TAXES

The sources of the Company’s earnings before taxes were as follows for the years ended December 31:



	2017		2016		2015
United States	$	45,105	$	37,363	$	20,992
Non-United States	529,117		466,830		442,432
Earnings before taxes	$	574,222	$	504,193	$	463,424

The provisions for taxes consist of:



	Current		Deferred			Total
Year ended December 31, 2017:
United States federal	$	55,660	$	10,173		$	65,833
State and local	361		3,471			3,832
Non-United States	144,974		(16,389		)	128,585
Total	$	200,995	$	(2,745	)	$	198,250
Year ended December 31, 2016:
United States federal	$	20,116	$	(4,817	)	$	15,299
State and local	2,947		1,149			4,096
Non-United States	94,882		5,546			100,428
Total	$	117,945	$	1,878		$	119,823
Year ended December 31, 2015:
United States federal	$	11,071	$	3,029		$	14,100
State and local	2,164		617			2,781
Non-United States	90,232		3,491			93,723
Total	$	103,467	$	7,137		$	110,604

The provisions for tax expense for the years ended December 31, 2017, 2016, and 2015 differed from the amounts computed by applying the United States federal income tax rate of 35% to the earnings before taxes as a result of the following:



	2017			2016			2015
Expected tax	$	200,978		$	176,467		$	162,198
United States state and local income taxes, net of federal income tax benefit	376			3,064			2,551
Change in valuation allowance (excluding U.S. tax reform)	—			—			(1,098		)
Net effect of U.S. tax reform (see below)	71,982			—			—
Non-United States income taxes at other than a 35% rate	(43,691		)	(65,917		)	(54,798		)
Excess tax benefits from stock option exercises	(35,171		)	—			—
Other, net	3,776			6,209			1,751
Total provision for taxes	$	198,250		$	119,823		$	110,604

As discussed further below, the 2017 provision for income taxes includes a provisional one-time charge of $72 million. Our annual effective tax rate in 2017 was 22% excluding this one-time charge. The reduction in the Company's annual effective tax rate from 24% in 2016 and 2015 to 22% (excluding the one-time charge) in 2017 is primarily related to the Company's adoption of ASU 2016-09 pertaining to excess tax benefits associated with stock option exercises.

On December 22, 2017, the Tax Cuts and Jobs Act ("the Act") significantly revised U.S. corporate income tax law. The Act includes, among other things, a reduction in the U.S. federal corporate income tax rate from 35% to 21% effective for taxable years beginning after December 31, 2017, and the implementation of a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries ("Transition Tax") that is payable over a period of up to eight years.

The Company has recorded a provisional one-time charge of $72 million relating to the Act during the fourth quarter of 2017. Of this amount, $59 million is expected to be payable over a period of up to 8 years of which $48 million is included as a component of other non-current liabilities, $7 million is included in deferred tax liabilities and $4 million is included in taxes payable. The components of the Company's provisional one-time charge include:

•

A one-time cash charge of $59 million for un-repatriated foreign earnings due to the estimated Transition Tax of $52 million, and $7 million of foreign withholding taxes, and U.S. federal, state, and local taxes related to the reassessment of planned repatriation of certain foreign earnings that were previously determined to be permanently reinvested. All other undistributed earnings are considered permanently reinvested.


•	A one-time non-cash charge of $13 million primarily related to changes in the current year treatment of certain deferred tax items and other non-cash items. The effect of remeasuring the U.S. net deferred tax balances resulting from the reduction of the U.S. income tax rate from 35% to 21% was immaterial.

Shortly after the Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Act enactment, during which a company acting in good faith may complete the accounting for the impacts of the Act. In accordance with SAB 118, the Company will reflect the income tax effects of the Act in the reporting period in which the accounting is complete.

The Company's accounting for the above items is based upon reasonable estimates of the tax effects of the Act; however, its estimates may change upon the finalization of its implementation and additional interpretive guidance from regulatory authorities. Among other things, the Company needs to complete its analysis of historical foreign earnings and related taxes paid and its analysis of foreign cash equivalents. In addition, the Company needs to complete its analysis of deemed repatriation of deferred foreign income and related state tax effects.

The Company will complete its accounting for the above tax effects of the Act during 2018 as provided in SAB 118 and will reflect any adjustments to its provisional amounts as an adjustment to the provision for taxes in the reporting period in which the amounts are finally determined.

Additionally, certain provisions of the Act are not effective until 2018. The Company is in the process of evaluating the impact of these provisions and has not yet recorded any impact in the financial statements, nor have we made any accounting policy elections with respect to these items.

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



	2017			2016
Deferred tax assets:
Inventory	$	13,779		$	17,612
Accrued and other liabilities	62,175			93,379
Accrued post-retirement benefit and pension costs	55,545			72,004
Net operating loss and tax credit carryforwards	32,247			15,844
Other	12,099			10,326
Total deferred tax assets	175,845			209,165
Less valuation allowance	(12,857		)	(10,730		)
Total deferred tax assets less valuation allowance	162,988			198,435
Deferred tax liabilities:
Inventory	4,730			3,741
Property, plant, and equipment	50,440			56,718
Acquired intangibles amortization	66,755			77,295
Prepaid post-retirement benefit and pension costs	27,747			36,741
International earnings	23,121			19,575
Unrealized currency gains	—			34,720
Total deferred tax liabilities	172,793			228,790
Net deferred tax (liability) asset	$	(9,805	)	$	(30,355	)

The increase in the valuation allowance during 2017 is primarily attributable to increases in valuation allowances against the Company's state net operating losses. Upon adoption of ASU 2016-09 in the first quarter of 2017, the Company recorded $69 million in additional deferred tax assets related primarily to U.S. tax credit carryforwards which arose directly from tax deductions for share-based compensation arrangements, against which a full valuation allowance was recorded in the first quarter and subsequently released in the fourth quarter, along with $11 million of other pre-existing valuation allowances, in connection with the determination of the Transition Tax related to the Act as described above.

The Company continues to record valuation allowances related to certain of its deferred income tax assets due to the uncertainty of the ultimate realization of future benefits from such assets. The potential decrease or increase of the valuation allowance in the near term is dependent on the future ability of the Company to realize the deferred tax assets that are affected by the future profitability of operations in various worldwide jurisdictions.

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



	2017			2016
Unrecognized tax benefits at beginning of year	$	20,240		$	15,259
Increases related to current tax positions	2,484			7,824
Increases (decreases) related to prior year tax positions	1,434			(885		)
Decreases relating to taxing authority settlements	(856		)	(794		)
Decreases resulting from a lapse of the applicable statute of limitations	(186		)	(896		)
Other, net	974			(268		)
Unrecognized tax benefits at end of year	$	24,090		$	20,240

Included in the balance of unrecognized tax benefits at December 31, 2017 and 2016 were $24.1 million and $16.6 million, respectively, of tax benefits that if recognized would reduce the Company’s effective tax rate. The Company recognizes accrued amounts of interest and penalties related to its uncertain tax positions as part of its income tax expense within its consolidated statement of operations. The amount of accrued interest and penalties included within other non-current liabilities within the Company’s consolidated balance sheet as of December 31, 2017 and 2016 was $2.8 million and $2.2 million, respectively.

The Company believes that it is reasonably possible that the unrecognized tax benefit balance could change over the next twelve months, primarily related to potential disputes raised by the taxing authorities over income and expense recognition. The Company does not expect a change would have a material impact on its financial position, results of operations, or cash flows.

The Company plans to repatriate earnings from China, Switzerland, Germany, the United Kingdom, and certain other countries in future years and believes that there will be no additional cost associated with the repatriation of such foreign earnings other than withholding taxes for which a deferred tax liability has been recorded. All other undistributed earnings not subject to the Transition Tax, or any additional outside basis difference inherent in these entities, are considered to be permanently reinvested on which no U.S. deferred income taxes or foreign withholding taxes have been provided. It is not practicable to estimate the amount of deferred tax liability related to these undistributed earnings and additional outside basis differences in these entities due to the complexity of the calculation and the uncertainty regarding assumptions necessary to compute the tax.

As of December 31, 2017, the major jurisdictions for which the Company is subject to examinations are Germany for years after 2012, the United States after 2013, France after 2016, Switzerland after 2014, the United Kingdom after 2014, and China after 2013. Additionally, the Company is currently under examination in various taxing jurisdictions in which it conducts business operations. While the Company has not yet received any material assessments from these taxing authorities, the Company believes that adequate amounts of taxes and related interest and penalties have been provided for any adverse adjustments as a result of these examinations and that the ultimate outcome of these examinations will not result in a material impact on the Company’s consolidated results of operations or financial position.