Income Taxes

The components of earnings from continuing operations before income taxes are as follows:



	Year Ended December 31
	2015		2014		2013
Domestic	$	254.2	$	142.1	$	111.2
Foreign	195.6		153.4		126.4
	$	449.8	$	295.5	$	237.6

Income tax expense from continuing operations is comprised of the following components:



	Year Ended December 31
	2015		2014			2013
Current
Federal	$	63.1	$	38.4		$	59.8
State and local	7.6		3.3			5.9
Foreign	40.0		29.8			24.2
	110.7		71.5			89.9
Deferred
Federal	9.6		(6.1		)	(26.4		)
State and local	.1		2.1			(1.8		)
Foreign	1.4		2.8			(10.4		)
	11.1		(1.2		)	(38.6		)
	$	121.8	$	70.3		$	51.3

Income tax expense from continuing operations, as a percentage of earnings before income taxes, differs from the statutory federal income tax rate as follows:



	Year Ended December 31
	2015		2014		2013
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in rate resulting from:
State taxes, net of federal benefit	1.6		1.0		1.4
Tax effect of foreign operations	(5.8	)	(7.5	)	(8.6	)
Deferred tax on undistributed foreign earnings	(1.0	)	.4		(.5	)
Change in valuation allowance	—		.2		(1.4	)
Change in uncertain tax positions, net	(.5	)	(.6	)	(1.1	)
Domestic Production Activities Deduction	(1.2	)	(3.4	)	(2.0	)
Other permanent differences, net	(1.0	)	(.7	)	(.6	)
Other, net	—		(.6	)	(.6	)
Effective tax rate	27.1	%	23.8	%	21.6	%

For all periods presented, the tax rate benefited from income earned in various foreign jurisdictions at rates lower than the U.S. federal statutory rate, primarily related to China and Luxembourg. Significant items impacting each year's tax rate are:


•	2015: We recognized tax benefits totaling $11.3, including a reduction in deferred taxes on undistributed foreign earnings associated with a planned reinvestment in China, and a deferred tax benefit related to our Australian operations.


•	2014: We recognized tax benefits totaling $13.9, primarily related to additional Domestic Production Activities Deductions for the current and prior years, incremental deferred foreign tax credits, and net favorable provision-to-return adjustments related to prior year taxes.


•	2013: We recognized tax benefits totaling $17.5, primarily related to the impact of Mexico tax law changes, the settlement of certain foreign and state audits, and a non-taxable bargain purchase gain.

We recognized net excess tax benefits of approximately $15.4, $10.1, and $4.6, in 2015, 2014, and 2013, respectively, related to stock plan activity, which have been recorded to additional contributed capital. These amounts include net windfall tax benefits as discussed in Note L.

We file tax returns in each jurisdiction where we are required to do so. In these jurisdictions, a statute of limitations period exists. After a statute period expires, the tax authorities can no longer assess additional income tax for the expired period. In addition, once the statute expires we are no longer eligible to file claims for refund for any tax that we may have overpaid.

Unrecognized Tax Benefits

The total amount of our gross unrecognized tax benefits at December 31, 2015, is $22.1, of which $12.8 would impact our effective tax rate, if recognized. A reconciliation of the beginning and ending balance of our gross unrecognized tax benefits for the periods presented is as follows:



	2015			2014			2013
Gross unrecognized tax benefits, January 1	$	19.8		$	24.4		$	26.6
Gross increases—tax positions in prior periods	.3			.1			4.5
Gross decreases—tax positions in prior periods	(.5		)	(2.4		)	(1.5		)
Gross increases—current period tax positions	1.3			1.3			1.0
Change due to exchange rate fluctuations	(1.3		)	(1.0		)	(.4		)
Settlements	(1.5		)	(.6		)	(2.8		)
Lapse of statute of limitations	(2.6		)	(2.0		)	(3.0		)
Gross unrecognized tax benefits, December 31	15.5			19.8			24.4
Interest	6.0			7.6			7.6
Penalties	.6			.8			.9
Total gross unrecognized tax benefits, December 31	$	22.1		$	28.2		$	32.9

We recognize interest and penalties related to unrecognized tax benefits as part of income tax expense in the Consolidated Statements of Operations, which is consistent with prior reporting periods.

As of December 31, 2015, four tax years were subject to audit by the United States Internal Revenue Service (IRS), covering the years 2012 through 2015. In 2015, the IRS examined our 2013 tax return for a U.S. non-consolidated filing entity, L&P Financial Services Co., and the audit was concluded with no adjustments. There are no current IRS examinations in process nor are we aware of any forthcoming.

Additionally, at December 31, 2015, eight tax years were either subject to or undergoing audit by the Canada Revenue Agency, covering the periods 2008 through 2015. The examinations in process are at various stages of completion, but to date we are not aware of any likely material adjustments. The Canada Revenue Agency did issue an assessment in 2014 with respect to the 2007 and 2008 years in the amount of $2.9, related to transfer pricing issues. We disagree with the findings and continue to appeal this assessment.

Various state and other foreign jurisdiction tax years also remain open to examination, though we believe any assessments would be immaterial to our consolidated financial statements.

It is reasonably possible that resolution of certain tax audits could reduce our unrecognized tax benefits within the next 12 months, as certain tax positions may be sustained on audit, or we may agree to certain adjustments. It is not expected that any change would have a material impact on our Consolidated Financial Statements.

Deferred Income Taxes

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The major temporary differences and their associated deferred tax assets or liabilities are as follows:



	December 31
	2015						2014
	Assets			Liabilities			Assets			Liabilities
Property, plant and equipment	$	6.9		$	(54.3	)	$	13.6		$	(56.6	)
Inventories	2.8			(26.5		)	2.2			(14.1		)
Accrued expenses	96.8			—			120.9			—
Net operating losses and other tax carryforwards	57.2			—			58.7			—
Pension cost and other post-retirement benefits	33.6			(.9		)	33.6			(.8		)
Subsidiary stock basis	2.0			—			—			—
Intangible assets	1.2			(107.3		)	1.9			(102.1		)
Derivative financial instruments	14.0			(1.7		)	12.8			(1.9		)
Tax on undistributed earnings	—			(6.9		)	—			(11.2		)
Uncertain tax positions	7.1			—			9.3			—
Other	5.0			(7.7		)	5.5			(9.0		)
Gross deferred tax assets (liabilities)	226.6			(205.3		)	258.5			(195.7		)
Valuation allowance	(26.6		)	—			(27.1		)	—
Total deferred taxes	$	200.0		$	(205.3	)	$	231.4		$	(195.7	)
Net deferred tax (liability) asset				$	(5.3	)				$	35.7

Significant fluctuations in our deferred taxes from 2014 to 2015 are:


•	The net deferred tax asset associated with property, plant, and equipment decreased in 2015 due primarily to the anticipated utilization of Canadian capital cost allowances on our Canadian tax return filing.


•	The increase in our net inventory deferred tax liability is primarily related to changes in our LIFO inventory assumptions associated with 2015 steel prices.


•	A significant portion of the net decrease in accrued expenses relates to 2015 payments of $82 associated with our foam antitrust litigation accrual.


•	The net increase in our deferred tax liability for intangible assets results from various acquisitions and divestitures in 2015.

The valuation allowance primarily relates to net operating loss, tax credit, and capital loss carryforwards for which utilization is uncertain. Cumulative tax losses in certain state and foreign jurisdictions during recent years, limited carryforward periods in certain jurisdictions, future reversals of existing taxable temporary differences, and reasonable tax planning strategies were among the factors considered in determining the valuation allowance. Individually, none of these tax carryforwards presents a material exposure.

These tax carryforwards have expiration dates that vary generally over the next 20 years, with no amount greater than $10 expiring in any one year.

Deferred income and withholding taxes have been provided on earnings of our foreign subsidiaries to the extent it is anticipated that the earnings will be remitted in the future as dividends. The tax effect of most distributions would be significantly offset by available foreign tax credits. As of December 31, 2015 and 2014, we have accrued $6.9 and $11.2, respectively, of deferred taxes related to incremental withholding taxes in China, since we no longer have specific plans to reinvest all of our Chinese earnings within China. In 2015, we reduced these accrued taxes by a net $4.3, primarily due to a planned reinvestment related to the buy-out of a minority interest partner at one of our China subsidiaries. Although these taxes would be due on dividends from certain of our China subsidiaries to their foreign parent, a subsidiary of the U.S. company, the earnings are still permanently reinvested outside the U.S. and are included in the undistributed earnings and incremental taxes discussed below.

Deferred income taxes and withholding taxes have not been provided on foreign earnings which are indefinitely reinvested. The cumulative undistributed earnings which are indefinitely reinvested as of December 31, 2015, are $616.2. If such earnings were distributed, we estimate that the resulting incremental tax expense would be approximately $106.9 based on present income tax laws, which are subject to change. In 2015, the foreign earnings we repatriated were immaterial, and resulted in no significant net tax benefit or cost.

Deferred tax assets (liabilities) included in the consolidated balance sheets are as follows:



	December 31
	2015			2014
Other current assets	$	—		$	42.3
Sundry	33.3			36.5
Other current liabilities	—			(1.3		)
Deferred income taxes	(38.6		)	(41.8		)
	$	(5.3	)	$	35.7

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, simplifying the presentation of deferred income taxes. This ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be presented as non-current in our Consolidated Balance Sheet. We adopted this guidance as of December 31, 2015, on a prospective basis, and no prior periods were retrospectively adjusted. Adoption of this ASU resulted in the reclassification of all our current deferred tax assets and liabilities to non-current deferred tax assets and liabilities in our December 31, 2015 Consolidated Balance Sheet.