Entity information:
12. Income Taxes

The components of earnings before income taxes and discontinued operations were:
 
Years Ended December 31,
(in millions)
2017
 
2016
 
2015
Domestic
$
402.7

 
$
(51.1
)
 
$
(57.9
)
Foreign
(383.3
)
 
79.2

 
78.5

Total earnings before income taxes and discontinued operations
$
19.4

 
$
28.1

 
$
20.6



Income tax expense for the years ended December 31, 2017, 2016, and 2015 is comprised of the following:
 
Years Ended December 31,
(in millions)
2017
 
2016
 
2015
Current:
 
 
 
 
 
U.S. Federal
$
28.9

 
$
—

 
$
1.9

State and local
0.1

 
0.1

 
—

Foreign
11.7

 
6.8

 
9.9

Total current tax expense
$
40.7

 
$
6.9

 
$
11.8

Deferred:
 
 
 
 
 
U.S. Federal
$
(26.8
)
 
$
0.8

 
$
(3.5
)
State and local
—

 
0.2

 
(0.1
)
Foreign
(1.0
)
 
0.4

 
(5.0
)
Total deferred tax (benefit) expense
(27.8
)
 
1.4

 
(8.6
)
Total income tax expense
$
12.9

 
$
8.3

 
$
3.2



The reconciliation of the U.S. Federal income tax rate to the Company’s effective income tax rate was as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
U.S. Federal income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State and local taxes, net of Federal income tax benefit
(0.2
)%
 
1.1
 %
 
(7.4
)%
Foreign operations tax effect
27.0
 %
 
(22.5
)%
 
(36.6
)%
Research & experimentation tax credits
(11.6
)%
 
(6.6
)%
 
(12.4
)%
Valuation allowance
60.8
 %
 
69.6
 %
 
97.0
 %
Tax contingencies
6.6
 %
 
(0.6
)%
 
(1.3
)%
Tax holiday
(78.0
)%
 
(64.2
)%
 
(87.9
)%
Foreign taxes
(5.0
)%
 
2.8
 %
 
8.8
 %
Non-deductible transaction costs
—
 %
 
—
 %
 
5.9
 %
Stock-based compensation
9.3
 %
 
9.6
 %
 
4.7
 %
Other, principally non-tax deductible items (1)
12.7
 %
 
5.1
 %
 
9.5
 %
Transition tax
89.7
 %
 
—
 %
 
—
 %
Tax reform
(85.3
)%
 
—
 %
 
—
 %
Prior period items
5.5
 %
 
0.2
 %
 
0.2
 %
Effective income tax rate
66.5
 %
 
29.5
 %
 
15.5
 %

(1) Includes income tax expense related to the Malaysian tax consequences of the intra-entity intellectual property sale between the U.S. and Malaysia that increases the effective income tax rate by 18.5% for the year ended December 31, 2017.

The Company’s effective tax rate is favorably impacted by two tax holidays granted to us by Malaysia effective through December 31, 2021. These tax holidays are subject to the Company’s satisfaction of certain conditions, including investment or sales thresholds, which the Company expects to maintain. During 2016, the Company applied for and received final approval to modify the terms of its main tax holiday in Malaysia, reducing the rate to 7.2% versus the statutory rate of 24.0%, effective January 1, 2017 through December 31, 2021. If the Company fails to satisfy such conditions, the Company’s effective tax rate may be significantly adversely impacted. The continuing operations benefit of these incentives for the years ending December 31, 2017, 2016, and 2015 is estimated to be $13.8 million, $16.3 million, and $17.7 million, respectively. The continuing operations benefit of the tax holidays on a per share basis for the years ending December 31, 2017, 2016, and 2015 was $0.15, $0.18, and $0.20, respectively.

The components of the Company’s deferred tax assets and liabilities included the following:
(in millions)
December 31, 2017
 
December 31, 2016
Deferred tax assets:
 
 
 
Accrued compensation, principally post-retirement, and other employee benefits
$
13.7

 
$
19.0

Accrued expenses, principally for state income taxes, interest, and warranty
5.9

 
6.5

Net operating loss and other carryforwards
115.6

 
148.2

Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes
3.6

 
7.5

Convertible Note Hedges
7.3

 
14.6

Plant and equipment, principally due to differences in depreciation
9.6

 
4.5

Total gross deferred tax assets
155.7

 
200.3

Valuation allowance
(99.7
)
 
(161.3
)
Total deferred tax assets
$
56.0

 
$
39.0

 
 
 
 
Deferred tax liabilities:
 
 
 
Intangible assets, principally due to different tax and financial reporting bases and amortization lives
$
(10.3
)
 
$
(27.3
)
Debt discount on convertible notes
(5.7
)
 
(11.6
)
Other liabilities
(17.6
)
 
(6.7
)
Total gross deferred tax liabilities
(33.6
)
 
(45.6
)
Net deferred tax asset (liability)
$
22.4

 
$
(6.6
)
 
 
 
 
Classified as follows in the Consolidated Balance Sheets:
 
 
 
Other assets and deferred charges (non-current deferred tax assets)
$
22.4

 
$
15.0

Deferred income taxes (non-current deferred tax liabilities)
—

 
(21.6
)
Net deferred tax asset (liability)
$
22.4

 
$
(6.6
)


The Company recorded valuation allowances of $99.7 million and $161.3 million at December 31, 2017 and 2016, respectively, against deferred tax assets from continuing operations as the Company believes it is more likely than not that these assets will not be realized. Of the $99.7 million allowance as of December 31, 2017, $11.7 million was related to a change in judgment regarding the realizability of the beginning of the year tax assets as a result of the Tax Reform Act enacted December 22, 2017. Management believes that it is more likely than not that the Company will realize the benefits of the remaining deferred tax assets. The amount of the deferred tax asset is considered realizable, however, it could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present, requiring that additional weight be given to subjective evidence such as our projections for growth.

At December 31, 2017, the Company had $34.2 million of Federal net operating losses that are available, of which $12.2 million will expire in the next 5 to 10 years and $22.0 million will expire in the next 10 to 20 years. There are $96.9 million of State net operating losses that are available between 2018 and 2037. There are $314.2 million of non-U.S. net operating loss carryforwards, of which $3.1 million will expire within the next 5 years, $0.8 million will expire in the next 5 to 10 years, and $310.3 million can be carried forward indefinitely.

The Company has $7.7 million of U.S. federal research and development credits that begin to expire in 2020 and $3.3 million of foreign tax credits that begin to expire in 2027. In addition, the Company has $13.8 million of state credits, of which $1.4 million will expire between 2019 and 2033 if unused, and $12.4 million can be carried forward indefinitely.

The Company has not provided for deferred taxes on the undistributed earnings of its international subsidiaries totaling approximately $1.7 billion. Such earnings are reinvested in foreign jurisdictions and it is currently intended that they will continue to be reinvested indefinitely. Our Malaysian principal subsidiary is our primary source of foreign earnings and cash. Any future decision to distribute cash from this subsidiary to the U.S. should not result in a material amount of U.S. or foreign taxes.

Unrecognized Tax Benefits

The Company records interest and penalties associated with unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2017 and 2016, the Company recorded a potential interest benefit of $1.1 million and potential interest expense of $0.3 million, respectively. The Company recorded no potential interest impact during the year ended December 31, 2015. Total accrued interest at December 31, 2017, 2016, and 2015 was $0.4 million, $1.4 million, and $1.3 million, respectively, and was included in other liabilities. During the year ended December 31, 2017, the Company recorded potential penalty expense of $0.2 million, which is also the cumulative penalty amount included in other liabilities. Total accrued penalties at December 31, 2017 was $0.2 million.

The Company's tax returns are routinely audited by the tax authorities in the relevant jurisdictions. For tax years before 2014, the Company is no longer subject to U.S. federal income tax examination. For tax years before 2012, the Company’s Malaysian subsidiaries are no longer subject to examination. It is reasonably possible that the gross amount of unrecognized tax benefits will decrease by $2.8 million during the next twelve months. Included in the balance of total unrecognized tax benefits at December 31, 2017 are potential benefits of $6.0 million, which if recognized, would affect the effective rate on earnings from continuing operations. Given the Company's current valuation allowance position, no benefit is expected to result from the reversal of any uncertain tax position associated with the acquired attributes.
Unrecognized tax benefits at January 1, 2015
$
5.0

Reductions for tax positions of prior years
(0.4
)
Additions for business combinations
8.4

Foreign exchange fluctuations
(0.2
)
Unrecognized tax benefits at December 31, 2015
$
12.8

Reductions for tax positions due to lapsed statutes of limitations
(0.5
)
Foreign exchange fluctuations
(0.5
)
Unrecognized tax benefits at December 31, 2016
$
11.8

Additions based on tax positions related to the current year
2.6

Additions for tax positions of prior years
0.6

Reductions for tax positions due to lapsed statutes of limitations
(1.3
)
Tax reform
(1.5
)
Foreign exchange fluctuations
0.3

Unrecognized tax benefits at December 31, 2017
$
12.5



On December 22, 2017, the Tax Reform Act was enacted which permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of $5.6 million. Due to the change in the net operating loss carryforward period, taxable temporary differences associated with our indefinite-lived intangible assets allow the company to recognize $11.7 million of deferred tax assets that previously required a valuation allowance. The Tax Reform Act also provided for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary E&P through the year ended December 31, 2017. The Company recorded provisional tax expense related to the deemed repatriation of $18.0 million payable over nine years. The expected gross payable due to the Tax Reform Act is $25.9 million, which will be reduced by the use of approximately $7.9 million of existing deferred tax assets resulting in an $18.0 million net expected liability as of December 31, 2017. The GILTI provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its Consolidated Financial Statements for the year ended December 31, 2017.

On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company has recognized the provisional tax impacts related to deemed repatriated earnings, the change in beginning of year valuation allowance, and the benefit for the remeasurement of deferred tax assets and liabilities in its Consolidated Financial Statements for the year ended December 31, 2017. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions the Company has made, and actions the Company may take as a result of the Tax Reform Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.