Income Taxes

12 Months Ended

Dec. 31, 2017

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)	2017		2016		2015
Income tax based on income from continuing operations, at estimated tax rates of 32%, 35%, and 32%, respectively	$17,519		$27,629		$16,388
Income tax before discrete items	17,519		27,629		16,388
Discrete tax expense(benefit):
Worthless stock deduction	-		-		(28,553	)
Net impact of mandatory deemed repatriations	5,758		-		-
Provision for/resolution of tax audits and contingencies, net	1,329		(2,856	)	6,500
Adjustments to prior period tax liabilities	(840	)	586		(867	)
Provision for/adjustment to beginning of year valuation allowances	(3,522	)	(88	)	75
Enacted tax legislation	1,879		183		670
Total income tax expense/(benefit)	$22,123		$25,454		($5,787	)

(in thousands)	2017		2016		2015
Income/(loss) before income taxes:
U.S.	($5,865	)	$8,556		($7,211	)
Non-U.S.	60,573		69,710		58,689
	$54,708		$78,266		$51,478
Income tax provision:
Current:
Federal	$1,551		$3,728		$-
State	1,770		176		1,993
Non-U.S.	19,282		19,979		20,842
	$22,603		$23,883		$22,835
Deferred:
Federal	$1,881		$2,138		($34,135	)
State	(1,237	)	1,984		(40	)
Non-U.S.	(1,124	)	(2,551	)	5,553
	($480	)	$1,571		($28,622	)
Total income tax expense/(benefit)	$22,123		$25,454		($5,787	)

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

(in thousands)	2017		2016		2015
Net effect of temporary differences	($5,774	)	$7,214		($7,615	)
Foreign tax credits	8,340		(6,869	)	(17,874	)
Retirement benefits	(502	)	1,734		1,844
Net impact to operating loss carryforwards	(900	)	(603	)	(5,722	)
Enacted changes in tax laws and rates	1,878		183		670
Adjustment to beginning-of-the-year valuation allowance balance for changes in circumstances	(3,522	)	(88	)	75
Total	($480	)	$1,571		($28,622	)

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

	2017		2016		2015
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.0		2.3		2.4
Non-U.S. local income taxes	5.9		3.5		4.1
Foreign permanent adjustments	0.4		1.6		7.4
Foreign rate differential	(10.5	)	(11.3	)	(13.6	)
Net U.S. tax on non-U.S. earnings and foreign withholdings	11.9		5.8		(1.8	)
Provision for/resolution of tax audits and contingencies, net	2.4		(3.4	)	12.6
Research and development and other tax credits	(1.5	)	(1.2	)	(2.4	)
Adjustment to beginning-of-the-year valuation allowances	(6.4	)	(0.1	)	0.1
Worthless stock deduction	-		-		(55.5	)
Other	2.2		0.3		0.5
Effective income tax rate	40.4	%	32.5	%	(11.2	)%

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 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 (blended 34% tax rate), China, (25% tax rate), Mexico (30% tax rate) and France (33.33% tax rate). As a result, the foreign income tax rate differential was primarily attributable to these tax rate differences.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company has elected to apply the measurement period guidance provided in SAB 118.

Deferred tax assets and liabilities: The Company remeasured certain deferred tax assets and liabilities based on the federal rate of 21%. However, the Company is still analyzing certain aspects of the Tax Reform Act, such as IRC section 162(m), and refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company’s deferred tax balance was a tax charge of $1.0 million.

Foreign tax effects: The one-time transition tax is based on the Company’s total post 1986 earnings and profits (E&P). The Company recorded a provisional federal tax charge of $5.8 million due to the transition tax on deemed repatriation of foreign earnings, for the year-ended December 31, 2017.

The final impact on the Company from the Tax Reform Act’s transition tax legislation may differ from the aforementioned reasonable estimate of $5.8 million due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1986. Such differences could be material, due to, among other things, changes in interpretations of the Tax Reform Act, future legislative action to address questions that arise because of the Tax Reform Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax’s reasonable estimate.

Given the lack of guidance from various states on the treatment of the mandatory deemed repatriation, the Company did not record any additional tax provision for the potential state tax impact of this item, but will, if necessary, as guidance is provided and analyzed during the measurement period.

The Company has foreign tax credit carryforward that can be applied against the federal tax liability of the mandatory deemed repatriation, therefore, the Company did not record a tax payable liability for the mandatory deemed repatriation.

The Company has determined at this time that the Base Erosion Anti-Abuse Tax (BEAT) does not apply under the Company’s current policies. Therefore no adjustments have been recorded in the December 31, 2017 consolidated financial statements.

Because of the complexity of the new Global Intangible Low-Taxed Income (GILTI) tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company is measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company’s current structure and estimated future results of global operations, but also its intent and ability to modify its structure. The Company is currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI.

Other federal tax: As a result of the Tax Reform Act, the corporate alternative minimum tax (AMT) was repealed. In addition, taxpayers with AMT carryforwards in excess of their regular tax liability may have the credits refunded over years from 2018 to 2022. The Company has $1.0 million of AMT credit carryforward; the Company is still determining the potential future AMT credit utilization and any carryforward remaining will be reclassified to non-current federal tax receivable during the measurement period.

The charges associated with the Tax Reform Act represent provisional amounts and the Company’s current best estimates. Any adjustments recorded to the provisional amounts through the end of the measurement period, and no later than the fourth quarter of fiscal 2018, will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.

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

	U.S.		Non-U.S.
(in thousands)	2017	2016	2017		2016
Noncurrent deferred tax assets:
Accounts receivable	$557	$1,155	$1,341		$1,381
Inventories	1,109	1,193	961		1,868
Deferred compensation	3,300	7,533	1,362		-
Depreciation and amortization	-	2,786	3,211		2,564
Postretirement benefits	18,286	26,602	1,464		2,067
Tax loss carryforwards	1,368	1,760	22,639		26,084
Tax credit carryforwards	41,920	50,624	1,654		1,186
Other	3,891	7,828	-		2,876
Noncurrent deferred tax assets
before valuation allowance	70,431	99,481	32,632		38,026
Less: valuation allowance	-	-	(16,057	)	(22,821	)
Total noncurrent deferred tax assets	70,431	99,481	16,575		15,205
Total deferred tax assets	$70,431	$99,481	$16,575		$15,205
Noncurrent deferred tax liabilities:
Unrepatriated foreign earnings	$914	$1,602	$-		$-
Depreciation and amortization	20,170	43,156	-		-
Deferred gain	4,169	7,156	-		-
Other	81	2,198	2,597		2,897
Total deferred tax liabilities	$25,334	$54,112	$2,597		$2,897
Net deferred tax asset	$45,097	$45,369	$13,978		$12,308

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 2017, the Company recorded the following movements in its valuation allowance: $5.3 million decrease in a valuation allowance due to a net reduction in the related deferred tax assets, $3.6 million decrease due to the elimination of previously recorded valuation allowances, and $2.1 million increase due to the effect of the changes in currency translation rates.

At December 31, 2017, the Company had available approximately $111 million of net operating loss carryforwards, for which we have a deferred tax asset of $23.4 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 $12.7 million as of December 31, 2017. Additionally, management has evaluated its ability to utilize its other Non-U.S. tax attributes during the various carryforward periods and has concluded that the Company will more likely than not be able to utilize the remaining Non-U.S. tax attributes. Included in the net operating loss carryforwards is approximately $20.1 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 $33.7 million that will begin to expire in 2020, U.S. and Non-U.S. research and development credit carryforwards of $7.6 million and $1.5 million, respectively, that will begin to expire in 2025, and alternative minimum tax credit carryforwards of $1.3 million with no expiration date.

The Company reported a U.S. net deferred tax asset of $45.1 million at December 31, 2017, which contained $43.3 million of tax attributes with limited lives. Management has evaluated its ability to utilize these tax attributes during the carryforward period. Based on the Company’s cumulative book income position over the past three years, the Company’s expected future profits from operations, available tax elections and tax planning opportunities, management has concluded that the Company will more likely than not be able 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 indefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner.

The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S. were approximately $200 million, and are intended to remain indefinitely invested in foreign operations. U.S. income taxes have been provided on these earnings at December 31, 2017 which are included in the provisional transition tax of $5.8 million. The Company has targeted for repatriation $41 million of current year and prior year earnings of the Company’s foreign operations. If these earnings were distributed, the Company would be subject to foreign withholding taxes of $0.9 million which have already been recorded.

No additional income taxes have been provided on the indefinitely invested foreign earnings at December 31, 2017. If these earnings were distributed, the Company could be subject to both foreign income taxes and additional foreign withholding taxes. Determining the amount of unrecognized deferred tax liability related to any additional outside basis difference in these entities is not practicable. In addition, the Company is still evaluating the impact of the one-time transition tax on the outside basis differences and cumulative temporary differences inherent in these subsidiaries as of December 31, 2017 and as a result, it is not practicable to provide the amount of any cumulative temporary differences related to unrecorded differences.

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)	2017		2016		2015
Unrecognized tax benefits balance at January 1	$4,183		$19,606		$19,509
Increase in gross amounts of tax positions related to prior years	480		62		2,315
Decrease in gross amounts of tax positions related to prior years	(50	)	(2,129	)	(145	)
Increase in gross amounts of tax positions related to current years	-		585		79
Decrease due to settlements with tax authorities	(381	)	(14,029	)	(42	)
Decrease due to lapse in statute of limitations	(29	)	(163	)	(90	)
Currency translation	306		251		(2,020	)
Unrecognized tax benefits balance at December 31	$4,509		$4,183		$19,606

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 interest and penalties related to the unrecognized tax benefits noted above of $0.1 million or less in each of 2017, 2016 and 2015. As of December 31, 2017, 2016 and 2015 the Company had approximately $0.4 million, $0.3 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 2017. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to Canada and Italy.

As of December 31, 2017 and 2016, current income taxes prepaid and receivable consisted of the following:

(in thousands)	2017	2016
Prepaid taxes	$4,872	$3,914
Taxes receivable	1,394	1,299
Total current income taxes prepaid and receivable	$6,266	$5,213

As of December 31, 2017 and 2016, noncurrent deferred tax liabilities and other credits consisted of the following:

(in thousands)	2017	2016
Deferred income taxes	$9,573	$11,188
Other liabilities	1,418	1,201
Total noncurrent deferred taxes and other liabilities	$10,991	$12,389

Taxes paid, net of refunds, amounted to $23.7 million in 2017, $23.4 million in 2016, and $18.3 million in 2015.