Income Taxes

Income before income taxes included income from domestic operations of $195.2 million for 2016, $213.8 million for 2015 and $221.4 million for 2014. Income before taxes included income from foreign operations of $46.1 million for 2016, $44.4 million for 2015 and $60.7 million for 2014.



Income tax provision (benefit) - in millions:	2016			2015			2014
Current
Federal	$	43.0		$	54.4		$	57.4
State	3.9			5.3			(1.1		)
Foreign	3.4			4.0			9.3
Total current	50.3			63.7			65.6
Deferred
Federal	4.3			3.5			(0.2		)
State	(4.8		)	(2.5		)	1.0
Foreign	0.6			(2.0		)	0.1
Total deferred	0.1			(1.0		)	0.9
Provision for income taxes	$	50.4		$	62.7		$	66.5

The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:



Tax rate reconciliation:	2016		2015		2014
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal benefit	1.6		1.9		2.5
Research and development tax credits	(2.0	)	(3.4	)	(3.3	)
Investment tax credits	(1.8	)	(1.2	)	(1.9	)
Qualified production activity deduction	(1.6	)	(2.2	)	(2.0	)
Foreign rate differential	(2.7	)	(2.1	)	(3.7	)
Net reversals for unrecognized tax benefits	(1.5	)	(2.1	)	(1.4	)
Stock-based compensation (ASU 2016-09)	(3.5	)	—		—
Other	(2.6	)	(1.6	)	(1.6	)
Effective income tax rate	20.9	%	24.3	%	23.6	%

Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse.

The categories of assets and liabilities that have resulted in differences in the timing of the recognition of income and expense were as follows (in millions):



Deferred income tax assets:	2016			2015
Long-term:
Accrued liabilities	$	36.4		$	31.3
Inventory valuation	17.7			17.3
Accrued vacation	10.7			10.5
Deferred compensation and other benefit plans	24.5			16.8
Postretirement benefits other than pensions	4.6			4.8
Tax credit and net operating loss carryforward	47.7			49.1
Valuation allowance	(16.9		)	(18.8		)
Total deferred income tax assets	124.7			111.0
Deferred income tax liabilities:
Long-term:
Property, plant and equipment differences	30.6			26.5
Intangible amortization	110.7			111.6
Other	4.8			3.3
Total deferred income tax liabilities	146.1			141.4
Net deferred income tax liabilities	$	21.4		$	30.4

We intend to indefinitely reinvest the earnings of our material foreign subsidiaries in our operations outside of the United States. The cash that the Company’s foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. We estimate that future domestic cash generation will be sufficient to meet future domestic cash requirements. At January 1, 2017, the amount of undistributed foreign earnings was $226.6 million, of which we have not recorded a deferred tax liability of approximately $59.0 million. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.

In assessing the need for a valuation allowance, we consider all positive and negative evidence, including recent financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable income in carryback periods and tax planning strategies. Based on a review of such information, management believes that it is possible that some portion of deferred tax assets will not be realized as a future benefit and therefore has recorded a valuation allowance. The valuation allowance for deferred tax assets decreased by $1.9 million in 2016, primarily related to the utilization of investment tax credit and net operating loss carryforward and evidence for future utilization of the remaining investment tax credit and net operating loss carryforwards.

At January 1, 2017, the Company had approximately $49.9 million of net operating loss carryforward from foreign entities primarily from the Company’s Danish entity, which has no expiration date. The Company had foreign capital loss carryforward in the amount of $4.0 million which has no expiration date. Also the Company had aggregate Canadian federal and provincial investment tax credits of $26.1 million, which have expiration dates of 2029 to 2037. In addition, the Company had domestic federal and state net operating loss carryforward of $5.0 million and $112.8 million, respectively. Generally, federal net operating loss carryforward amounts are limited in their use by earnings of certain acquired subsidiaries, and have expiration dates ranging from 2030 to 2036 and the state net operating loss carryforward amounts have expiration dates ranging from 2017 to 2036. Finally, the Company had federal research and development credit carryforward in the amount of $1.4 million which will expire between 2032 and 2035 and state tax credits of $9.9 million, of which $8.1 million have no expiration date and $1.8 million have expiration dates ranging from 2017 to 2032. The Company also had foreign tax credit carryforward in the amount of $0.4 million with an expiration date of 2022.



Unrecognized tax benefits (in millions):	2016			2015			2014
Beginning of year	$	28.8		$	32.3		$	35.4
Increase in prior year tax positions (a)	1.6			2.1			4.3
Increase for tax positions taken during the current period	1.6			1.6			0.9
Reduction related to settlements with taxing authorities	—			(1.5		)	(2.8		)
Reduction related to lapse of the statute of limitations	(7.5		)	(5.0		)	(4.8		)
Impact of exchange rate changes	—			(0.7		)	(0.7		)
End of year	$	24.5		$	28.8		$	32.3
a) Includes the impact of acquisitions in all years.

The Company anticipates the total unrecognized tax benefit for various federal, state and foreign tax items may be reduced by $8.3 million due to the expiration of statutes of limitation for various federal, state and foreign tax issues in the next 12 months.

We recognized net tax benefits for interest and penalties related to unrecognized tax benefits within the provision for income taxes in our statements of operations of $0.2 million, $0.6 million and $0.2 million, for 2016, 2015 and 2014, respectively. Interest and penalties in the amount of $1.9 million, $2.1 million and $2.9 million were recognized in the 2016, 2015 and 2014 statement of financial position, respectively. Substantially all of the unrecognized tax benefits as of January 1, 2017, if recognized would affect our effective tax rate.

We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. The Company has substantially concluded on all U.S. federal income tax matters for all years through 2012, California income tax matters for all years through 2011 and Canadian income tax matters for all years through 2008.