Income Taxes

The components of income before income taxes are presented below.



	2016		2015			2014
	(in millions)
U.S.	$	96.8	$	55.4		$	71.6
Non-U.S.	0.2		(4.7		)	1.9
Income before income taxes	$	97.0	$	50.7		$	73.5

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 $54.7 million at September 30, 2016. 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.

The components of income tax expense are presented below.



	2016			2015			2014
	(in millions)
Current:
U.S. federal	$	37.4		$	12.4		$	0.1
U.S. state and local	3.1			0.7			1.6
Non-U.S.	0.1			(0.2		)	0.7
	40.6			12.9			2.4
Deferred:
U.S. federal	(10.5		)	4.5			28.7
U.S. state and local	3.2			2.9			(12.8		)
Non-U.S.	(0.2		)	(0.5		)	(0.3		)
	(7.5		)	6.9			15.6
Income tax expense	$	33.1		$	19.8		$	18.0

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.



	2016			2015			2014
	(in millions)
Expense at U.S. federal statutory income tax rate of 35%	$	34.0		$	17.7		$	25.7
Adjustments to reconcile to income tax expense:

State income taxes, net of federal benefit	3.8			2.4			3.6
Domestic production activities deduction	(3.9		)	(1.5		)	—
Tax credits	(2.2		)	(1.3		)	(0.1		)
Nondeductible expenses, other than compensation	0.9			0.7			0.9
Federal valuation allowance	(0.2		)	0.6			(1.2		)
Foreign income taxes	0.1			0.4			(0.2		)
Nondeductible compensation	0.4			0.3			0.8
State valuation allowance, net of federal benefit	—			(0.1		)	(8.4		)
State tax rate change	0.4			—			(2.5		)
Other	(0.2		)	0.6			(0.6		)
Income tax expense	$	33.1		$	19.8		$	18.0

Deferred income tax balances are presented below.



	September 30,
	2016			2015
	(in millions)
Deferred income tax assets:
Inventory reserves	$	14.8		$	15.5
Accrued expenses	15.0			13.6
Pension and other postretirement benefits	25.0			17.8
Stock-based compensation	7.7			8.9
State net operating losses	5.0			8.1
Federal credit carryovers	0.6			0.5
Other	4.8			3.0
	72.9			67.4
Valuation allowance	(0.9		)	(1.3		)
Total deferred income tax assets, net of valuation allowance	72.0			66.1
Deferred income tax liabilities:
Intangible assets	177.0			182.3
Other	3.8			0.8
Total deferred income tax liabilities	180.8			183.1
Net deferred income tax liabilities	$	108.8		$	117.0

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 included 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 substantially 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 calendar years 2016 and 2033, remain available to offset future taxable earnings.

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



	2016			2015
	(in millions)
Balance at beginning of year	$	2.6		$	2.7
Increases related to prior year positions	0.3			0.3
Increases related to current year positions	0.2			—
Decreases due to lapse in statute of limitations	(0.3		)	(0.4		)
Balance at end of year	$	2.8		$	2.6

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, 2016 and 2015, we had $0.5 million and $0.6 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 2012 returns are closed except to the extent net operating losses from those years have been utilized on subsequent years’ returns. Tax years 1980 to 1994 and 1999 to 2001 remain open for our predecessor company, U.S. Pipe, which was a subsidiary of Walter Energy in those years. See Note 16. We also remain liable for any taxes related to periods prior to the sale of U.S. Pipe in 2012 pursuant to the terms of the sale agreement with the purchaser of the segment.

Our state income tax returns are generally closed for years prior to 2012, except to the extent of our state net operating loss carryforwards. Our Canadian income tax returns are generally closed for years prior to 2009. We are currently under audit by several jurisdictions, including Canada Revenue Agency for the year ended September 30, 2014, at various levels of completion. We do not have any material unpaid assessments.