Income Taxes

12 Months Ended

Dec. 31, 2019

9. INCOME TAXES

We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assets and liabilities calculated using enacted applicable tax rates. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. Changes in the valuation allowance, when recorded, are included in the provision for income taxes in the consolidated financial statements.

The components of income before taxes and the provision for income taxes recorded in the consolidated statements of income are as follows:



	For the Years Ended December 31,
Components of Income before Taxes		2019		2018		2017
Domestic	$	185.1	$	163.3	$	155.2
Foreign		14.8		15.8		12.3
Income before taxes	$	199.9	$	179.1	$	167.5



	For the Years Ended December 31,
Components of Income Tax Provision		2019		2018		2017
Current expense
U.S. Federal	$	41.9	$	20.5	$	66.5
State		12.4		6.9		11.4
Foreign		4.4		4.6		3.5
Total current expense	$	58.7	$	32.0	$	81.4
Deferred (benefit) expense
U.S. Federal		(3.0)		2.5		15.3
State		(0.8)		0.8		(1.1)
Foreign		0.1		0.1		—
Total deferred (benefit) expense	$	(3.7)	$	3.4	$	14.2
Total income tax provision	$	55.0	$	35.4	$	95.6

A reconciliation between the statutory U.S. federal income tax rate and the effective tax rate in the consolidated statements of income is as follows:



	For the Years Ended December 31,
	2019		2018		2017
Statutory U.S. federal income tax rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net of federal benefit	4.5		3.1		4.0
Deemed repatriation of foreign earnings	—		(1.0)		3.3
Effect of tax rate changes	—		(5.1)		13.5
Meals and entertainment	1.4		1.4		1.4
Other, net	0.6		0.4		(0.1)
Effective tax rate	27.5	%	19.8	%	57.1	%

The effective tax rate increased in 2019 and reflects a normalization after the one-time effects of the TCJA were recorded in the 2018 and 2017 results.

Deferred income taxes are provided based upon differences between the financial statement and tax bases of assets and liabilities. The following deferred tax assets (liabilities) were recorded at December 31:



Assets (Liabilities)		2019		2018
Pension	$	38.7	$	31.0
Operating lease liabilities		30.6		—
Postretirement benefits		19.6		18.6
Inventory		14.9		12.1
Other deferred tax assets		5.0		5.0
Payroll accruals		2.9		2.9
Bad debt reserves		1.0		1.0
Subtotal		112.7		70.6
Less: valuation allowances		(0.4)		—
Deferred tax assets		112.3		70.6
Fixed assets		(32.2)		(28.3)
Operating lease right-of-use assets		(28.7)		—
Other deferred tax liabilities		(4.5)		(4.0)
Computer software		(2.9)		(3.2)
Deferred tax liabilities		(68.3)		(35.5)
Net deferred tax assets	$	44.0	$	35.1

Deferred income taxes included in non-current assets (liabilities) at December 31 were:



		2019		2018
Deferred tax assets included in other non-current assets	$	44.5	$	35.5
Deferred tax liabilities included in other non-current liabilities		(0.5)		(0.4)

Operating loss and tax credit carryforwards included in net deferred tax assets at December 31 were:



		2019		2018
U.S. Federal^(A)	$	0.4	$	—
State^(A)		0.3		0.4
Foreign^(B)		0.1		0.1

^(A)Expires between 2023 and 2030

^(B)Indefinite life

We have placed a partial valuation allowance on certain state net operating losses of less than $0.1 million and a full valuation allowance on U.S. federal tax credits of $0.4 million that are not expected to be utilized prior to expiration.

We have no material undistributed earnings of non-U.S. subsidiaries as of December 31, 2019, due to the one-time transition tax and global intangible low-taxed income (“GILTI”) provisions enacted under the TCJA. We have settled the entire transition tax liability with the filing of the 2017 federal income tax return. No additional income taxes have been provided for any outside basis difference inherent in these foreign entities, as these amounts continue to be indefinitely reinvested in foreign operations. We have made an accounting policy election to treat GILTI as a period cost as it did not have a material impact on our tax provision.

Our federal income tax returns for the tax years 2016 and forward are available for examination by the United States Internal Revenue Service (“IRS”). The statute of limitation for the 2016 federal return will expire on October 15, 2020, unless extended by consent. Our state income tax returns for 2015 through 2019 remain subject to examination by various state authorities with the latest period closing on December 31, 2024. We have not extended the statutes of limitations in any state jurisdictions with respect to years prior to 2015.

The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017. Among the provisions, the TCJA reduced the U.S. federal corporate income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018, required companies to pay a one-time transition tax on deemed repatriated earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. As of December 31, 2018, we completed our accounting for the tax effects of the enactment of the TCJA and finalized the tax effects on our existing deferred tax balances and the one-time transition tax under Staff Accounting Bulletin No. 118 ("SAB 118"). No further updates with respect to these TCJA provisions have been made in 2019.

At December 31, 2017, we remeasured domestic deferred tax assets and liabilities based on the expected future applicable tax rate and recorded a provisional tax expense of $22.6 million, consisting of $43.5 million of tax expense related to items previously recorded through accumulated other comprehensive income under FASB Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("FAS 158"), and $20.9 million of tax benefit related to items previously recorded through our provision for income taxes. During 2018, we finalized calculations of cumulative timing differences, resulting in a decrease in tax expense of $9.2 million due to the return vs. provision difference remeasurement of these balances related to tax planning initiatives as of December 31, 2018.

The one-time transition tax is based on our total post-1986 earnings and profits ("E&P") that we previously deferred from U.S. income taxation, and the amount of those earnings held in cash and other specified assets. At December 31, 2017, we recorded a provisional amount for our one-time transition tax liability of $6.2 million. We finalized our calculation as of December 31, 2018, resulting in a decrease in income tax expense of $2.4 million. The entire transition tax liability was settled with the filing of the 2017 U.S. federal income tax return in 2018.

Our unrecognized tax benefits of $1.9 million, $2.6 million, and $2.3 million as of December 31, 2019, 2018, and 2017, respectively, are uncertain tax positions that would impact our effective tax rate if recognized. We are periodically engaged in tax return examinations, reviews of statute of limitations periods, and settlements surrounding income taxes. We do not anticipate a material change in unrecognized tax benefits during the next twelve months.

Our uncertain tax benefits, and changes thereto, during 2019, 2018, and 2017 were as follows:



		2019		2018		2017
Balance at January 1,	$	2.6	$	2.3	$	1.8
Additions based on tax positions related to current year		0.2		1.1		0.4
Additions based on tax positions of prior years		—		—		0.3
Reductions for tax positions of prior years		(0.1)		(0.8)		(0.2)
Settlements		(0.8)		—		—
Balance at December 31,	$	1.9	$	2.6	$	2.3

We classify interest expense and penalties as part of our provision for income taxes based upon applicable federal and state interest/underpayment percentages. We have accrued $0.4 million in interest and penalties at December 31, 2019 and 2018. Interest was computed on the difference between the provision for income taxes recognized in accordance with GAAP and the amount of benefit previously taken or expected to be taken in our federal, state, and local income tax returns.