Income Taxes

12 Months Ended

Dec. 31, 2019

11. Income Taxes

Income tax expense (benefit) is based on our earnings from continuing operations before income taxes as presented in the following table:



	2019		2018		2017
	(Dollars in thousands)
U.S.	$	18,709	$	13,854	$	20,816
Foreign		24,802		57,196		62,499
Total	$	43,511	$	71,050	$	83,315

Our income tax expense (benefit) from continuing operations consists of the following components:


	2019		2018		2017
	(Dollars in thousands)
Current:
U.S. federal	$	475	$	449	$	714
Foreign		18,358		19,548		25,908
State and local		168		211		123
Total current		19,001		20,208		26,745
Deferred:
U.S. federal		(3,832)		3,265		25,125
Foreign		(8,340)		(9,157)		(5,801)
State and local		1,290		(186)		344
Total deferred		(10,882)		(6,078)		19,668
Total income tax expense (benefit)	$	8,119	$	14,130	$	46,413

In addition, income tax expense (benefit) that we allocated directly to Ferro Corporation shareholders’ equity is detailed in the following table:


	2019		2018		2017
	(Dollars in thousands)
Interest rate swaps	$	(3,210)	$	(1,529)	$	547
Postretirement benefit liability adjustments		11		(32)		1
Net investment hedge		654		954		(4,025)
Foreign currency translations		27		—		—
Total income tax (benefit) expense allocated to Ferro Corporation shareholders' equity	$	(2,518)	$	(607)	$	(3,477)

A reconciliation of the U.S. federal statutory income tax rate and our effective tax rate follows:



	2019			2018			2017
U.S. federal statutory income tax rate		21.0	%		21.0	%		35.0	%
Foreign tax rate difference		9.8			7.4			(5.9)
Non-deductible expenses		4.4			2.9			0.1
Global intangible low-taxed income, net		2.8			1.8			—
Other		2.8			(2.5)			(1.9)
Uncertain tax positions, net of tax audit settlements		1.7			3.8			7.0
Foreign currency		1.4			0.3			0.7
Foreign withholding taxes		1.3			1.0			0.7
State taxes		1.3			0.7			(0.6)
Tax rate changes		0.9			(3.0)			25.2
Goodwill dispositions, impairments and amortization		(1.2)			—			(0.5)
Tax credits		(3.2)			(1.7)			(1.2)
Foreign derived intangible income deduction		(3.2)			(1.6)			—
Net adjustment of prior year accrual		(5.0)			(4.2)			(1.0)
Adjustment of valuation allowances		(16.1)			(6.0)			(1.9)
Effective tax rate		18.7	%		19.9	%		55.7	%

On December 22, 2017, U.S. federal tax legislation was enacted containing a broad range of tax reform provisions including a corporate tax rate reduction. In 2017, the write-down of U.S. net deferred tax assets to reflect the reduction in the U.S. corporate tax rate from 35 percent to 21 percent resulted in additional tax expense of $21.5 million.

We have refundable income taxes of $16.9 million at December 31, 2019 and $13.5 million at December 31, 2018, classified as Other receivables on our consolidated balance sheets. We also have income taxes payable of $8.4 million at December 31, 2019, and $6.0 million at December 31, 2018, classified as Accrued expenses and other current liabilities on our consolidated balance sheets.

The components of deferred tax assets and liabilities at December 31, 2019 and 2018 were:


	2019		2018
	(Dollars in thousands)
Deferred tax assets:
Foreign operating loss carryforwards	$	35,394	$	41,611
Pension and other benefit programs		39,633		37,397
Foreign tax credit carryforwards		11,423		17,356
Accrued liabilities		10,726		11,114
Other credit carryforwards		6,707		5,815
Other		11,161		9,035
State and local operating loss carryforwards		2,058		2,272
Inventories		2,366		2,153
Allowance for doubtful accounts		746		704
Currency differences		1,407		—
Total deferred tax assets		121,621		127,457
Deferred tax liabilities:
Property, plant and equipment and intangibles -- depreciation and amortization		23,617		28,601
Unremitted earnings of foreign subsidiaries		1,594		1,575
Other		2,115		2,784
Total deferred tax liabilities		27,326		32,960
Net deferred tax assets before valuation allowance		94,295		94,497
Valuation allowance		(10,447)		(24,577)
Net deferred tax assets	$	83,848	$	69,920

The amounts of foreign operating loss carryforwards, foreign tax credit carryforwards, and other credit carryforwards included in the table of temporary differences are net of reserves for unrecognized tax benefits.

At December 31, 2019, we had $36.4 million of state and local operating loss carryforwards and $157.9 million of foreign operating loss carryforwards, which can be carried forward indefinitely and others expire in one to twenty years. At December 31, 2019, we had $22.6 million in tax credit carryforwards, some of which can be carried forward indefinitely. These operating loss carryforwards and tax credit carryforwards expire as follows:



	Operating Loss		Tax Credit
	Carryforwards		Carryforwards
Expiring in:	(Dollars in thousands)
2020	$	10,175	$	137
2021-2025		23,953		10,791
2026-2030		22,814		6,469
2031-2035		11,943		3,267
2036-2040		81		966
2041-Indefinitely		125,307		987
Total	$	194,273	$	22,617

We assess the available positive and negative evidence to determine if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated by jurisdiction was whether a cumulative loss over the three-year period ended December 31, 2019 had been incurred. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future income.

Based on this assessment as of December 31, 2019, the Company has recorded a valuation allowance of $10.4 million in order to measure only the portion of the deferred tax assets that more likely than not will be realized. The most significant items that decreased the valuation allowance from 2018 to 2019 primarily related to the removal of a valuation allowance due to expiration of tax attributes and changes in Management’s assessment regarding the realizability of certain deferred tax assets.

We classified net deferred income tax assets as of December 31, 2019 and 2018 as detailed in the following table:


	2019		2018
	(Dollars in thousands)
Non-current assets	$	98,714	$	88,526
Non-current liabilities		(14,866)		(18,606)
Net deferred tax assets	$	83,848	$	69,920

Activity and balances of unrecognized tax benefits are summarized below:



	2019		2018		2017
	(Dollars in thousands)
Balance at beginning of year	$	24,869	$	28,470	$	30,085
Additions based on tax positions related to the current year		3,425		4,041		1,609
Additions for tax positions of prior years		—		24		2,057
Reductions for tax positions of prior years		—		(1,710)		(288)
Reductions as a results of expiring statutes of limitations		(688)		(420)		(6,284)
Foreign currency adjustments		(660)		(786)		1,644
Settlements with taxing authorities		(946)		(4,750)		(353)
Balance at end of year	$	26,000	$	24,869	$	28,470

The total amount of unrecognized tax benefits that, if recognized, would affect the effective rate was $8.7 million at December 31, 2019, $9.2 million at December 31, 2018, and $9.8 million at December 31, 2017. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of income tax expense. The Company recognized $0.5 million of expense in 2019, $0.4 million of expense in 2018, and $0.7 million of expense in 2017 for interest, net of tax, and related penalties. The Company accrued $2.9 million at December 31, 2019, $1.8 million at December 31, 2018, and $3.8 million at December 31, 2017 for payment of interest, net of tax, and penalties.

We anticipate that $2.4 million of liabilities for unrecognized tax benefits, including accrued interest and penalties, may be reversed within the next 12 months. These liabilities relate to international tax issues and are expected to reverse due to the expiration of the applicable statute of limitations periods and the anticipation of the closure of tax examinations.

The Company conducts business globally, and, as a result, the U.S. parent company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the U.S. parent company and its subsidiaries are subject to examination by taxing authorities. With few exceptions, we are not subject to federal, state, local or non-U.S. income tax examinations for years before 2005.

At December 31, 2019, we provided $1.6 million for deferred income taxes on $11.2 million of undistributed earnings of foreign subsidiaries that are not considered to be indefinitely reinvested. For certain other of the Company’s foreign subsidiaries, undistributed earnings of approximately $126.1 million are considered to be indefinitely reinvested, and we have not provided for deferred taxes on such earnings. We have not disclosed deferred income taxes on undistributed earnings of foreign subsidiaries where they are considered to be indefinitely reinvested, as it is not practicable to estimate the additional taxes that might be payable on the eventual remittance of such earnings, given the uncertain timing of when any such eventual remittance may occur, the significant number of foreign subsidiaries we have, the multiple layers within our legal entity structure, and the complexities of tax regulations across those foreign subsidiaries.