NEWMARKET CORP

Income Taxes

On December 22, 2017, the U.S. enacted tax legislation commonly known as the Tax Cuts and Jobs Act (Tax Reform Act), which required a one-time transition tax in 2017 on the deemed repatriation of previously deferred foreign earnings and reduces the U.S. corporate tax rate to 21% beginning in 2018. As of December 31, 2017, we have not fully completed our analysis of the impacts of the Tax Reform Act. However, we have recorded the effects of the reduced tax rate on our existing deferred tax balances and have estimated the one-time tax on deferred foreign earnings. We recognized $31 million of income tax expense in the year ended December 31, 2017, as a result of the Tax Reform Act. This expense includes $32 million relating to the one-time tax on deferred foreign earnings, which we will elect to pay over an eight-year period, partially offset by $1 million of reductions to deferred tax liabilities. The amount recorded for the transition tax on foreign earnings that is due within the next 12 months has been recorded as an offset to trade and other accounts receivable, net in our Consolidated Balance Sheet at December 31, 2017. The remainder has been recorded in other noncurrent liabilities.

Our estimate of the transition tax expense is based on currently available information and interpretations regarding the application of the new tax provisions. The U.S. Treasury, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance regarding the provisions of the Tax Reform Act that differ from our interpretation, which could impact our provisional expense. Additional work is necessary to further analyze our historical foreign earnings and other items that affect the calculations. Adjustments to the provisional amounts recorded as of December 31, 2017, will affect our tax expense or benefit from continuing operations in the period that adjustments are determined, which will be no later than the fourth quarter of 2018.

Our income before income tax expense, as well as our provision for income taxes is shown in the table below.



	Years Ended December 31,
(in thousands)	2017		2016		2015
Income before income tax expense
Domestic	$	140,779	$	161,687	$	229,561
Foreign	174,663		181,521		109,410
	$	315,442	$	343,208	$	338,971

Income tax expense
Current income taxes
Federal	$	61,188	$	34,213	$	62,491
State	3,942		9,020		11,216
Foreign	32,428		37,349		26,511
	97,558		80,582		100,218
Deferred income taxes
Federal	15,901		13,876		1,287
State	3,633		3,095		(936		)
Foreign	7,841		2,214		(201		)
	27,375		19,185		150
Total income tax expense	$	124,933	$	99,767	$	100,368

The reconciliation of the U.S. federal statutory rate to the effective income tax rate follows:



	% of Income Before Income Tax Expense
	2017		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax	1.6		2.3		2.0
Foreign operations	(4.4	)	(5.8	)	(4.3	)
Domestic research tax credit	(1.1	)	(1.2	)	(1.2	)
Domestic manufacturing tax benefit	(0.8	)	(0.8	)	(1.9	)
Deemed repatriation of foreign earnings	10.1		0.0		0.0
Other items and adjustments	(0.8	)	(0.4	)	0.0
Effective income tax rate	39.6	%	29.1	%	29.6	%

Our deferred income tax assets and liabilities follow.



	December 31,
(in thousands)	2017			2016
Deferred income tax assets
Future employee benefits	$	8,039		$	30,178
Environmental and future shutdown reserves	3,327			5,737
Operating loss and credit carryforwards	6,312			2,935
Trademark expenses	3,852			5,810
Foreign currency translation adjustments	3,993			6,687
Other	3,248			7,458
Gross deferred income tax assets	28,771			58,805
Valuation allowance	(5,768		)	(2,935		)
Total deferred income tax assets	23,003			55,870
Deferred income tax liabilities
Depreciation and amortization	45,128			29,736
Other	8,829			6,305
Total deferred tax liabilities	53,957			36,041
Net deferred income tax (liabilities) assets	$	(30,954	)	$	19,829
Reconciliation to financial statements
Deferred income tax assets	$	4,349		$	29,063
Deferred income tax liabilities	35,303			9,234
Net deferred income tax (liabilities) assets	$	(30,954	)	$	19,829

Deferred income tax liabilities are included in other noncurrent liabilities in our Consolidated Balance Sheets. Our deferred taxes are in a net liability position at December 31, 2017. Our deferred tax assets include $6 million of foreign operating loss carryforwards and foreign and state tax credits. The loss carryforwards expire in 2019 through 2022 and certain tax credits expire in 2026. Based on current forecasted operating plans and historical profitability, we believe that we will recover the full benefit of our deferred tax assets with the exception of $6 million of certain credits and operating loss carryforwards. Therefore, as of December 31, 2017, we have recorded an offsetting valuation allowance against these items, as we do not believe we will be able to utilize these credits and operating loss carryforwards before expiration. The $3 million increase in operating loss and credit carryforwards, and the offsetting valuation allowance, during 2017 is primarily due to recording foreign tax credits as a result of the deemed repatriation of foreign earnings under the Tax Reform Act.

A reconciliation of the beginning and ending balances of the unrecognized tax benefits from uncertain positions is as follows:



	December 31,
(in thousands)	2017			2016			2015
Balance at beginning of year	$	8,810		$	2,322		$	1,465
Increases for tax positions of prior years	865			773			1,035
Decreases for tax positions of prior years	0			0			0
Increases for tax positions of the current year	453			5,826			533
Settlements	(260		)	(111		)	(497		)
Lapses of statutes	(766		)	0			(214		)
Balance at end of year	$	9,102		$	8,810		$	2,322

At December 31, 2017, $9 million of the amount of unrecognized tax benefits, if recognized, would affect our effective tax rate.

We expect the amount of unrecognized tax benefits to change in the next twelve months; however, we do not expect the change to have a material impact on our financial statements.

Our U.S. subsidiaries file a U.S. federal consolidated income tax return. We are currently under examination by various U.S. state and foreign jurisdictions and remain subject to examination until the statute of limitations expires for the respective tax jurisdiction. We are no longer subject to U.S. federal income examination for years before 2014. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. Years still open to examination by foreign tax authorities in major jurisdictions include: the United Kingdom (2015 and forward); Singapore (2013 and forward); Belgium (2016 and forward); and Brazil (2013 and forward).