Income Taxes

The components of income before income taxes are presented below.



	2015			2014		2013
	(in millions)
U.S.	$	55.4		$	71.6	$	41.0
Non-U.S.	(4.7		)	1.9		3.2
Income before income taxes	$	50.7		$	73.5	$	44.2

The cumulative amount of undistributed earnings of foreign subsidiaries that we consider to be indefinitely reinvested, and thus for which United States income taxes have not been provided, was $54.4 million at September 30, 2015. It is not currently practical to estimate the amount of unrecognized United States income taxes that might be payable on the repatriation of these earnings.

Income tax expense of continuing operations is presented below.



	2015			2014			2013
	(in millions)
Current:
U.S. federal	$	12.4		$	0.1		$	0.6
U.S. state and local	0.7			1.6			0.1
Non-U.S.	(0.2		)	0.7			0.8
	12.9			2.4			1.5
Deferred:
U.S. federal	4.5			28.7			6.2
U.S. state and local	2.9			(12.8		)	1.3
Non-U.S.	(0.5		)	(0.3		)	(0.2		)
	6.9			15.6			7.3
Income tax expense	$	19.8		$	18.0		$	8.8

The allocations of current income tax expense between continuing and discontinued operations are provided below.



	2013
	Continuing operations			Discontinued operations

Expense from operations	$	17.5		$	2.1
Valuation allowance-related benefit	(8.5		)	(2.1		)
Other items	(0.2		)	—
Income tax expense	$	8.8		$	—

The reconciliation between income tax expense at the U.S. federal statutory income tax rate and reported income tax expense from continuing operations is presented below.



	2015			2014			2013
	(in millions)
Expense at U.S. federal statutory income tax rate of 35%	$	17.7		$	25.7		$	15.5
Adjustments to reconcile to income tax expense:

State income taxes, net of federal benefit	2.4			3.6			2.0
Domestic production activities deduction	(1.5		)	—			—
Tax credits	(1.3		)	(0.1		)	(0.6		)
Nondeductible expenses, other than compensation	0.7			0.9			0.5
Federal valuation allowance	0.6			(1.2		)	(7.8		)
Foreign income taxes	0.4			(0.2		)	0.4
Nondeductible compensation	0.3			0.8			0.2
State valuation allowance, net of federal benefit	(0.1		)	(8.4		)	(1.1		)
State tax rate change	—			(2.5		)	—
Other	0.6			(0.6		)	(0.3		)
Income tax expense	$	19.8		$	18.0		$	8.8

Deferred income tax balances are presented below.



	September 30,
	2015			2014
	(in millions)
Deferred income tax assets:
Inventory reserves	$	15.5		$	15.2
Accrued expenses	13.6			15.3
Pension and other postretirement benefits	17.8			20.3
Stock-based compensation	8.9			10.7
State net operating losses	8.1			10.3
Federal net operating losses and credit carryovers	0.5			6.8
Other	3.0			1.9
	67.4			80.5
Valuation allowance	(1.3		)	(0.7		)
Total deferred income tax assets, net of valuation allowance	66.1			79.8
Deferred income tax liabilities:
Intangible assets	182.3			190.1
Other	0.8			1.5
Total deferred income tax liabilities	183.1			191.6
Net deferred income tax liabilities	$	117.0		$	111.8

We reevaluate the need for a valuation allowance against the U.S. deferred tax assets each quarter, considering results to date, projections of taxable income, tax planning strategies and reversing taxable temporary differences.

After inclusion of the tax effect of the loss on the sale of U.S. Pipe in 2012, our net reversing deferred tax credits were insufficient to fully support our deferred tax assets, which include net operating loss carryforwards, and we concluded that a valuation allowance was necessary to reduce our U.S. net reversing deferred tax assets to zero. Accordingly, we recorded income tax expense in 2012 to establish valuation allowances related to deferred tax assets. In the 2014 fourth quarter, we credited to income almost all of the deferred tax valuation allowance based on our expectation of future taxable income. In the 2015 fourth quarter, we credited to income the remaining state net operating loss valuation allowance based on utilization.

Our state net operating loss carryforwards, which expire between 2016 and 2033, remain available to offset future taxable earnings. At September 30, 2015, we have utilized our federal net operating loss carryforwards. At September 30, 2015, we have $3.9 million of foreign net operating losses. We plan to utilize substantially all of this amount during 2016, and the remainder has no expiration date.

The following table summarizes information concerning our gross unrecognized tax benefits.



	2015			2014
	(in millions)
Balance at beginning of year	$	2.7		$	3.7
Increases related to prior year positions	0.3			0.1
Decreases due to lapse in statute of limitations	(0.4		)	(1.1		)
Balance at end of year	$	2.6		$	2.7

Substantially all unrecognized tax benefits would, if recognized, impact the effective tax rate. We recognize interest related to uncertain tax positions as interest expense and recognize any penalties incurred as a component of selling, general and administrative expenses. At September 30, 2015 and 2014, we had $0.6 million and $0.7 million, respectively, of accrued interest expense related to unrecognized tax benefits.

We expect to settle certain state income tax audits within the next 12 months and believe it is reasonably possible that these audit settlements will reduce the gross unrecognized tax benefits by $0.8 million.

The federal income tax returns for Mueller Co. and Anvil are closed for years prior to 2005 and for Mueller Water Products, Inc. for 2007 and 2008. Our 2009 through 2011 returns are closed except to the extent net operating losses from those years have been utilized on subsequent years’ returns. U.S. Pipe is subject to statute extension agreements that may be applicable to Walter Energy, and we remain liable for any tax related to U.S. Pipe pursuant to the terms of our sale of that segment. See Note 17.

Our state income tax returns are generally closed for years prior to 2010, except to the extent of our state net operating loss carryforwards. Our Canadian income tax returns are generally closed for years prior to 2008. We are currently under audit by several states at various levels of completion. We do not have any material unpaid assessments.