Income Taxes

The components of income before income taxes were taxed under the following jurisdictions:



(In thousands)	2017		2016		2015

Domestic	$	76,876	$	103,576	$	121,614
Foreign	50,096		42,454		10,175

Income before income taxes	$	126,972	$	146,030	$	131,789

Income tax expense consists of the following:



(In thousands)	2017			2016			2015

Current tax expense:
Federal	$	28,584		$	32,262		$	50,272
Foreign	10,219			5,667			4,042
State and local	2,241			3,210			4,886

Current tax expense	41,044			41,139			59,200

Deferred tax (benefit) expense:
Federal	(1,764		)	2,004			(13,739		)
Foreign	1,118			5,099			(1,180		)
State and local	(2,514		)	(105		)	(899		)

Deferred tax (benefit) expense	(3,160		)	6,998			(15,818		)

Income tax expense	$	37,884		$	48,137		$	43,382

The difference between the reported income tax expense and a tax determined by applying the applicable U.S. federal statutory income tax rate to income before income taxes is reconciled as follows:



(In thousands)	2017			2016			2015

Expected income tax expense	$	44,440		$	51,110		$	46,126
State and local income tax, net of federal benefit	1,135			1,982			2,673
Effect of foreign statutory rate different from U.S. and other foreign adjustments	(6,026		)	(4,092		)	(654		)
U.S. production activities deduction	(1,575		)	(3,063		)	(3,500		)
Goodwill disposition	—			—			646
Investment in unconsolidated affiliates	216			1,030			—
Permanent adjustment to deferred tax liabilities	—			—			(4,218		)
Benefit of stock-based compensation deductions	(2,160		)	(656		)	—
Effect of tax on accumulated foreign earnings	12,893			—			—
Effect of tax rate change on net deferred tax liability balance	(12,067		)	—			—
Other, net	1,028			1,826			2,309

Income tax expense	$	37,884		$	48,137		$	43,382

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on the accumulated earnings of certain foreign subsidiaries, and creates new taxes on certain foreign-sourced earnings. At December 30, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act. However, the Company has made a reasonable estimate of the one-time transition tax on accumulated foreign earnings as well as the impact of the Act on its existing deferred tax balances.

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (E&P) for which the accrual of U.S. income taxes has previously been deferred. The Company recorded a provisional amount for its one-time transition tax liability, resulting in an increase in income tax expense of $12.9 million, or 22 cents per diluted share. The Company has not yet completed its calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is impacted in part by the amount of those earnings held in cash and other specified assets. Accordingly, the Company’s estimate of the one-time transition tax may change when it finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. Consistent with prior years, the Company continues to assert that the earnings subject to the transition tax are permanently reinvested. Accordingly, no additional income taxes have been provided for any additional outside basis differences that may exist with respect to these entities or any taxes that may be due upon the repatriation of these earnings. Determining the amount of unrecognized deferred tax liability related to any additional outside basis difference in these entities (i.e., basis differences other than those subject to the one-time transition tax) is not practicable due to the complexities of the hypothetical calculation in determining residual taxes on undistributed earnings, including the availability of foreign tax credits, applicability of any additional local withholding tax, and other indirect tax consequences that may arise due to the distribution of these earnings.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances. The provisional amount recorded related to the remeasurement of the deferred tax balance was an income tax benefit of $12.1 million, or 21 cents per diluted share.

The global intangible low-taxed income (GILTI) provisions of the Act impose a tax on the income of certain foreign subsidiaries in excess of a specified return on tangible assets used by the foreign companies. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of these provisions and has not yet determined the new accounting policy. Accordingly, the Company is unable to make a reasonable estimate and has not reflected any adjustments related to GILTI in its Consolidated Financial Statements.

During 2015, the Company had an adjustment to a deferred tax liability of $4.2 million, or seven cents per diluted share, resulting from the acquisition of a foreign subsidiary.

The Company includes interest and penalties related to income tax matters as a component of income tax expense. The income tax expense related to penalties and interest was immaterial in 2017, 2016, and 2015.

The Internal Revenue Service completed its audit of the Company’s 2013 tax return during 2016, the results of which were immaterial to the Consolidated Financial Statements. The Company is currently under audit in various other jurisdictions.

The statute of limitations is still open for the Company’s federal tax return and most state income tax returns for 2014 and all subsequent years. The statutes of limitations for certain state and foreign returns are also open for some earlier tax years due to differing statute periods. While the Company believes that it is adequately reserved for possible audit adjustments, the final resolution of these examinations cannot be determined with certainty and could result in final settlements that differ from current estimates.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:



(In thousands)	2017			2016

Deferred tax assets:
Inventories	$	10,598		$	15,483
Other postretirement benefits and accrued items	9,239			13,180
Other reserves	9,029			9,821
Federal and foreign tax attributes	11,936			5,813
State tax attributes, net of federal benefit	29,720			22,572
Stock-based compensation	2,102			2,416
Basis difference in unconsolidated affiliates	—			211

Total deferred tax assets	72,624			69,496
Less valuation allowance	(30,316		)	(18,681		)

Deferred tax assets, net of valuation allowance	42,308			50,815

Deferred tax liabilities:
Property, plant, and equipment	43,972			52,319
Pension	3,841			4,633
Basis difference in unconsolidated affiliates	203			—

Total deferred tax liabilities	48,016			56,952

Net deferred tax liabilities	$	(5,708	)	$	(6,137	)

As of December 30, 2017, after consideration of the federal impact, the Company had state income tax credit carryforwards of $4.5 million, all of which expire by 2020, and other state income tax credit carryforwards of $12.6 million with unlimited lives. The Company had state net operating loss (NOL) carryforwards with potential tax benefits of $13.5 million expiring between 2019 and 2032. The state tax credit and NOL carryforwards are offset by valuation allowances totaling $17.6 million.

As of December 30, 2017, the Company had foreign tax credits with potential tax benefits of $5.1 million, which were fully offset by a valuation allowance.

As of December 30, 2017, the Company had foreign tax attributes with potential tax benefits of $5.9 million which have an unlimited life. These attributes were fully offset by a valuation allowance.

Income taxes paid were approximately $42.5 million in 2017, $40.1 million in 2016, and $49.9 million in 2015.