INCOME TAXES

For the years ended December 31, 2017 and 2016, the seven months ended December 31, 2015 and the year ended May 31, 2015, we were taxed on income (loss) from continuing operations at an effective tax rate of 24%, 20%, 34% and 36%, respectively. Our income tax provision (benefit) on continuing operations for years ended December 31, 2017 and 2016, the seven months ended December 31, 2015 and the year ended May 31, 2015, was $(33.4) million, $(3.1) million, $4.6 million and $22.8 million, respectively, and includes federal, state and foreign taxes. The components of our tax provision (benefit) on continuing operations were as follows (in thousands):



	Current			Deferred			Total
Twelve months ended December 31, 2017:
U.S. Federal	$	6,177		$	(42,516	)	$	(36,339	)
State & local	170			(4,819		)	(4,649		)
Foreign jurisdictions	6,821			795			7,616
	$	13,168		$	(46,540	)	$	(33,372	)
Twelve months ended December 31, 2016:
U.S. Federal	$	(2,048	)	$	(5,262	)	$	(7,310	)
State & local	(1,338		)	206			(1,132		)
Foreign jurisdictions	4,529			820			5,349
	$	1,143		$	(4,236	)	$	(3,093	)
Seven months ended December 31, 2015:
U.S. Federal	$	(4	)	$	1,667		$	1,663
State & local	90			187			277
Foreign jurisdictions	2,128			505			2,633
	$	2,214		$	2,359		$	4,573
Twelve months ended May 31, 2015:
U.S. Federal	$	17,183		$	606		$	17,789
State & local	2,634			(141		)	2,493
Foreign jurisdictions	3,598			(1,087		)	2,511
	$	23,415		$	(622	)	$	22,793

The components of pre-tax income (loss) from continuing operations for the years ended December 31, 2017 and 2016, the seven months ended December 31, 2015 and the year ended May 31, 2015 were as follows (in thousands):



	Twelve Months Ended December 31,						Seven Months Ended December 31,		Twelve Months Ended May 31,
	2017			2016			2015		2015
Domestic	$	(149,045	)	$	(25,488	)	$	6,627	$	51,784
Foreign	11,512			9,830			6,824		11,506
	$	(137,533	)	$	(15,658	)	$	13,451	$	63,290

Income tax expense (benefit) attributable to income (loss) from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to pre-tax income (loss) from continuing operations as a result of the following (in thousands):



	Twelve Months Ended December 31,						Seven Months Ended December 31,			Twelve Months Ended May 31,
	2017			2016			2015			2015
Pre-tax income (loss) from continuing operations	$	(137,533	)	$	(15,658	)	$	13,451		$	63,290
Computed income taxes at statutory rate	(48,136		)	(5,481		)	4,710			22,153
State income taxes, net of federal benefit	(4,709		)	(713		)	258			1,670
Foreign tax rate differential	(642		)	(707		)	(648		)	(1,318		)
Production activity deduction	—			—			(10		)	(136		)
Deferred taxes on investment in foreign subsidiaries	(17,079		)	1,777			(335		)	819
Non-deductible expenses	1,030			871			335			513
Foreign tax credits	(17,445		)	(2,302		)	(19		)	(11		)
Other tax credits	(631		)	(1,033		)	(446		)	(223		)
Deemed repatriation tax	24,374			—			—			—
Goodwill impairment	19,442			—			—			—
Dividend from foreign subsidiaries	—			2,021			—			—
Valuation allowance	20,955			1,986			771			(394		)
Rate change	(17,360		)	—			—			—
Other	6,829			488			(43		)	(280		)
Total provision (benefit) for income tax on continuing operations	$	(33,372	)	$	(3,093	)	$	4,573		$	22,793

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):



	December 31,
	2017			2016
Deferred tax assets:
Accrued compensation and benefits	$	9,810		$	12,559
Receivables	2,381			3,856
Inventory	873			3,539
Stock options	738			1,526
Foreign currency translation and other equity adjustments	2,945			6,359
Other accrued liabilities	3,066			5,811
Tax credit carry forward	2,588			4,769
Net operating loss carry forwards	35,185			25,061
Other	2,066			4,227
Deferred tax assets	59,652			67,707
Less: Valuation allowance	(26,185		)	(13,168		)
Deferred tax assets, net	33,467			54,539
Deferred tax liabilities:
Property, plant and equipment	(20,918		)	(28,700		)
Goodwill and intangible costs	(27,762		)	(43,737		)
Unremitted earnings of foreign subsidiaries	(13,795		)	(51,087		)
Convertible debt	(3,622		)	—
Other	(679		)	(1,602		)
Deferred tax liabilities	(66,776		)	(125,126		)
Net deferred tax liability	$	(33,309	)	$	(70,587	)

As of December 31, 2017, we had a valuation allowance of $26.2 million to reduce our deferred tax assets to an amount more likely than not to be recovered. This valuation allowance relates primarily to deferred tax asset on U.S. net operating loss carry forwards in the amount of $19.8 million. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider factors including the reversal of future taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment.

As of December 31, 2017, we had net foreign net operating loss carry forwards totaling $5.6 million that were expected to be realized in the future periods. A total of $2.2 million has an unlimited carry forward period and will therefore not expire.

At December 31, 2017, we also have net operating loss carry forwards for U.S. federal income tax purposes of $99.0 million, which are available, subject to certain limitations, to offset future taxable income, if any, through the year 2037. In addition, we have alternative minimum tax credit carry forwards of approximately $1.2 million which, under the 2017 Tax Act, can be used to offset regular income tax in future periods, and which is refundable for any tax year beginning after 2017 and before 2022 in an amount equal to 50% (100% for tax years beginning in 2021).

At December 31, 2017, none of our undistributed earnings of foreign operations were considered to be permanently reinvested overseas. As a result of the recent changes in U.S. tax law (the 2017 Tax Act, as further discussed below), we recorded a net tax benefit of $17.1 million reflecting the impact of a new foreign dividends-received deduction for U.S. tax purposes. The existence of this deduction under the new law has significantly reduced our requirement under ASC 740 to recognize a deferred tax liability for the future remittance of such earnings to the U.S.

At December 31, 2017, we have established liabilities for uncertain tax positions of $1.2 million, inclusive of interest and penalties. To the extent these uncertainties are ultimately resolved favorably, the resulting reduction of recorded liabilities would have an effect on our effective tax rate. In accordance with ASC 740-10, our policy is to recognize interest and penalties related to unrecognized tax benefits through the tax provision.

We file income tax returns in the U.S. with federal and state jurisdictions as well as various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. Federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2015. We are currently in the examination phase of IRS audits for the tax years ended May 31, 2015 and December 31, 2015. The income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make certain subjective assumptions and judgments regarding our tax positions that may have a material effect on our results of operations, financial position or cash flows. We believe, however, that there is appropriate support for the income tax positions taken, and to be taken, on our returns, and that our accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

Set forth below is a reconciliation of the changes in our unrecognized tax benefits associated with uncertain tax positions (in thousands):



	Twelve Months Ended December 31,					Seven Months Ended December 31,		Twelve Months Ended May 31,
	2017		2016			2015		2015
Balance at beginning of year	$	858	$	539		$	477	$	715
Acquisition of Furmanite uncertain tax positions	—		660			—		—
Additions based on current year tax positions	—		464			62		—
Additions based on tax positions related to prior years	301		96			—		68
Reductions based on tax positions related to prior years	—		(564		)	—		(306		)
Settlements	—		(337		)	—		—
Reductions resulting from a lapse of the applicable statute of limitations	—		—			—		—
Balance at end of year	$	1,159	$	858		$	539	$	477

The estimated amount of liabilities recorded for uncertain tax positions that we believe will be effectively settled within the next twelve months is immaterial.

Recent Legislation - The 2017 Tax Act and SAB 118 Provisional Estimates

On December 22, 2017, the U.S. government enacted the 2017 Tax Act, which significantly revises U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other changes.

Due to the complexities involved in accounting for the 2017 Tax Act, the SEC issued SAB 118, which requires that companies include in their financial statements reasonable estimates of the impact of the 2017 Tax Act to the extent such reasonable estimates have been determined. Accordingly, the Company recorded the following reasonable estimates of the tax impact of the new law in its statement of operations for the year ended December 31, 2017:

The Company accrued a reasonable estimate of $8.4 million of tax expense (net of applicable foreign tax credits) for the 2017 Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings going back to 1986. The Company will elect to pay the transition tax in installments over the period of 8 years, pursuant to the guidance of the new Internal Revenue Code Section 965.


b)	The Company accrued $17.4 million of provisional tax benefit related to the net change in deferred tax balances stemming from the 2017 Tax Act’s reduction of the U.S. federal income tax rate,


c)	The Company recorded a reasonable estimate of the state tax impact of the 2017 Tax Act, based on the current law in the states in the U.S in which it operates, and


d)	The Company calculated a reasonable estimate of the effect on certain deferred tax assets and liabilities of the Company related to the 2017 Tax Act’s revised rules regarding certain incentive-based compensation tax deductions under Internal Revenue Code Section 162(m).

The 2017 Tax Act also includes a provision to tax GILTI of foreign subsidiaries and a BEAT measure that taxes certain payments between a U.S. corporation and its subsidiaries. The Company will be subject to the GILTI and BEAT provisions effective beginning January 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from an accounting policy standpoint.

The final impact on the Company from the 2017 Tax Act’s transition tax legislation may differ from the aforementioned reasonable estimate due to the complexity of calculating and supporting such U.S. tax attributes as accumulated foreign earnings and profits, foreign taxes paid and other tax components involved in foreign tax credit calculations for prior years back to 1986. The other provisional estimates outlined above may also change based on the various applications of the respective elements of the 2017 Tax Act, to the extent that they pertain to the provisional items disclosed herein. Such differences could be material, due to, among other things, changes in interpretations of the 2017 Tax Act, future changes in U.S. states’ tax laws related to the Act, future legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act or any updates or changes in estimates that the Company has utilized to calculate these reasonable estimates.

Pursuant to the SAB 118, the company is allowed a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. The Company will continue to assess the impact of the 2017 Tax Act on our provisional estimates and will record any resulting tax adjustments during 2018.