INCOME TAXES

The components of income before income taxes for the three years ended December 31, 2018 were as follows:



	Year Ended December 31,
	2018		2017		2016
U.S.	$	255,088	$	213,171	$	209,409
Non-U.S.	113,572		153,065		67,979
Total	$	368,660	$	366,236	$	277,388

The components of income tax expense (benefit) for the three years ended December 31, 2018 were as follows:



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	45,521		$	89,182		$	57,090
Non-U.S.	28,894			25,746			23,344
State and local	10,515			7,640			8,386
	84,930			122,568			88,820
Deferred:
Federal	(691		)	(4,391		)	(1,716		)
Non-U.S.	(3,121		)	(82		)	(8,261		)
State and local	549			666			172
	(3,263		)	(3,807		)	(9,805		)
Total	$	81,667		$	118,761		$	79,015

The U.S. Tax Act was enacted on December 22, 2017. The U.S. Tax Act reduced the U.S. federal corporate income tax rate to 21% from 35%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign-sourced earnings. The SEC staff issued SAB 118 related to the U.S. Tax Act, which provided for a one-year measurement period and guidance for the application of ASC Topic 740, Income Taxes. At December 31, 2017, the Company had not completed its accounting related to the U.S. Tax Act. All provisional amounts were based on reasonable estimates using the best information available at the time. At December 31, 2018, the Company has completed its accounting related to the U.S. Tax Act. In 2018, the Company recognized a net adjustment of $399 to provisional amounts recorded at December 31, 2017, resulting in an increase to income tax expense. As described in more detail below, the net adjustment includes additional transition tax expense, offset by a tax benefit from the remeasurement of deferred tax assets and liabilities and a reduction of foreign withholding taxes.

The one-time transition tax is based on total post-1986 earnings and profits for which the Company had previously deferred from U.S. income taxes. At December 31, 2017, the Company recorded a provisional amount of $36,387 for the one-time transition tax resulting in an increase to income tax expense. The transition tax is based partially on the earnings and profits held in cash and partially on the earnings and profits invested in assets. Considering all additional guidance and regulations proposed and issued during the year, the Company finalized calculations of the transition tax liability during 2018. The result was an increase of $5,152 to the December 31, 2017 provisional amount. The Company has elected to pay the transition tax liability over the eight-year period provided in the U.S. Tax Act.

At December 31, 2017, the Company recorded a provisional tax benefit of $14,532 related to the remeasurement of deferred tax assets and liabilities as a result of the U.S. Tax Act. The Company finalized the remeasurement of deferred tax assets and liabilities during 2018. The result was an increase of $329 to the December 31, 2017 provisional benefit.

At December 31, 2017, the provisional amount recorded for taxes on the planned repatriation of certain earnings and profits subject to the transition tax was $6,667. This additional tax pertains to foreign withholding taxes associated with the repatriation of earnings that are not indefinitely reinvested in the foreign operations. Based on the Company’s final transition tax calculations, an adjustment of $4,424 was recorded in 2018 to reduce the foreign withholding taxes associated with the planned repatriation set forth in 2017.

Other provisions of the U.S. Tax Act became effective for the Company in 2018. The Foreign-Derived Intangible Income (“FDII”) provision generates a deduction against the Company’s U.S. taxable income for U.S. earnings derived offshore that utilize intangibles held by the Company in the U.S. Conversely, the Global Intangible Low-Taxed Income (“GILTI”) provision requires the Company to subject to U.S. taxation a portion of its foreign subsidiary earnings that exceed an allowable return. The Company has elected to treat any GILTI inclusion as a period expense in the year incurred.

The differences between total income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes for the three years ended December 31, 2018 were as follows:



	Year Ended December 31,
	2018			2017			2016
Statutory rate applied to pre-tax income	$	77,419		$	128,182		$	97,086
State and local income taxes, net of federal tax benefit	8,844			5,671			5,554
Excess tax benefits resulting from exercises of stock-based compensation	(1,094		)	(6,276		)	—
Net impact of the U.S. Tax Act	4,823			21,949			—
Foreign withholding taxes	(4,424		)	6,667			—
Intangible and asset impairments/(write-off)	—			—			(4,438		)
Foreign rate variance	(4,560		)	(13,929		)	(8,128		)
Venezuela deconsolidation/devaluation	—			—			5,192
Bargain purchase gain	—			(17,556		)	—
Valuation allowances	5,596			102			(8,525		)
Manufacturing deduction	—			(5,922		)	(5,190		)
Research and development credit	(3,859		)	(2,688		)	(2,748		)
Other	(1,078		)	2,561			212
Total	$	81,667		$	118,761		$	79,015
Effective tax rate	22.2		%	32.4		%	28.5		%

The 2018 effective tax rate is impacted by the reduced corporate income tax rate associated with the U.S. Tax Act, rationalization charges in regions with low or no tax benefit, as well as the incremental adjustments recognized in 2018 related to the U.S. Tax Act provisional amounts, as discussed in the paragraphs above. Total income tax payments, net of refunds, were $85,805 in 2018, $81,691 in 2017 and $72,965 in 2016.

Deferred Taxes

Significant components of deferred tax assets and liabilities at December 31, 2018 and 2017, were as follows:



	December 31,
	2018			2017
Deferred tax assets:
Tax loss and credit carry-forwards	$	60,756		$	60,454
Inventory	3,544			2,501
Other accruals	13,172			14,873
Employee benefits	22,963			18,468
Pension obligations	12,122			12,363
Other	3,739			4,923
Deferred tax assets, gross	116,296			113,582
Valuation allowance	(69,400		)	(68,694		)
Deferred tax assets, net	46,896			44,888
Deferred tax liabilities:
Property, plant and equipment	28,606			21,427
Intangible assets	10,950			10,729
Inventory	4,814			5,891
Pension obligations	19,346			16,137
Other	8,770			15,483
Deferred tax liabilities	72,486			69,667
Total deferred taxes	$	(25,590	)	$	(24,779	)

At December 31, 2018, certain subsidiaries had net operating loss carry-forwards of approximately $61,931 that expire in various years from 2019 through 2034, plus $214,438 for which there is no expiration date.

In assessing the realizability of deferred tax assets, the Company assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. At December 31, 2018, a valuation allowance of $69,400 was recorded against certain deferred tax assets based on this assessment. The Company believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company's assessment of future taxable income or tax planning strategies changes.

The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As a result of the U.S. Tax Act, the Company determined it will repatriate earnings for certain non-U.S. subsidiaries, which are subject to foreign withholding taxes. The Company has estimated the associated tax to be $2,243. The Company considers remaining earnings and outside basis in all other non-U.S. subsidiaries to be indefinitely reinvested and has not recorded any deferred taxes as such estimate is not practicable.

Unrecognized Tax Benefits

Liabilities for unrecognized tax benefits are classified as Other liabilities unless expected to be paid in one year, with a portion recorded to Deferred income taxes to offset tax attributes. The Company recognizes interest and penalties related to unrecognized tax benefits in Income taxes. Current income tax expense included benefits of $1,277 for the year ended December 31, 2018 and expense of $1,079 for the year ended December 31, 2017 for interest and penalties. For those same years, the Company's accrual for interest and penalties related to unrecognized tax benefits totaled $6,655 and $8,135, respectively.

The following table summarizes the activity related to unrecognized tax benefits:



	2018			2017
Balance at beginning of year	$	28,449		$	18,499
Increase related to current year tax provisions	1,431			1,448
Increase related to prior years' tax positions	4,917			1,460
Increase related to acquisitions	—			8,223
Decrease related to settlements with taxing authorities	(111		)	(522		)
Resolution of and other decreases in prior years' tax liabilities	(1,501		)	(1,734		)
Other	(4,381		)	1,075
Balance at end of year	$	28,804		$	28,449

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $25,069 at December 31, 2018 and $25,024 at December 31, 2017.

The Company files income tax returns in the U.S. and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2014. The Company is currently subject to U.S. federal, various state audits and non-U.S. income tax audits. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until after the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained.

Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations. Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits. It is reasonably possible there could be a further reduction of $1,759 in prior years' unrecognized tax benefits in 2019.