. Accordingly, the Company accrues liabilities when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken in its tax returns or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with ASC 740-10. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest and penalties in income tax expense (benefit). Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but could possibly be material to the Company’s consolidated results of operations or cash flow in any given quarter or annual period.

As of December 31, 2016, the Company’s gross amount of unrecognized tax benefits is $46,434, excluding interest and penalties. If the Company were to prevail on all uncertain tax positions, $28,489 of the unrecognized tax benefits would affect the Company’s effective tax rate, exclusive of any benefits related to interest and penalties.

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



	2016			2015
Balance as of January 1	$	51,037		49,599
Additions based on tax positions related to the current year	2,221			684
Additions for tax positions of acquired companies	—			27,455
Additions for tax positions of prior years	6,412			2,330
Reductions resulting from the lapse of the statute of limitations	(6,294		)	(13,471	)
Settlements with taxing authorities	(6,555		)	(11,693	)
Effects of foreign currency translation	(387		)	(3,867	)
Balance as of December 31	$	46,434		51,037

The Company will continue to recognize interest and penalties related to unrecognized tax benefits as a component of its income tax provision. As of December 31, 2016 and 2015, the Company has $8,020 and $5,394, respectively, accrued for the payment of interest and penalties, excluding the federal tax benefit of interest deductions where applicable. During the years ending December 31, 2016 , 2015 and 2014, the Company accrued interest and penalties through the consolidated statements of operations of $2,170, $(5,635) and $(3,579), respectively.

The Company believes that its unrecognized tax benefits could decrease by $10,336 within the next twelve months. The Company has effectively settled all Federal income tax matters related to years prior to 2010. Various other state and foreign income tax returns are open to examination for various years.

Belgian Tax Matter

In January 2012, the Company received a €23,789 assessment from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position. The Belgian tax authority set aside the assessment in the third quarter of 2012 and refunded all related deposits, including interest income of €1,583 earned on such deposits. However, on October 23, 2012, the Belgian tax authority notified the Company of its intent to increase the Company's taxable income for the year ended December 31, 2008 under a revised theory. On December 28, 2012, the Belgian tax authority issued assessments for the years ended December 31, 2005 and December 31, 2009, in the amounts of €46,135 and €35,567, respectively, including penalties, but excluding interest. The Company filed a formal protest during the first quarter of 2013 relating to the new assessments. In September 2013, the Belgian tax authority denied the Company's protests, and the Company has brought these two years before the Court of First Appeal in Bruges. In December 2013, the Belgian tax authority issued additional assessments related to the years ended December 31, 2006, 2007, and 2010, in the amounts of €38,817, €39,635, and €43,117, respectively, including penalties, but excluding interest. The Company filed formal protests during the first quarter of 2014, refuting the Belgian tax authority's position for each of the years assessed. In the quarter ended June 28, 2014, the Company received a formal assessment for the year ended December 31, 2008, totaling €30,131, against which the Company also submitted its formal protest. All 4 additional years have been brought before the Court of First Appeal in November 2014. In January of 2015, the Company met with the Court of First Appeal in Bruges, Belgium and agreed with the Belgium tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and apply the ruling to all of the open years (to the extent there are no additional facts/procedural arguments in the other years).

On January 27, 2016, the Court of First Appeal in Bruges, Belgium ruled in favor of the Company with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal.

The Company disagrees with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company's properties in Wielsbeke (Ooigemstraat and Breestraat), Oostrozebeke (Ingelmunstersteenweg) and Desselgem (Waregemstraat) included in the Flooring ROW segment. The purpose of the lien is to provide security for payment should the Belgian tax authority prevail on its appeal. The lien does not interfere with the Company's operations at these properties.