Income Taxes

12 Months Ended

Dec. 31, 2018

16. Income Taxes

The components of income from continuing operations before income taxes and noncontrolling interests were as follows:



(In millions)	2018		2017		2016
Domestic operations	$	456.7	$	554.7	$	513.8
Foreign operations		80.3		80.1		68.3
Income before income taxes and noncontrolling interests	$	537.0	$	634.8	$	582.1

A reconciliation of income taxes at the 35% federal statutory income tax rate for 2016 and 2017 and 21% for 2018 to the income tax provision reported was as follows:



(In millions)	2018			2017			2016
Income tax expense computed at federal statutory income tax rate	$	112.8		$	222.2		$	203.7
Other income taxes, net of federal tax benefit		13.7			13.4			12.6
Foreign taxes at a different rate than U.S. federal statutory income tax rate		3.5			(8.3	)		(7.6	)
Tax benefit on income attributable to domestic production activities		0.0			(10.9	)		(13.0	)
Net adjustments for uncertain tax positions		4.1			11.6			13.2
Share-based compensation (ASU 2016-09)		(2.1	)		(23.9	)		(27.8	)
Tax Act impact		5.5			(25.7	)		—
Deferred tax impact of state tax rate changes		3.5			(2.0	)		(1.1	)
Valuation allowance increase (decrease)		3.0			(5.2	)		(2.1	)
Miscellaneous other, net		3.0			(11.7	)		(8.2	)
Income tax expense as reported	$	147.0		$	159.5		$	169.7
Effective income tax rate		27.4	%		25.1	%		29.2	%

The 2018 effective income tax rate was favorably impacted by the corporate tax rate reduction from 35% to 21% under The Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The 2018 effective income tax rate was unfavorably impacted by the repeal of the Domestic Production Activity (Internal Revenue Code Section 199) Deduction, a valuation allowance increase, an adjustment to the provisional net benefit recorded in 2017 under the Tax Act, state and local taxes, unfavorable tax rates in foreign jurisdictions, and increases in uncertain tax positions.

The 2017 effective income tax rate was favorably impacted by the Tax Act. The effective income tax rates for 2017 and 2016 were favorably impacted by a tax benefit related to share-based compensation, the tax benefit attributable to the Domestic Production Activity (Internal Revenue Code Section 199) Deduction and favorable tax rates in foreign jurisdictions, partially offset by state and local taxes and increases to uncertain tax positions.

The Tax Act made significant changes to the U.S. Internal Revenue Code including a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, generally providing for an exemption from federal income tax for dividends received from foreign subsidiaries, and imposing a

one-

time

transition tax on the deemed repatriation of cumulative foreign earnings and profits as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued, which deals with the application of U.S. GAAP to situations where a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we calculated our best estimate of the impact of the Tax Act on our 2017 effective income tax rate. As a result, the Company recorded a provisional net benefit of $25.7 million in the fourth quarter of 2017, the period in which the Tax Act was enacted. This provisional amount included an estimated reduction in the Company’s net deferred tax liabilities of $62.4 million resulting from the decrease in the federal income tax rate; an estimated deemed repatriation tax liability of $28.5 million; and an estimated net increase to our provision for taxes on foreign earnings not considered permanently reinvested of $8.2 million. In the quarter ended December 31, 2018, the Company completed its analysis in conjunction with the SAB 118 measurement period ending on December 22, 2018. The total tax provision impact for the year ended December 31, 2018 was an unfavorable adjustment of $5.5 million related primarily to certain deferred tax assets and liabilities.

The Tax Act included a provision for Global Intangible

Low-Taxed

Income (GILTI). The Company elected an accounting policy to treat GILTI as a period cost when incurred. The GILTI provision is effective for taxable years of foreign corporations beginning after December 31, 2017.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”) was as follows:



(In millions)	2018			2017			2016
Unrecognized tax benefits — beginning of year	$	87.5		$	58.2		$	38.2
Gross additions — current year tax positions		9.1			31.0			10.7
Gross additions — prior year tax positions		9.3			10.9			10.4
Gross additions (reductions) — purchase accounting adjustments		1.0			4.0			9.7
Gross reductions — prior year tax positions		(14.5	)		(9.4	)		(9.8	)
Gross reductions — settlements with taxing authorities		(8.9	)		(7.2	)		(1.0	)
Unrecognized tax benefits — end of year	$	83.5		$	87.5		$	58.2

The amount of UTBs that, if recognized as of December 31, 2018, would affect the Company’s effective tax rate was $64.3 million. It is reasonably possible that, within the next twelve months, total UTBs may decrease in the range of $1.4 million to $3.5 million primarily as a result of the conclusion of U.S. federal, state and foreign income tax proceedings.

We classify interest and penalty accruals related to UTBs as income tax expense. In 2018, we recognized an interest and penalty expense of approximately $2.2 million. In 2017, we recognized an interest and penalty expense of approximately $2.0 million. In 2016, we recognized an interest and penalty expense of approximately $1.1 million. At December 31, 2018 and 2017, we had accruals for the payment of interest and penalties of $14.4 million and $11.8 million, respectively.

We file income tax returns in the U.S., various state and foreign jurisdictions. The Company is open and subject to examination for tax years 2016 and subsequent by the U.S. Internal Revenue Service (“IRS”). In addition to the U.S., we have tax years that remain open and subject to examination by tax authorities in the following major taxing jurisdictions: Canada for years after 2013, Mexico for years after 2012 and China for years after 2014.

Income taxes in 2018, 2017 and 2016 were as follows:



(In millions)	2018			2017			2016
Current
Federal	$	93.5		$	133.1		$	150.4
Foreign		26.4			22.4			22.3
State and other		24.1			22.8			22.9
Deferred
Federal, state and other		4.8			(27.2	)		(23.9	)
Foreign		(1.8	)		8.4			(2.0	)
Total income tax expense	$	147.0		$	159.5		$	169.7

The components of net deferred tax assets (liabilities) as of December 31, 2018 and 2017 were as follows:



(In millions)	2018			2017
Deferred tax assets:
Compensation and benefits	$	31.5		$	22.1
Defined benefit plans		39.3			43.7
Capitalized inventories		16.1			11.1
Accounts receivable		5.4			7.8
Other accrued expenses		55.2			45.6
Net operating loss and other tax carryforwards		21.2			25.6
Valuation allowance		(13.3	)		(11.0	)
Miscellaneous		2.5			3.7
Total deferred tax assets		157.9			148.6
Deferred tax liabilities:
LIFO inventories		0.0			(4.2	)
Fixed assets		(60.2	)		(44.5	)
Intangible assets		(224.6	)		(232.0	)
Investment in partnership		(3.8	)		(9.2	)
Miscellaneous		(20.0	)		(16.1	)
Total deferred tax liabilities		(308.6	)		(306.0	)
Net deferred tax liability	$	(150.7	)	$	(157.4	)

In accordance with ASC requirements for Income Taxes, deferred taxes were classified in the consolidated balance sheets as of December 31, 2018 and 2017 as follows:



(In millions)	2018			2017
Other assets		11.9			9.4
Deferred income taxes		(162.6	)		(166.8	)
Net deferred tax liability	$	(150.7	)	$	(157.4	)

As of December 31, 2018 and 2017, the Company had deferred tax assets relating to net operating losses, capital losses, and other tax carryforwards of $21.2 million and $25.6 million, respectively, of which approximately $7.1 million will expire between 2019 and 2023, and the remainder of which will expire in 2024 and thereafter.

The Company has provided a valuation allowance to reduce the carrying value of certain of these deferred tax assets, as management has concluded that, based on the available evidence, it is more likely than not that the deferred tax assets will not be fully realized.

Under the Tax Act, the accumulated foreign earnings and profits of the Company’s foreign subsidiaries as of December 31, 2017 are subject to a deemed repatriation tax and should not be subject to additional U.S. federal income tax upon an actual repatriation of those earnings. As a result, the Company has recorded an estimated tax liability of $9.3 million for foreign and state taxes that would be payable on a distribution of those earnings and profits.

We have not provided for deferred taxes on the remaining book over tax outside basis differences of our foreign subsidiaries. The outside basis differences of foreign subsidiaries considered indefinitely reinvested totaled approximately $128.1million at December 31, 2018. The associated deferred tax liability on this basis difference is less than $5 million.