Income Taxes

On December 22, 2017, "H.R.1", also known as the "Tax Cuts and Jobs Act" (2017 Tax Act) was signed into law. The 2017 Tax Act resulted in an income tax charge of $53.1 million, all of which the Company regards as provisional. Given the complexity and timing of the 2017 Tax Act, the Company has recorded the impact of the 2017 Tax Act based on reasonable estimates and considers these estimates to be provisional under SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). The Company was impacted by the following aspects of the 2017 Tax Act: the remeasurement of net deferred tax assets resulting from the federal income tax rate change from 35% to 21%, a one-time transition tax related to the inclusion of deferred foreign earnings in U.S. taxable income, the write-off of foreign tax credit deferred tax assets related to withholding tax on foreign dividend payments, state tax estimates related to the conformity of federal tax law changes (notably the transition tax and 100% expensing of certain qualified property acquired and placed in service after September 27, 2017), and other smaller items.

The 2017 Tax Act requires companies to include in taxable income the earnings of certain foreign subsidiaries that were previously deferred for U.S. tax purposes. This inclusion results in a one-time transition tax and creates new deferred tax liabilities related to foreign earnings. The Company has made a reasonable estimate of the effects of this foreign inclusion in its 2017 U.S. taxable income and to its deferred tax balances based on the Company’s interpretation of the computations and intent of Congress as defined in the 2017 Tax Act. The one-time transition tax which is based on the Company’s accumulated post-1986 deferred foreign earnings did not have a significant impact on income tax expense. Uncertainty concerning the transition tax exists due to the lack of guidance within the 2017 Tax Act regarding certain highly technical aspects of the current year tax calculation as well as the deferred tax impacts. It is expected that future guidance will be issued that will enable the Company to refine these calculations.

U.S. federal taxable income is the base starting point for determining most state jurisdictions’ taxable income. Each of the 50 states is free to individually adopt a potentially different level of conformity to federal tax law each time it changes. This variability creates significant uncertainty for state income tax purposes, especially with regard to states that do not have “rolling conformity” to follow enacted federal tax law. It is expected that each state will provide guidance related to their conformity to the Act in the future that will enable the Company to refine the state tax current year and deferred tax impacts.

Finally, the Company believes future guidance, interpretations and pronouncements will add clarity to the numerous aspects of the 2017 Tax Act that may impact the Company. Future clarifications may give rise to additional unanticipated impacts on the Company’s tax liabilities or effective tax rate and revisions to the Company’s provisional estimates related to the impacts of the 2017 Tax Act on the Company’s income tax provision.

Provision for income taxes for the years ended December 31 consists of the following (in thousands):



	2017		2016			2015
Current:
Federal	$	245,189	$	284,489		$	363,803
State	24,898		28,406			37,811
Foreign	21,138		19,017			12,826
	291,225		331,912			414,440
Deferred:
Federal	47,046		(4,250		)	(15,474		)
State	2,688		7,038			(2,264		)
Foreign	1,121		(2,953		)	1,254
	50,855		(165		)	(16,484		)
Total	$	342,080	$	331,747		$	397,956

The components of income before income taxes for the years ended December 31 were as follows (in thousands):



	2017		2016		2015
Domestic	$	788,878	$	954,138	$	1,101,427
Foreign	74,961		69,773		48,736
Total	$	863,839	$	1,023,911	$	1,150,163

The provision for income taxes differs from the amount that would be provided by applying the statutory U.S. corporate income tax rate due to the following items for the years ended December 31:



	2017		2016		2015
Provision at statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.9		1.8		1.8
Foreign rate differential	(0.8	)	(0.6	)	(0.4	)
Domestic manufacturing deduction	(2.2	)	(2.1	)	(2.1	)
Research and development credit	(0.7	)	(0.4	)	(0.4	)
Unrecognized tax benefits including interest and penalties	2.3		(1.3	)	1.1
Valuation allowance adjustments	(0.1	)	0.1		(0.1	)
Deferred remeasurement for rate change	5.5		—		—
Tax reform territorial tax	(0.1	)	—		—
Adjustments for previously accrued taxes	(1.2	)	0.2		(0.1	)
Other	—		(0.3	)	(0.2	)
Provision for income taxes	39.6	%	32.4	%	34.6	%

The principal components of the Company’s deferred tax assets and liabilities as of December 31 include the following (in thousands):



	2017			2016
Deferred tax assets:
Accruals not yet tax deductible	$	92,158		$	141,961
Pension and postretirement benefit plan obligations	37,357			88,741
Stock compensation	12,669			19,051
Net operating loss carryforward	33,171			33,587
Valuation allowance	(21,561		)	(30,953		)
Other, net	52,422			56,903
	206,216			309,290
Deferred tax liabilities:
Depreciation, tax in excess of book	(88,989		)	(139,268		)
Other	(8,154		)	(2,293		)
	(97,143		)	(141,561		)
Total	$	109,073		$	167,729

The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.

At December 31, 2017, the Company had approximately $291.1 million gross state operating loss carryforwards expiring in 2031. At December 31, 2017 the Company also had Wisconsin research and development credit carryforwards of $11.3 million expiring in 2028. The Company had a deferred tax asset of $27.1 million as of December 31, 2017 for the benefit of these losses and credits. A valuation allowance of $4.5 million has been established against the deferred tax asset, which is a decrease of $0.1 million from the prior year.

The Company has foreign net operating losses (NOL) totaling $6.1 million as of December 31, 2017. It has a valuation allowance of $17.1 million against both the NOLs and other deferred tax assets of $11.0 million. The valuation allowance on foreign net operating losses decreased by $9.2 million, reflecting movement related to realizability assessment on additional earnings and loss, as well as movements related to foreign currency rates.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):



	2017			2016
Unrecognized tax benefits, beginning of period	$	55,539		$	73,100
Increase in unrecognized tax benefits for tax positions taken in a prior period	9,513			2,828
Decrease in unrecognized tax benefits for tax positions taken in a prior period	(3,749		)	(21,061		)
Increase in unrecognized tax benefits for tax positions taken in the current period	13,779			7,402
Statute lapses	—			(1,907		)
Settlements with taxing authorities	(2,852		)	(4,823		)
Unrecognized tax benefits, end of period	$	72,230		$	55,539

The amount of unrecognized tax benefits as of December 31, 2017 that, if recognized, would affect the effective tax rate was $63.1 million.

The total gross amount of expense related to interest and penalties associated with unrecognized tax benefits recognized during 2017 in the Company’s Consolidated Statements of Income was $2.8 million.

The total gross amount of interest and penalties associated with unrecognized tax benefits recognized at December 31, 2017 in the Company’s Consolidated Balance Sheets was $30.9 million.

The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2018. However, the Company is under regular audit by tax authorities. The Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

The Company or one of its subsidiaries files income tax returns in the U.S. federal and Wisconsin state jurisdictions and various other state and foreign jurisdictions. The Company is no longer subject to income tax examinations for Wisconsin state income taxes before 2013 or for U.S. federal income taxes before 2014.