Income Taxes

The components of domestic and foreign income (loss) before the provision for income taxes are as follows:



	Year ended December 31,
	2014			2013			2012
U.S.	$	(16,311	)	$	(14,230	)	$	(20,595	)
Foreign	39,009			22,746			(1,002		)
Total	$	22,698		$	8,516		$	(21,597	)

The components of the income tax provision (benefit) are as follows:



	Year ended December 31,
	2014			2013			2012
Current:
U.S.	$	247		$	222		$	749
Foreign	34,690			9,827			3,938
Total current	34,937			10,049			4,687
Deferred:
U.S.	330			113			(206		)
Foreign	(5,187		)	(5,799		)	(8,043		)
Total deferred	(4,857		)	(5,686		)	(8,249		)
Total provision (benefit)	$	30,080		$	4,363		$	(3,562	)

For the years ended December 31, 2014 and 2013, the provision (benefit) for income taxes was $30,080 and $4,363 respectively. The Company's effective income tax rate for the year ended December 31, 2014 was 132.5% as compared with our effective rate for the year ended December 31, 2013 of 51.2%. The Company's effective income tax rate is primarily impacted by income the Company earns in tax paying jurisdictions relative to income it earns in non-tax paying jurisdictions. The majority of income recognized for purposes of computing the Company's effective tax rate is earned in countries where the statutory income tax rates range from 15% to 39.43%. The Company generates losses in certain jurisdictions for which it receives no tax benefit as the deferred tax assets in these jurisdictions (including the net operating losses) are fully reserved by a valuation allowance. For this reason, the Company recognizes minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States and Australia. Due to these reserves, the geographic mix of its pre-tax earnings has a direct correlation with how high or low its annual effective tax rate is relative to consolidated earnings.

The provision for income taxes differs from the amount computed by applying the U.S. statutory tax rate (35)% to income before income taxes, due to the following:



	Year ended December 31,
	2014			2013			2012
Book income (loss) at U.S. 35% statutory rate	$	7,944		$	2,981		$	(7,559	)
State income and other taxes due, net of federal benefit	1,095			1,017			833
Foreign tax rate differential	(3,110		)	(840		)	(563		)
Dividends and other foreign (loss) income	(2,922		)	1,679			6,904
Change in valuation allowance	2,084			(4,885		)	4,330
Tax rate changes	454			1,922			1,798
Tax credits and refunds	(449		)	(185		)	(427		)
Goodwill	—			(2,292		)	(2,512		)
Change in unrecognized tax benefits and tax reserves	(136		)	(89		)	(6,004		)
Provision to return adjustments	(251		)	(209		)	(571		)
Non-deductible expenses	1,906			1,446			2,168
Statute expiration of tax attributes	(30		)	2,764			—
Other, net	259			1,054			(1,959		)
Settlement of Brazil tax assessment	23,236			—			—
Total	$	30,080		$	4,363		$	(3,562	)

The effective tax rate on continuing operations for the year ended December 31, 2014 varied from the statutory rate of 35% primarily due to the tax effect of dividends and other foreign income, foreign rate differential, settling a tax assessment in Brazil and changes in valuation allowances. The amount for dividends and other foreign income of ($2,922), was primarily related to residual U.S. taxes provided on foreign earnings no longer considered permanently reinvested. The foreign rate differential arises as a result of income earned in countries where the statutory income tax rates vary from the U.S. statutory rate of 35%, for which Austria creates the Company’s largest tax rate benefit. The settlement of a tax assessment in Brazil also resulted in current tax expense of $23,386 and utilization of tax attributes of $1,912 and tax deductible interest of $(2,062). The change in the valuation allowance of $2,084 relates primarily to an increase in domestic deferred tax assets of $9,214, a removal of a portion of the UK holding company valuation allowance of $(6,625), and approximately $(505) of pre-tax losses generated in foreign jurisdictions for which the Company has determined no benefit should be recorded.

As presented herein, the aforementioned amounts related to December 31, 2013 and December 31, 2012 have been restated for comparability. The effective tax rate on continuing operations for the year ended December 31, 2013 varied from the statutory rate of 35% primarily due to the tax effect on dividends and other foreign income, statute expirations of tax attributes, tax rate changes, and changes in valuation allowances. The amount for dividends and other foreign income was $1,679, primarily related to residual U.S. taxes provided on foreign earnings no longer considered permanently reinvested including $327 of foreign withholding taxes, offset by residual U.S. taxes no longer provided on foreign earnings considered permanently reinvested for Argentina for years prior to 2014. The statute expiration of tax attributes relates to net operating loss carry-forwards in China and France and resulted in a corresponding decrease to the valuation allowance. Enacted tax rate changes of $1,922 primarily relate to the revaluation of U.K. deferred tax assets as a result of an enacted law change, which are fully offset by a corresponding valuation allowance. The change in the valuation allowance of $(4,885) relates primarily to a decrease in domestic deferred tax assets of $(2,590), a removal of the Canadian valuation allowance of $6,194, and approximately $(15,871) of pre-tax losses generated in foreign jurisdictions for which the Company has determined no benefit should be recorded.

The effective tax rate on continuing operations for the year ended December 31, 2012 varied from the statutory rate of 35% primarily due to the tax effect on dividends and other foreign income, changes in valuation allowances and the change in unrecognized tax benefits and tax reserves. The amount for dividends and other foreign income was $6,904. The change in the valuation allowance of $4,330 relates to a reduction in domestic deferred tax assets of ($268), offset by an increase in deferred tax assets for foreign jurisdictions primarily related to current year losses in jurisdictions for which the Company has determined no benefit should be recorded, as well as additional items that are not currently deductible. The change in unrecognized tax benefits and tax reserves were from tax audit settlements which resulted in the reversal of tax expense of approximately $5,188, statute of limitations expiring which allowed the Company to reverse reserves of approximately $1,094 and the recording of net additional reserves of $(278).

For the years ended December 31, 2014 and 2013, tax expense included a benefit of approximately $171 and $249 for a Chinese tax holiday expired in the year ending December 31, 2014.

The Company utilizes the asset and liability method for accounting for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”). Under Topic 740, deferred tax assets and liabilities are determined based on the difference between their financial reporting and tax basis. The assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company reduces its deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making this determination, the Company evaluates all available information including the Company’s financial position and results of operations for the current and preceding years, as well as any available projected information for future years.

The tax effect of temporary differences which give rise to deferred income tax assets and liabilities are as follows:



	Year Ended December 31,
	2014			2013
Deferred tax assets arising from:
Loss carryforwards	$	104,890		$	109,299
Intangible assets, net	—			1,825
Pension and other benefit accruals	18,180			12,457
Tax credits	1,567			1,582
Investments	2,821			2,102
Interest and finance fees	1,697			2,975
Other allowances and accruals, net	13,334			14,855
Total	142,489			145,095
Deferred tax liabilities arising from:
Property and equipment, net	23,897			29,174
Intangible assets, net	4,188			2,731
Foreign income inclusions	7,178			16,455
Other allowances and accruals, net	165			143
Total	35,428			48,503
Valuation allowance	102,795			99,860
Net deferred tax (asset) liability	$	(4,266	)	$	3,268

Deferred taxes are recorded as follows in the consolidated balance sheets:



	December 31,
	2014			2013
Current Deferred Tax Asset, Net	$	4,853		$	8,125
Current Deferred Tax Liability, Net	833			88
Noncurrent Deferred Tax Asset, Net	10,662			5,045
Noncurrent Deferred Tax Liability, Net	10,416			16,350
Net Deferred Tax (Asset) Liability	$	(4,266	)	$	3,268

As of December 31, 2014, the Company has pre-tax net operating loss carry-forwards for U.S. federal income tax purposes of approximately $187,337 that expire on various dates from 2025 through 2034 and federal tax credits of approximately $166 that either expire on various dates or can be carried forward indefinitely. As of December 31, 2014, the Company has pre-tax net operating loss carry-forwards for U.S. state income tax purposes of approximately $206,037 that expire on various dates from 2015 through 2034. As of December 31, 2014, the U.S. federal and U.S. state net operating loss carry-forwards and federal tax credits are fully reserved in our valuation allowance. The Company has foreign federal net operating loss carry-forwards of approximately $125,383 and capital loss carry forwards of $7,619, the majority of which can be carried forward indefinitely, and federal and provincial tax credits of approximately $1,401 that begin to expire primarily in 2024 or are carried forward indefinitely. As of December 31, 2014, $61,037, $7,607 and $118, of foreign federal net operating loss carry-forwards, capital loss carry-forwards and federal and provincial tax credits, respectively, are reserved in our valuation allowance. Historic and future ownership changes could potentially reduce the amount of net operating loss carry-forwards available for use.

As a result of certain realization requirements of ASC 718, the table of deferred assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2014 that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation recognized for financial reporting. Equity will be increased by $601 if and when such deferred tax assets are ultimately realized.

As of December 31, 2014, the Company had a valuation allowance in place for certain of its deferred tax assets due to the Company’s accumulated loss position, and its uncertainty around the future profitability in certain of its tax jurisdictions. The valuation allowance primarily relates to deferred tax assets for available net operating loss carry forwards in the United States, the United Kingdom, Germany, Sweden, France, Australia, China, Turkey, Vietnam and Spain. While the Company believes it has adequately provided for its income tax assets and liabilities in accordance with Topic 740, it recognizes that adverse determinations by taxing authorities, or changes in tax laws and regulations could have a material adverse effect on its consolidated financial position, results of operations or cash flows.

During the year ended December 31, 2014, the Company reassessed its valuation allowance requirements related to its UK holding company, evaluating all evidence in its analysis, both positive and negative, including historical and projected income and losses before the provision for income taxes, as well as reversals of temporary differences. The Company also considered tax planning strategies that are prudent and can be reasonably implemented if needed in order to realize the related tax benefits. During 2014, the Company recorded $6,625 of tax benefits related to the partial reversal of its valuation allowance previously established against its UK holding company net deferred tax assets. The Company believes that the deferred tax assets are more likely than not to be realized based on estimates of future taxable income generated by future earnings of the UK holding company.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $99,509 at December 31, 2014. Earnings generated prior to 2013 are considered to be indefinitely reinvested for continued use in foreign operations except for a portion of the earnings generated by our Brazil operations. As a result of the 2014 settlement of the income tax assessment with the Federal Revenue Department of the Ministry of Finance of Brazil, approximately $30,203 of unremitted earnings in Brazil generated before 2013 are considered permanently reinvested to support debt obligations related to the tax assessment, to fund local restructuring, and reinvest in the operations. All earnings generated prior to 2013 related to our Mexico operations have been distributed for U.S. income tax purposes. The earnings generated in all foreign subsidiaries for 2013 and 2014 are not considered to be permanently reinvested, because of our desire to manage global cash and liquidity related to ongoing financial obligations, capital expenditures, restructuring payments, and other changes in business conditions going forward. The amount of undistributed earnings not considered to be permanently reinvested, for which we have recorded a deferred tax liability, is $50,328. Federal income taxes and foreign withholding taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. For the earnings generated prior to 2013 considered to be indefinitely reinvested, no provision for U.S. income taxes or foreign withholding taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes and foreign withholding taxes payable to the various jurisdictions. The earnings that are considered indefinitely reinvested relate to on-going operations and were approximately $49,181 as of December 31, 2014.

The Company accrues for certain known and reasonably anticipated income tax obligations after assessing the likely outcome. In the event that actual results differ from these accruals or if the Company becomes subject to a tax obligation for which the Company has made no accrual, the Company may need to make adjustments, which could materially impact the financial condition and results of operations. For example, taxing authorities may disagree with the Company’s tax accounting methodologies and may subject the Company to inquiries regarding such taxes, which potentially could result in additional income tax assessments. In accordance with ASC 740-10-25-6, the Company does not accrue for potential income tax obligations if management deems a particular tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. In making this determination, the Company assumes that the taxing authorities will have access to all relevant facts and information in accordance with ASC 740-10-25-7.

As of December 31, 2014, the Company had a gross unrecognized tax benefit of $7,502, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $10 during the year ended December 31, 2014. The unrecognized tax benefit increased as a result of ongoing changes in currently reserved positions. The unrecognized tax benefit decreased as a result of foreign currency effects, statute expirations and audit settlements.

A reconciliation of the balances of the unrecognized tax benefits is as follows, (excludes interest and penalties):



	Year Ended December 31,
	2014			2013			2012
Balance as of January 1	$	7,492		$	7,181		$	13,244
Gross decreases-tax positions in prior period due to settlements	(286		)	(446		)	(5,117		)
Gross increases (decreases)-tax positions in prior period-other	100			867			(170		)
Gross decreases-related to lapse in statute of limitations	(251		)	(1,004		)	(1,154		)
Gross increases-tax positions in current period	911			820			236
Currency effects	(464		)	74			142
Balance at December 31	$	7,502		$	7,492		$	7,181

The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense and accordingly, the Company recorded a $318 benefit, including currency effects, and a $363 benefit, including currency effects, for interest and penalties during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the Company had accrued interest and penalties related to uncertain tax positions of approximately $1,533 and $1,699, respectively. The Company's unrecognized tax benefits increased by approximately $10 and $311 during the years ended December 31, 2014 and 2013, respectively. If the Company were to prevail on all unrecognized tax benefits recorded, approximately $4,678 would benefit the effective tax rate. During the next twelve months, management estimates a range between $0 and $309 of the Company's gross unrecognized tax benefit will reverse due to expected settlements and statute of limitations expiring which relate to various items and will benefit the effective tax rate. The company regularly evaluates, assesses and adjusts the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period.

In November of 2011, the Federal Revenue Department of the Ministry of Finance of Brazil (“FRD”) issued a tax assessment against the Company’s indirect subsidiary, Xerium Technologies Brasil Indústria e Comércio S.A. (“Xerium Brazil”), challenging the goodwill recorded in the 2005 acquisition of Wangner Itelpa and Huyck Indústria e Comércio S.A. by Robec Brasil Participações Ltda., a predecessor to Xerium Brazil. This assessment denied the amortization of that goodwill against net income for the years 2006 through 2010 and sought payment of tax, penalties and interest.

During the third quarter of 2014, the Company chose to participate in an amnesty program offered by the FRD that was open to taxpayers until August 25, 2014. The amnesty program offered significant reductions in the penalties and interest initially assessed against the Company. By paying a lump sum amount, the Company received a reduction of 100% of the penalties assessed and a 45% reduction of interest accrued on the tax assessment relating to tax years 2006 through 2010. Because tax amnesty and voluntary disclosure programs were open for tax years beyond the time period of the Company's particular assessment, the Company also included in its payment to the Brazilian government amounts relating to tax years 2011 through 2013, which corresponded to the same tax deductions under review in the assessment for tax years 2006 through 2010. Additionally, the Company has adjusted the tax calculations for 2014 to exclude the same tax deductions which were under review, and the Company adjusted its tax payments related to tax year 2014 accordingly. In August of 2014, the Company settled the assessed and unassessed tax debts with the Brazilian government by paying principal and interest totaling $18,254 and $6,724, respectively. The settlement had no impact on the Company's unrecognized tax benefits during the year ended December 31, 2014. As previously discussed in Note 5, the Company borrowed an additional $30.0 million under its Incremental Facility to fund this tax settlement payment.

The tax years 2005 through 2014 remain open to examination in the Company's U.S. federal jurisdiction, and the tax years 2001 through 2014 remain open to examination in the Company's U.S. state jurisdictions. The tax years 2005 through 2014 remain open to examination in the major foreign tax jurisdictions to which the Company and its subsidiaries are subject. There are currently no U.S. Federal audits or examinations underway. The Company has ongoing audits and tax litigation in Canada, Germany, France and Italy.

In January 2015 the Company received notice of a tax audit report which could lead to an income tax assessment of an unknown amount related to its Italian operation. We expect to litigate if such an assessment is received, and the Company believes it would prevail on some portion of the issues litigated. A tax liability ranging between $0 and $1.5 million may arise as a result of the litigation.

The Company believes that it has made adequate provisions for all income tax uncertainties.