Income Taxes

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the "Tax Reform Act"). During the year ended December 31, 2017, the Company followed guidance in Staff Accounting Bulletin No.118 ("SAB 118"), which provided a measurement period, not to exceed one year from the enactment of the Tax Reform Act, and recorded a provisional benefit of $3.7 million related to the revaluation of deferred tax assets and liabilities, the one-time mandatory repatriation of foreign earnings, and legislative changes to 162(m). During the year ended December 31, 2018, the Company evaluated interpretations and additional regulatory guidance and adjusted the provisional tax reform benefit by recording tax expense of $0.7 million. As of December 31, 2018, the Company has completed its accounting for the Tax Reform Act as described in SAB 118. In 2019, the Company will continue to review and incorporate updates related to forthcoming U.S. Treasury Regulations and other interpretive guidance and determine any impacts to the Company.

The provision for income taxes consists of the following:



	For the years ended December 31,
In thousands	2018			2017			2016
Current:
Federal	$	3,739		$	11,526		$	15,376
State	498			956			1,513
Foreign	3,788			2,425			2,104
Total Current	$	8,025		$	14,907		$	18,993
Deferred:
Federal	$	2,646		$	(2,472	)	$	(594	)
State	380			256			601
Foreign	(2,598		)	(717		)	(1,179		)
Total Deferred	428			(2,933		)	(1,172		)
Provision for income taxes	$	8,453		$	11,974		$	17,821

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory tax rate on earnings:



	For the years ended December 31,
	2018		2017		2016
Statutory federal income tax rate	21.0	%	35.0	%	35.0	%
State income taxes	1.6		1.6		2.1
Valuation allowances for deferred tax assets, including state	(1.3	)	0.1		1.3
Research and development credits	(1.3	)	(1.0	)	(1.2	)
Capitalized transaction costs	0.6		—		0.7
Domestic production activities deduction	—		(1.8	)	(2.7	)
Stock based compensation	(0.7	)	(4.4	)	(2.1	)
German Cartel settlement	—		—		2.2
Foreign income taxed at lower rates	(1.6	)	(2.8	)	(3.5	)
Reserves for uncertain tax positions	—		(1.7	)	(0.1	)
Repatriation of foreign undistributed earnings	1.6		1.3		—
Revaluation of deferred tax liabilities due to federal rate change	—		(7.3	)	—
Other	(0.4	)	0.5		0.7
Effective income tax rate	19.5	%	19.5	%	32.4	%

In 2018, the effective tax rate of 19.5% was below the federal statutory rate and included valuation allowance activity of $0.6 million. This was primarily a result of the fourth quarter partial release of valuation allowance on the Netherlands net operating losses offset by a valuation allowance addition in Germany. Compared to 2017, the tax benefit from stock compensation expense had a lesser impact on the 2018 rate because of less windfall benefits recognized. Also, foreign income taxed at lower rates had a lesser impact on the 2018 rate because of new U.S. regulations that were released in the fourth quarter 2018 that limit the amount of the tax benefit recorded compared to 2017.

In 2017, in addition to the Tax Reform Act, which favorably impacted the effective tax rate by a net $3.7 million, the effective tax rate of 19.5% was impacted by a favorable mix of taxable income generated from foreign income taxed at lower rates, resulting in a tax benefit of $1.7 million, net of $0.7 million of expense to correct a foreign tax error in prior years. The Company also recorded a tax benefit of $1.1 million attributable to the Domestic Production Activities Deduction, a tax benefit of $2.7 million related to stock based compensation and a tax benefit of $1.5 million attributable to the release of certain reserves for uncertain tax positions from the settlement of the IRS tax audit that closed in the third quarter of 2017. These favorable adjustments were partially offset by tax expense of $0.3 million against certain deferred tax assets in China, as future realization of the assets is not reasonably assured.

In 2016, the effective tax rate of 32.4% was positively impacted by a favorable mix of taxable income generated from countries with lower tax rates compared to that of the United States at that time, resulting in a tax benefit of $1.3 million. The Company also recorded a tax benefit of $1.5 million attributable to the Domestic Production Activities Deduction and a tax benefit of $1.1 million related to stock based compensation. These favorable adjustments were partially offset by tax expense of $1.2 million related to a nondeductible German Cartel settlement and a net increase in valuation allowance against certain deferred tax assets of $0.7 million, primarily related to tax valuation allowances of $0.5 million recorded against certain net deferred tax assets in the Netherlands and China, as future realization of the assets is not reasonably assured.

The Company maintains valuation allowances against certain deferred tax assets where realization is not reasonably assured. The Company evaluates the likelihood of the realization of deferred tax assets and reduces the carrying amount to the extent it believes a portion will not be realized. The Company’s effective tax rates in future periods could be affected by increases or decreases in anticipated earnings in countries where tax rates differ from the United States federal rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, completion of acquisitions or divestitures, changes in tax rates or tax laws, and the outcome of tax audits.

The following schedule presents net current and net long-term deferred tax assets and liabilities by tax jurisdiction as of December 31, 2018 and 2017:



	2018				2017
	Deferred Tax Assets				Deferred Tax Assets
In thousands	Current		Long-term		Current		Long-term
Federal	$	—	$	—	$	—	$	—
State	—		—		—		—
Foreign	—		2,055		—		1,146
Totals	$	—	$	2,055	$	—	$	1,146



	2018				2017
	Deferred Tax Liabilities				Deferred Tax Liabilities
In thousands	Current		Long-term		Current		Long-term
Federal	$	—	$	30,193	$	—	$	7,288
State	—		3,728		—		424
Foreign	—		5,344		—		7,002
Totals	$	—	$	39,265	$	—	$	14,714

Net deferred tax assets (liabilities) consisted of the following as of December 31, 2018 and 2017:



	December 31,
In thousands	2018			2017
Deferred tax assets:
Accounts receivable	$	172		$	132
Inventories	520			164
Net operating loss carryforwards	6,095			5,339
Other accrued liabilities	3,426			1,053
Pension	5,181			1,482
Tax Credits	1,846			1,735
Total deferred tax assets	17,240			9,905
Deferred tax liabilities:
Intangible assets	25,133			2,073
Property, plant and equipment	23,353			15,691
Total deferred tax liabilities	48,486			17,764
Valuation allowance	5,964			5,709
Net deferred tax liabilities	$	(37,210	)	$	(13,568	)

For the years ended December 31, 2018, 2017 and 2016, income before income taxes was derived from the following sources:



	For the years ended December 31,
In thousands	2018		2017		2016
United States	$	33,928	$	54,212	$	53,356
Foreign	9,337		7,107		1,583
Total income before income taxes	$	43,265	$	61,319	$	54,939

At December 31, 2018, the Company had approximately $4.1 million of state net operating loss carryforward which will expire between 2027 and 2036. The Company has not recorded a deferred tax asset for $4.0 million of this carryforward as the Company anticipates paying a non-income based franchise tax for the foreseeable future in the applicable jurisdiction. In addition, at December 31, 2018, the Company had $1.8 million of state tax credit carryforwards that expire between 2019 and 2033. As of December 31, 2018, the Company has recorded a valuation allowance against the full amount of its state tax credit carryforwards. The Company also has $6.8 million of foreign net operating loss carryforwards in China, $10.5 million of net operating loss carryforwards in Germany, and $5.1 million of net operating loss carryforwards in the Netherlands. The Netherlands’ net operating losses expire between the years 2019 and 2025 and the China net operating losses expire between the years 2019 and 2023. A partial valuation allowance is recorded against the net operating losses in all three jurisdictions for the portion of its net operating losses that future realization is not reasonably assured. The Company evaluates and weighs the positive and negative evidence present at each period. The Company will continue to monitor the realization criteria based on future operating results.

During 2018 the Company changed its assertion and no longer intends to reinvest certain undistributed earnings of its foreign subsidiaries that have been previously taxed in the U.S. and has recorded taxes associated with this position. For the remainder of the undistributed foreign earnings, unless tax effective to repatriate, the Company will continue to permanently reinvest these earnings. As of December 31, 2018, such undistributed earnings were approximately $1.8 million. The Company estimates that the amount of tax that would be payable on the undistributed earnings if repatriated to the United States could be up to $0.5 million. This amount may vary in the future due to a variety of factors including future tax law changes, future earnings and statutory taxes paid by foreign subsidiaries, and ongoing tax planning strategies by the Company.

The Company and its subsidiaries file a consolidated federal income tax return, as well as returns required by various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including such major jurisdictions as the United States, China, France, Germany, Hong Kong, the Netherlands, Canada and the United Kingdom. Within the next fiscal year, the Company expects to conclude certain income tax matters through the year ended December 31, 2015 and it is reasonably expected that net unrecognized

benefits of $0.3 million may be recognized. The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $3.6 million as of December 31, 2018. However, $1.4 million of the unrecognized tax benefits, if recognized, would be offset in pre-tax income by the reversal of indemnification assets due to the Company. The Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2013, and non-U.S. income tax examinations for years before 2003.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



In thousands	2018			2017
Unrecognized tax benefits at beginning of year	$	2,526		$	3,219
Decreases relating to positions taken in prior periods	(298		)	—
Increases relating to positions taken in prior periods	—			221
Increases relating to current period	1,584			475
Decreases due to settlements with tax authorities	(233		)	(1,372		)
Decreases due to lapse of statute of limitations	(16		)	(17		)
Unrecognized tax benefits at end of year	$	3,563		$	2,526

The Company recognizes the interest accrued and the penalties related to unrecognized tax benefits as a component of tax expense.