Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

7. Income Taxes

The following tables present components of income tax expense/(benefit) and income before income taxes on continuing operations:

(in thousands)	2016		2015		2014
Income tax based on income from continuing operations, at estimated tax rates of 35%, 32%, and 34%, respectively	$27,629		$16,388		$25,703
Pension plan settlements	-		-		(3,194	)
Income tax before discrete items	27,629		16,388		22,509
Discrete tax expense/(benefit):
Worthless Stock deduction	-		(28,553	)	-
Repatriation of non-U.S. prior years' earnings	-		-		2,210
Provision for/resolution of tax audits and contingencies, net	(2,856	)	6,500		744
Adjustments to prior period tax liabilities	769		(867	)	397
Provision for/adjustment to beginning of year valuation allowances	(88	)	75		(109	)
Enacted tax legislation	-		670		-
Total income tax expense/(benefit)	$25,454		($5,787	)	$25,751

(in thousands)	2016		2015		2014
Income/(loss) before income taxes:
U.S.	$8,556		($7,211	)	$4,993
Non-U.S.	69,710		58,689		62,507
	$78,266		$51,478		$67,500
Income tax provision:
Current:
Federal	$3,728		$-		$1,874
State	176		1,993		1,102
Non-U.S.	19,979		20,842		17,474
	$23,883		$22,835		$20,450
Deferred:
Federal	$2,138		($34,135	)	($1,707	)
State	1,984		(40	)	(495	)
Non-U.S.	(2,551	)	5,553		7,503
	$1,571		($28,622	)	$5,301
Total income tax expense/(benefit)	$25,454		($5,787	)	$25,751

The significant components of deferred income tax expense/(benefit) are as follows:

(in thousands)	2016		2015		2014
Net effect of temporary differences	$7,214		($7,615	)	($1,667	)
Foreign tax credits	(6,869	)	(17,874	)	(481	)
Retirement benefits	1,734		1,844		1,438
Net impact to operating loss carryforwards	(603	)	(5,722	)	6,120
Enacted changes in tax laws and rates	183		670		-
Adjustments to beginning-of-the-year valuation
allowance balance for changes in circumstances	(88	)	75		(109	)
Total	$1,571		($28,622	)	$5,301

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:

	2016		2015		2014
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	2.3		2.4		1.7
Non-U.S. local income taxes	3.5		4.1		4.0
Foreign adjustments	1.6		7.4		3.7
Foreign rate differential	(11.3	)	(13.6	)	(13.9	)
Net U.S. tax on non-U.S. earnings and foreign withholdings	5.8		(1.8	)	8.0
Provision for/resolution of tax audits and contingencies, net	(3.4	)	12.6		1.0
Research and development and other tax credits	(1.2	)	(2.4	)	(1.6	)
Adjustment to beginning of year valuation allowances	(0.1	)	0.1		(0.2	)
Worthless stock deduction	-		(55.5	)	-
Other	0.3		0.5		0.4
Effective income tax rate	32.5	%	(11.2	)%	38.1	%

The Company has operations which constitute a taxable presence in 18 countries outside of the United States. All of these countries had income tax rates that were at or below the United States’ federal tax rate of 35% during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges. The foreign income tax rate differential that is included above in the reconciliation of the effective tax rate includes the difference between tax expense calculated at the U.S. federal statutory tax rate of 35% and the expense accrued based on lower statutory tax rates that apply in the jurisdictions where the income or loss is earned.

During the periods reported, income outside of the U.S. was heavily concentrated within Brazil, China, (both with 25% tax rates), Mexico (30% tax rate) and Switzerland (8% tax rate). As a result, the foreign income tax rate differential was primarily attributable to these tax rate differences.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of certain assets and liabilities for financial reporting and income tax return purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	U.S.		Non-U.S.
	2016	2015	2016		2015
(in thousands)
Noncurrent deferred tax assets:
Accounts receivable	$1,155	$1,392	$1,381		$1,304
Inventories	1,193	897	1,868		1,750
Deferred compensation	7,533	6,714	-		-
Depreciation and amortization	2,786	10,323	5,030		4,882
Postretirement benefits	26,602	26,475	3,478		4,138
Tax loss carryforwards	1,760	2,682	26,084		27,134
Tax credit carryforwards	50,624	42,851	1,186		1,740
Other	7,828	10,222	2,876		3,503
Noncurrent deferred tax assets
before valuation allowance	99,481	101,556	41,903		44,451
Less: valuation allowance	-	-	(22,821	)	(24,439	)
Total noncurrent deferred tax assets	99,481	101,556	19,082		20,012
Total deferred tax assets	$99,481	$101,556	$19,082		$20,012
Noncurrent deferred tax liabilities:
Unrepatriated foreign earnings	$1,602	$1,157	$-		$-
Depreciation and amortization	43,156	10,309	2,466		3,174
Postretirement benefits	-	-	1,411		2,003
Deferred gain	7,156	7,559	-		-
Branch losses subject to recapture	-	-	-		918
Other	2,198	-	2,897		3,245
Total deferred tax liabilities	$54,112	19,025	$6,774		9,340
Net deferred tax asset	$45,369	$82,531	$12,308		$10,672

Deferred income tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income. In 2016, the Company recorded the following decreases in its valuation allowance: $0.9 million due to a net reduction in the related deferred tax assets, $0.3 million due to the elimination of previously recorded valuation allowances, and $0.4 million due to the effect of changes in currency translation rates.

At December 31, 2016, the Company had available approximately $143 million of net operating loss carryforwards, for which we have a deferred tax asset of $27.8 million, with expiration dates ranging from one year to indefinite, that may be applied against future taxable income. We believe that it is more likely than not that certain benefits from these net operating loss carryforwards will not be realized and, accordingly, we have recorded a valuation allowance of $19.7 million as of December 31, 2016. Included in the net operating loss carryforwards is approximately $23.0 million of state net operating loss carryforwards that are subject to various business apportionment factors and multiple jurisdictional requirements when utilized. In addition, the Company had available a foreign tax credit carryforward of $41.4 million that will begin to expire in 2020, U.S. and non-U.S. research and development credit carryforwards of $7.9 million, and $1.2 million, respectively, that will begin to expire in 2025, and alternative minimum tax credit carryforwards of $1.2 million with no expiration date.

The Company reported a U.S. net deferred tax asset of $45.4 million at December 31, 2016, which contained $52.4 million of tax attributes with limited lives. Although the Company is in a cumulative book income position over the evaluation period (three-year period ending December 31, 2016), management has evaluated its ability to utilize these tax attributes during the carryforward period. The Company’s future profits from operations, available tax elections and tax planning opportunities, coupled with the repatriation of non-U.S. earnings will

generate income of sufficient character to utilize the remaining tax attributes. Accordingly, no valuation allowance has been established for the remaining U.S. net deferred tax assets.

The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be permanently reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner.

At December 31, 2016 the Company reported a deferred tax liability of $1.6 million on $24.9 million of non-U.S. earnings that have been targeted for future repatriation to the U.S. Included in these amounts are $1.1 million of tax expense on approximately $14.6 million of foreign earnings that were generated in 2016.

The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S. were approximately $164.0 million, and are intended to remain permanently invested in foreign operations. Accordingly, no taxes have been provided on these earnings at December 31, 2016. If these earnings were distributed, the Company would be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits. Determination of the amount of any unrecognized deferred tax liability on these earnings is not practicable because of the complexities of the hypothetical calculation.

The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits, all of which, if recognized, would impact the effective tax rate.

(in thousands)	2016		2015		2014
Unrecognized tax benefits balance at January 1	$19,606		$19,509		$12,538
Increase in gross amounts of tax positions related to prior years	62		2,315		14,699
Decrease in gross amounts of tax positions related to prior years	(2,129	)	(145	)	(67	)
Increase in gross amounts of tax positions related to current year	585		79		1,077
Decrease due to settlements with tax authorities	(14,029	)	(42	)	(32	)
Decrease due to lapse in statute of limitations	(163	)	(90	)	(6,775	)
Currency translation	251		(2,020	)	(1,931	)
Unrecognized tax benefits balance at December 31	$4,183		$19,606		$19,509

The Company recognizes interest and penalties related to unrecognized tax benefits within its global operations as a component of income tax expense. The Company recognized (income)/expense for interest and penalties related to the unrecognized tax benefits noted above of ($0.1) million, ($0.1) million and $1.0 million in the Consolidated Statements of Income in 2016, 2015 and 2014, respectively. As of December 31, 2016, 2015 and 2014, the Company had approximately $0.3 million, $0.4 million, and $0.4 million respectively, of accrued interest and penalties related to unrecognized tax benefits.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2007 to 2016. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to Canada, France, and Italy.

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of less than $0.1 million to a net decrease of $0.6 million, from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes.

In the first quarter of 2016, the Company reached a settlement with the German tax authorities over matters that had been outstanding for a number of years. The German Tax Authority had denied tax positions taken by the Company related to a 1999 reorganization. In 2009, the Company made a payment of $14.5 million in order to appeal the German Tax Authority decision, and that payment was recorded as an income tax receivable. As additional information became available in subsequent years, the receivable was written down by $6.3 million in 2014 and $6.4 million in 2015. In 2016, the Company received $3.7 million representing the final settlement of this matter, which resulted in the recognition of a discrete tax benefit.

As of December 31, 2016 and 2015, current income taxes prepaid and receivable consisted of the following:

(in thousands)	2016	2015
Prepaid taxes	$3,914	$2,417
Taxes receivable	1,299	510
Total current income taxes prepaid and receivable	$5,213	$2,927

As of December 31, 2016 and 2015, noncurrent income taxes receivable and deferred consisted of the following:

(in thousands)	2016	2015
Deferred income taxes	$68,865	$105,792
Taxes receivable	-	3,153
Total noncurrent income taxes receivable and deferred	$68,865	$108,945

As of December 31, 2016 and 2015, current income taxes payable consisted of the following:

(in thousands)	2016	2015
Taxes Payable	$9,531	$7,090
Total current income taxes payable	$9,531	$7,090

As of December 31, 2016 and 2015, noncurrent deferred taxes and other liabilities consisted of the following:

(in thousands)	2016	2015
Deferred income taxes	$11,188	$12,589
Other liabilities	1,201	1,565
Total noncurrent deferred taxes and other liabilities	$12,389	$14,154

Taxes paid, net of refunds, amounted to $23.4 million in 2016, $18.3 million in 2015, and $17.6 million in 2014.