Income Taxes

The U.S. Tax Cuts and Jobs Act (“Tax Act”) was enacted in December 2017 resulting in broad and complex changes to U.S. income tax law. The Tax Act included a one-time transition tax in 2017 on accumulated foreign subsidiary earnings not previously subject to U.S. income tax, reduced the U.S. corporate statutory tax rate from 35% to 21% effective January 1, 2018, generally eliminated U.S. federal income tax on dividends from foreign subsidiaries, created new tax on certain foreign-sourced earnings, made other changes to limit certain deductions and changed rules on how certain tax credits and net operating loss carryforwards can be utilized. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our 2017 financial statements.

The following summarizes the provisional amounts for the income tax effects of the Tax Act that were recorded as of December 31, 2017 and the measurement-period adjustments related to these items recognized during 2018 based on additional guidance provided by regulatory bodies as well as the preparation of our 2017 U.S. federal income tax return.

One-Time Transition Tax

The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount of $6.9 million in 2017 for our one-time transitional tax liability and income tax expense based on estimates of the effects of the Tax Act. In 2018, we finalized our one-time transitional tax liability in the amount of $4.6 million in connection with the completion of our 2017 U.S. federal income tax return and recognized a $2.3 million decrease to tax expense for 2018.

Taxes on Repatriation of Foreign Earnings

Prior to the Tax Act, we considered the unremitted earnings in our non-U.S. subsidiaries held directly by a U.S. parent to be indefinitely reinvested and, accordingly, had not provided any deferred income taxes. As a result of the Tax Act, we now intend to pursue repatriation of unremitted earnings in our non-U.S. subsidiaries held directly by a U.S. parent to the extent that such earnings have been included in the one-time transition tax discussed above, and subject to cash requirements to support the strategic objectives of the non-U.S. subsidiary. As such, we recorded a provisional amount of $7.0 million in 2017 for the estimated liability and income tax expense for any U.S. federal or state income taxes or additional foreign withholding taxes related to repatriation of such earnings. In addition, in 2017 we recognized certain foreign tax credits of $5.5 million in the U.S. related to the provisional accounting for taxes on repatriation of foreign earnings, however, we also recognized a full valuation allowance related to such tax assets as it is more likely than not that these assets will not be realized. In 2018, we finalized this estimated liability with no significant change to the $7.0 million amount provisionally recognized in 2017. Based on additional interpretive guidance by regulatory bodies, we adjusted the foreign tax credits related to the repatriation of foreign earnings to $5.7 million and also adjusted the related full valuation allowance. As a result, there was no significant impact of these adjustments included in income tax expense in 2018.

In 2018, our income tax provision includes the estimated expense for any U.S. federal and state income taxes from the new tax on certain foreign-sourced earnings as well as any additional foreign withholding taxes related to future repatriation of current year earnings in our non-U.S. subsidiaries held directly by a U.S. parent.

Deferred Tax Effects

The Tax Act reduced the U.S. corporate statutory tax rate from 35% to 21% for years after 2017. Accordingly, we remeasured our U.S. net deferred tax liabilities as of December 31, 2017 to reflect the reduced rate that will apply in future periods when those deferred taxes are settled or realized. We recognized a provisional deferred tax benefit of $17.4 million in 2017 to reflect the reduced U.S. tax rate on our estimated U.S. net deferred tax liabilities. Although the tax rate reduction was known, we had not completed our analysis of the effect of the Tax Act on the underlying deferred taxes for the items discussed above, and as such, the amounts recorded as of December 31, 2017 were provisional. In 2018, we finalized our U.S. net deferred tax liabilities in connection with the completion of our 2017 U.S. federal income tax return and recognized a $0.7 million increase to tax expense for 2018 related to the reduced U.S. tax rate on the changes to the underlying deferred taxes.

The net tax benefit recognized in 2017 related to the Tax Act was $3.4 million. As we completed our analysis of the Tax Act in 2018 for purposes of finalizing our 2017 U.S. federal income tax return, including assessment of additional guidance provided by regulatory bodies, we revised the cumulative net tax benefit related to the Tax Act to $5.0 million by recognizing an additional $1.6 million net tax benefit for 2018.

The provision (benefit) for income taxes related to continuing operations was as follows:



	Year Ended December 31,
(In thousands)	2018			2017			2016
Current:
U.S. Federal	$	805		$	(236	)	$	(37,854	)
State	1,384			561			20
Foreign	12,572			10,301			10,440
Total current	14,761			10,626			(27,394		)
Deferred:
U.S. Federal	(331		)	(3,848		)	2,670
State	66			(796		)	(181		)
Foreign	501			(1,089		)	863
Total deferred	236			(5,733		)	3,352
Total income tax expense (benefit)	$	14,997		$	4,893		$	(24,042	)

The total provision (benefit) was allocated to the following components of income (loss):



	Year Ended December 31,
(In thousands)	2018		2017			2016
Income (loss) from continuing operations	$	14,997	$	4,893		$	(24,042	)
Loss from discontinued operations	—		(4,616		)	—
Total provision (benefit)	$	14,997	$	277		$	(24,042	)

Income (loss) from continuing operations before income taxes was as follows:



	Year Ended December 31,
(In thousands)	2018		2017			2016
U.S.	$	4,084	$	(27,282	)	$	(76,805	)
Foreign	43,194		43,394			12,051
Income (loss) from continuing operations before income taxes	$	47,278	$	16,112		$	(64,754	)

The effective income tax rate for continuing operations is reconciled to the statutory federal income tax rate as follows:



	Year Ended December 31,
	2018		2017		2016
Income tax expense (benefit) at federal statutory rate	21.0	%	35.0	%	(35.0	%)
Nondeductible executive compensation	2.5	%	4.8	%	0.3	%
Other nondeductible expenses	2.6	%	8.5	%	2.5	%
Stock-based compensation	(1.7	%)	2.9	%	—
Different rates on earnings of foreign operations	1.9	%	(13.3	%)	(1.2	%)
Dividend taxes on unremitted earnings	6.4	%	9.3	%	2.2	%
U.S. tax on foreign earnings	0.7	%	—		—
Change in valuation allowance	(1.7	%)	1.5	%	6.9	%
State tax expense (benefit), net	2.7	%	(1.8	%)	(2.5	%)
Net impact of Tax Act	(3.4	%)	(22.3	%)	—
Worthless stock deduction - Brazil	—		—		(14.4	%)
Goodwill and other asset impairments	—		—		3.5	%
Manufacturing deduction	—		—		0.8	%
Other items, net	0.7	%	5.8	%	(0.2	%)
Total income tax expense (benefit)	31.7	%	30.4	%	(37.1	%)

The provision for income taxes was $15.0 million for 2018, reflecting an effective tax rate of 32%, compared to $4.9 million for 2017, reflecting an effective tax rate of 30%. The provision for income taxes for 2018 includes a $1.6 million net benefit related to the Tax Act as discussed above. In addition, the 2018 effective tax rate was favorably impacted by excess tax benefits related to the vesting of certain stock-based compensation awards and a reduction in the valuation allowance related to our U.K. subsidiary. Although the Tax Act reduced the U.S. corporate statutory tax rate effective January 1, 2018, our provision for income taxes in 2018 also includes the estimated expense for any U.S. federal and state income taxes from the new tax on certain foreign-sourced earnings as well as any additional foreign withholding taxes related to future repatriation of current year earnings from our non-U.S. subsidiaries. Due to the relative contribution of our domestic and foreign earnings, these taxes on certain foreign-sourced earnings and the impact of changes to deduction limitations from the Tax Act effectively offset the benefit of the lower U.S. corporate statutory tax rate in our 2018 provision for income taxes. The impact of the Tax Act on our effective tax rate in future periods will depend in large part on the relative contribution of our domestic and foreign earnings.

Our effective tax rate in 2017 includes a $3.4 million benefit resulting from the provisional accounting for the Tax Act as described above. In addition, the 2017 effective tax rate was negatively impacted primarily by non-deductible expenses relative to the amount of pre-tax income.

Our effective tax rate in 2016 includes a $9.3 million benefit associated with a worthless stock deduction and related impacts from restructuring the investment in our Brazilian subsidiary, partially offset by a $4.5 million charge for increases to the valuation allowance for certain deferred tax assets which may not be realized (primarily related to our Australian subsidiary and certain U.S. state net operating losses).

Temporary differences and carryforwards which give rise to deferred tax assets and liabilities consisted of the following at December 31:



(In thousands)	2018			2017
Deferred tax assets:
Net operating losses	$	14,054		$	23,490
Foreign tax credits	7,304			9,262
Accruals not currently deductible	3,209			7,730
Unrealized foreign exchange losses, net	3,575			2,595
Stock-based compensation	3,266			3,793
Capitalized inventory costs	1,972			4,581
Alternative minimum tax carryforwards	2,198			1,626
Other	6,631			8,825
Total deferred tax assets	42,209			61,902
Valuation allowance	(23,842		)	(30,154		)
Total deferred tax assets, net of allowances	18,367			31,748
Deferred tax liabilities:
Accelerated depreciation and amortization	(29,656		)	(34,265		)
Tax on unremitted earnings	(16,174		)	(16,821		)
Original issue discount on 2021 Convertible Notes	(3,347		)	(4,299		)
Other	(2,160		)	(3,190		)
Total deferred tax liabilities	(51,337		)	(58,575		)
Total net deferred tax liabilities	$	(32,970	)	$	(26,827	)

Noncurrent deferred tax assets	$	4,516		$	4,753
Noncurrent deferred tax liabilities	(37,486		)	(31,580		)
Net deferred tax liabilities	$	(32,970	)	$	(26,827	)

As described in Note 1, the adoption of the new accounting guidance for the income tax consequences of intra-entity transfers of assets other than inventory resulted in a $4.5 million increase in deferred tax liabilities as of January 1, 2018.

For state income tax purposes, we have net operating loss carryforwards (“NOLs”) of approximately $158.2 million available to reduce future state taxable income. These NOLs expire in varying amounts beginning in 2019 through 2038. Foreign NOLs of approximately $18.2 million are available to reduce future taxable income, some of which expire beginning in 2019.

The realization of our net deferred tax assets is dependent on our ability to generate taxable income in future periods. At December 31, 2018 and 2017, we have recorded a valuation allowance in the amount of $23.8 million and $30.2 million, respectively, primarily related to certain U.S. state and foreign NOL carryforwards, including Australia, as well as for certain tax credits recognized related to the accounting for the impact of the Tax Act, which may not be realized. The 2018 decreases in NOL carryforwards and related valuation allowance were primarily attributable to the expiration of certain state NOLs.

We file income tax returns in the United States and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. We are no longer subject to income tax examinations for U.S. federal and substantially all state jurisdictions for years prior to 2012 and for substantially all foreign jurisdictions for years prior to 2008. We are currently under examination by the United States federal tax authorities for tax years 2014–2016. During the second quarter of 2017, we received a Revenue Agent Report from the IRS disallowing a deduction claimed on our 2015 tax return associated with the forgiveness of certain inter-company balances due from our Brazilian subsidiary and assessing tax due of approximately $3.9 million. We submitted our response to the IRS in the third quarter of 2017, and had an initial tax appeals hearing in June 2018. In the third quarter of 2018, the Appeals Officer provided a favorable notification recommending that no additional tax should be assessed on our 2015 tax return which is subject to approval by the Joint Committee on Taxation. Although the tax appeals process has not concluded, we believe our tax position is properly reported in accordance with applicable U.S. tax laws and regulations and will continue to vigorously defend our position through the tax appeals process.

Following an audit in 2015, the treasury authority in Mexico issued a tax assessment (inclusive of interest and penalties) in the amount of 60 million pesos (approximately $3.3 million) to our Mexico subsidiary primarily in connection with the export of mats from Mexico which took place in 2010. The mats that are the subject of this assessment were owned by a U.S. subsidiary and leased to our Mexico subsidiary for matting projects in the Mexican market. In 2010, we made the decision to move these mats out of Mexico to markets with higher demand. The Mexican treasury authority determined the export of the mats was the equivalent of a sale, and assessed taxes on the gross declared value of the exported mats to our Mexico subsidiary. We retained outside legal counsel and filed administrative appeals with the treasury authority, but we were notified on April 13, 2018, that the last administrative appeal had been rejected. In the second quarter of 2018, we filed an appeal in the Mexican Federal Tax Court, which required that we post a bond in the amount of the assessed taxes (plus additional interest). In the fourth quarter of 2018, the Mexican Federal Tax Court issued a favorable judgment nullifying in full the tax assessment which has been subsequently appealed by the treasury authority in Mexico. Although the tax appeals process has not concluded, we believe our tax position is properly reported in accordance with applicable tax laws and regulations in Mexico and intend to vigorously defend our position through the tax appeals process.

We are also under examination by various tax authorities in other countries, and certain foreign jurisdictions have challenged the amounts of taxes due for certain tax periods. These audits are in various stages of completion. We fully cooperate with all audits, but defend existing positions vigorously. We evaluate the potential exposure associated with various filing positions and record a liability for uncertain tax positions as circumstances warrant. Although we believe all tax positions are reasonable and properly reported in accordance with applicable tax laws and regulations in effect during the periods involved, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals.

A reconciliation of the beginning and ending provision for uncertain tax positions is as follows:



(In thousands)	2018			2017			2016
Balance at January 1	$	257		$	665		$	419
Additions (reductions) for tax positions of prior years	(3		)	(399		)	477
Additions (reductions) for tax positions of current year	—			—			—
Reductions for settlements with tax authorities	—			—			—
Reductions for lapse of statute of limitations	(31		)	(9		)	(231		)
Balance at December 31	$	223		$	257		$	665

Approximately $0.2 million of unrecognized tax benefits at December 31, 2018, if recognized, would favorably impact the effective tax rate.

We recognize accrued interest and penalties related to uncertain tax positions in operating expenses. The amount of interest and penalties was immaterial for all periods presented.