Income Taxes

The significant components of our deferred income tax liabilities and assets are as follows (in thousands):



	December 31,
	2016			2015
Deferred income tax liabilities:
Excess tax over book depreciation	$	11,210		$	5,070
Other	4,650			1,314
Intangible assets	42,837			10,119
Total deferred income tax liabilities	58,697			16,503
Deferred income tax assets:
Accrued expenses	8,146			9,037
Equity compensation	6,461			5,710
Inventories	9,323			8,686
Net operating loss and state credit carry-forward	3,974			4,653
Foreign tax credit carryforward	18,177			7,760
Pension benefit obligation	5,262			6,466
Other	1,549			1,458
Total deferred income tax assets	52,892			43,770
Valuation allowance	(3,028		)	(892		)
Deferred income tax asset, net of valuation allowance	49,864			42,878
Deferred income tax (liability)/asset, net	$	(8,833	)	$	26,375

The deferred income taxes by classification and geography are as follows:



	December 31,
	2016			2015
Long-term deferred income tax asset, net	$	4,824		$	36,799
Long-term deferred income tax liability, net	(13,657		)	(10,424		)
Deferred income tax (liability)/asset, net	$	(8,833	)	$	26,375
Deferred income taxes by geography are as follows:
Domestic net long-term (liability)/asset	$	(4,315	)	$	32,099
Foreign net long-term liability	(4,518		)	(5,724		)
Net non-current deferred income tax asset	$	(8,833	)	$	26,375

The (benefit from) provision for income taxes is based on the following pre-tax income (in thousands):



	Year Ended December 31,
	2016			2015		2014
Domestic	$	(16,766	)	$	12,965	$	26,229
Foreign	26,446			9,463		37,032
Income before income taxes	$	9,680		$	22,428	$	63,261

The provision for income taxes consists of the following (in thousands):



	Year Ended December 31,
	2016			2015			2014
Current provision:
Federal - US	$	(232	)	$	705		$	3,916
Foreign	10,823			11,023			10,455
State -US	(275		)	56			1,244
Total current	$	10,316		$	11,784		$	15,615
Deferred provision (benefit):
Federal - US	$	(8,992	)	$	2,618		$	(967	)
Foreign	(3,328		)	(887		)	(1,594		)
State -US	1,583			(950		)	(179		)
Total (benefit) deferred	$	(10,737	)	$	781		$	(2,740	)
Total (benefit) provision for income taxes	$	(421	)	$	12,565		$	12,875

Actual income taxes reported from operations are different from those that would have been computed by applying the federal statutory tax rate to income before income taxes. The expense for income taxes differs from the U.S. statutory rate due to the following:



	Year Ended December 31,
	2016		2015		2014
Expected federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	(4.8	)	(0.7	)	1.0
Change in state tax rate	—		3.5		—
Change in valuation allowance on state net operating losses	18.9		(7.3	)	—
Foreign tax rate differential	(38.4	)	(18.9	)	(8.7	)
Unbenefited foreign losses	14.7		41.4		3.0
Foreign tax credits	(26.6	)	—		(9.1	)
Manufacturing deduction	—		(1.6	)	(1.7	)
Research and development credit	(6.6	)	(1.1	)	(0.5	)
Foreign audit settlement	—		6.0		—
Other, net	3.4		(0.3	)	1.4
Effective tax rate	(4.4	)%	56.0	%	20.4	%

Included in the 2016 foreign tax rate differential (38.4)% above are the following items: valuation allowance for foreign deferred tax assets (-3.4%), foreign tax rate changes (5.0%), and foreign permanent difference (-5.7%). Included in Other, net is nondeductible transaction costs.

As of December 31, 2016 and 2015, the Company maintained a total valuation allowance of $3.0 million and $0.9 million, respectively, which relates to foreign and state deferred tax assets as of December 31, 2016 and to state deferred tax assets as of December 31, 2015. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable.

The following table provides a summary of the changes in the deferred tax valuation allowance for the years ended December 31, 2016, 2015, and 2014 (in thousands):



	December 31,
	2016			2015			2014
Deferred tax valuation allowance at January 1	$	892		$	9,448		$	13,928
Additions	2,257			15			1,460
Deductions	(121		)	(7,798		)	(5,705		)
Translation adjustments	—			(773		)	(235		)
Deferred tax valuation allowance at December 31	$	3,028		$	892		$	9,448

The Company repatriated $32 million of foreign earnings to the US during the fourth quarter of 2016, resulting in a tax benefit of $2.6 million in the year ended December 31, 2016. The tax benefit is a result of foreign tax credits associated with the repatriation, in excess of the US corporate tax rate.

As of December 31, 2016 the Company had foreign tax credits of $17.7 million, foreign net operating losses of $1.5 million, state net operating losses of $57.2 million and state tax credits of $2.0 million. As of December 31, 2015, the Company had foreign tax credits of $7.8 million, foreign net operating losses of $4.4 million, state net operating losses of $51.9 million and state tax credits of $2.0 million. The foreign tax credits, if not utilized, will expire in 2026. The state net operating losses and state tax credits, if not utilized, will expire at various dates through 2036.

As we closed the Brazil site in 2016, we do not believe that any of the deferred tax assets related to Brazil have any value. Accordingly, this portion of the valuation allowance was written off during 2015, along with the related deferred tax assets.

During 2014, the Company believes a valuation allowance of $5.7 million is no longer needed on US foreign tax credits due to changes in our risk of loss / title transfer contract provisions which were finalized in 2014 for certain international sites. Under these new provisions, title and risk of loss transfers to the customer at the international point of manufacture or receipt rather than when the product is shipped. These revised contract provisions resulted in increased foreign source income allowing for the full utilization of the foreign tax credits. Based upon this change, the Company believes it will fully utilize all available foreign tax credits well in advance of their expiration, and, accordingly, reversed the related valuation allowance.

On December 18, 2015, the President of the United States signed legislation that permanently extended the research and development ("R&D") tax credit. Accordingly, the Company recorded the entire benefit of $0.3 million for the R&D tax credit attributable to 2015 in the fourth quarter.

The Company files income tax returns in the U.S. federal, state and local jurisdictions and in foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service ("IRS") for years prior to 2013 and is no longer subject to examination by the tax authorities in foreign and state jurisdictions prior to 2006, with the exception of net operating loss carryforwards. The Company is currently under examination for income tax filings in various foreign jurisdictions. During 2015, the Company settled a tax audit in Italy for $2.2 million, of which $0.9 million had been accrued in 2014.

During 2015, the Company restructured its multi-state activities, which resulted in a reduction of its state tax rate. In connection with this reduction, the Company recorded a one time tax expense of $0.8 million to reflect the effect of this tax rate reduction on its deferred tax assets. In addition, the Company recognized a tax benefit of $1.6 million on certain state net operating loss carryforwards, as it is more likely than not to utilize these losses within the carryforward period.

During 2016, the Company recorded a valuation allowance and additional tax expense of $1.8 million on certain state net operating loss carryforwards, due to the uncertainty of the Company's ability to utilize these losses within the foreseeable future. The amount of net operating losses considered realizable, however, could be adjusted if objective evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company’s projections for growth.

As of December 31, 2016, the liability for uncertain income tax positions was approximately $3.0 million. Approximately $2.9 million as of December 31, 2016 represents the amount that if recognized would affect the Company’s effective income tax rate in future periods. The Company expects the unrecognized tax benefits to change over the next 12 months if certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe, or if the applicable statute of limitations lapses. The impact of the amount of such changes to previously recorded uncertain tax positions could range from zero to $1.0 million.

The table below does not include interest and penalties of $0.2 million and $0.1 million as of December 31, 2016 and 2015, respectively. The following is a reconciliation of the Company’s liability for uncertain income tax positions for the years ended December 31, 2016 and 2015 (in thousands).



	December 31,
	2016			2015			2014
Balance beginning January 1	$	2,937		$	1,978		$	1,612
Additions for tax positions of prior years	(102		)	521			149
Additions based on tax positions related to current year	483			69			820
Acquired uncertain tax position	—			1,326			—
Settlements	—			(544		)	—
Lapse of statute of limitations	(328		)	(612		)	(562		)
Currency movement	10			199			(41		)
Balance ending December 31	$	3,000		$	2,937		$	1,978

Undistributed earnings of our foreign subsidiaries amounted to $222.6 million at December 31, 2016 and $202.8 million at December 31, 2015. The undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested and accordingly, no provision for U.S. federal and state income taxes has been recorded. Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriation.