Income Taxes

12 Months Ended

Dec. 31, 2018

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)	2018		2017		2016
Income tax based on income from continuing operations, at
estimated tax rates of 31%, 32%, and 35%, respectively	$36,044		$17,519		$27,629
Income tax before discrete items	36,044		17,519		27,629
Discrete tax expense(benefit):
Net impact of mandatory deemed repatriation	(1,003	)	5,758		-
Provision for/resolution of tax audits and contingencies, net	1,286		1,329		(2,856	)
Adjustments to prior period tax liabilities	(1,284	)	(840	)	586
Provision for/adjustment to beginning of year valuation allowances	(4,882	)	(3,522	)	(88	)
Enacted tax legislation	2,067		1,879		183
Total income tax expense	$32,228		$22,123		$25,454

(in thousands)	2018		2017		2016
Income/(loss) before income taxes:
U.S.	$41,875		$(5,865	)	$8,556
Non-U.S.	73,372		60,573		69,710
	$115,247		$54,708		$78,266
Income tax provision
Current:
Federal	$304		$1,551		$3,728
State	4,996		1,770		176
Non-U.S.	21,557		19,282		19,979
	$26,857		$22,603		$23,883
Deferred:
Federal	$10,700		$1,881		$2,138
State	(338	)	(1,237	)	1,984
Non-U.S.	(4,991	)	(1,124	)	(2,551	)
	$5,371		$(480	)	$1,571
Total income tax expense	$32,228		$22,123		$25,454

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

(in thousands)	2018		2017		2016
Net effect of temporary differences	$(4,657	)	$(5,774	)	$7,214
Foreign tax credits	9,437		8,340		(6,869	)
Retirement benefits	2,360		(502	)	1,734
Net impact to operating loss carryforwards	1,046		(900	)	(603	)
Enacted changes in tax laws and rates	2,067		1,878		183
Adjustment to beginning-of-the-year valuation allowance balance for changes in circumstances	(4,882	)	(3,522	)	(88	)
Total	$5,371		$(480	)	$1,571

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

	2018		2017		2016
U.S. federal statutory tax rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	2.9		0.4		1.2
Non-U.S. local income taxes	3.3		5.9		3.5
U.S. permanent adjustments	(0.3	)	0.5		1.5
Foreign permanent adjustments	(0.4	)	0.4		1.6
Foreign rate differential	0.2		(10.5	)	(11.3	)
Net U.S. tax on non-U.S. earnings and foreign withholdings	5.7		11.9		5.8
Provision for/resolution of tax audits and contingencies, net	1.1		2.4		(3.4	)
Research and development and other tax credits	(0.1	)	(1.5	)	(1.2	)
Provision for/adjustment to beginning of year valuation allowances	(4.2	)	(6.4	)	(0.1	)
Enacted tax legislation and rate change	1.8		3.0		-
Return to provision and other adjustments	(3.0	)	(0.7	)	(0.1	)
Effective income tax rate	28.0	%	40.4	%	32.5	%

The Company has operations which constitute a taxable presence in 18 countries outside of the United States. The majority of these countries had income tax rates that are above the United States federal tax rate of 21% during 2018. The jurisdictional location of earnings is a significant component of the Company’s 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 the Company’s 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 21% and the expense accrued based on the different 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), and Mexico (30% 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, imposing a transition tax on deemed repatriated earnings of foreign subsidiaries, creating new taxes on certain foreign-sourced earnings including global intangible low-taxed income (GILTI) and creating the foreign-derived intangible income (FDII) deduction. 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 elected to apply the measurement period guidance provided in SAB 118. As of December 31, 2018, the accounting for all of the enactment-date income tax effects of the Tax Reform Act was complete. As further discussed below, during 2018, the Company recognized adjustments of $(0.6) million to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations.

Deferred tax assets and liabilities: At December 31, 2017, the Company re-measured certain deferred tax assets and liabilities based on the federal rate of 21%. Upon further analysis of certain aspects of the Tax Reform Act and refinement of the calculations during the 12 months ended December 31, 2018, the Company adjusted its provisional amount by $1.6 million, which is included as a component of income tax expense from continuing operations.

Foreign tax effects: At December 31, 2017, the Company recorded a provisional federal tax charge due to the transition tax on deemed repatriation of foreign earnings because the Company had not yet completed its enactment-date accounting for these effects. The Company recorded a net $1.0 million reduction to the provisional transition tax in 2018. The $1.0 million adjustment was comprised of a $1.1 million federal tax benefit attributable to adjustments discovered while analyzing the post 1986 earnings and profits and tax pools through 2017, and a $0.1 million state tax charge based on interpretive guidance issued by various states during the year on how the deemed mandatory repatriation would be taxed in those jurisdictions. The changes to 2017 enactment-date provisional amounts decreased the effective tax rate in 2018 by 0.9%.

The Company continues to believe that the Base Erosion Anti-Abuse Tax (BEAT) does not apply. The Company currently makes payments to its non-U.S. affiliates for contract manufacturing services and contract research and development recharge expenses. The contract manufacturing costs are excluded from BEAT as they are considered cost of goods sold expenses. The contract research and development payments would be subject to BEAT. However, the Company exceeds the gross revenue threshold test, but it does not meet the 3% Base Erosion percentage requirement. Therefore, the Company is not subject to the BEAT provisions. As such, no adjustments have been recorded in the December 31, 2018 financial statements.

The Company has elected to account for the GILTI tax as a current-period expense when incurred (the “period cost method”). The net GILTI inclusion calculated by the Company (including the gross up on the GILTI Inclusion and GILTI deduction) was $24.3 million. The Company has also generated apportioned foreign tax credits available to be applied to GILTI in the amount of $2.4 million. Overall, the GILTI inclusion less the applicable foreign tax credits increased the effective tax rate by 2.3%. The Company also calculated a foreign-derived intangible income FDII deduction of $3.4 million which decreased the effective tax rate by 0.6%.

Other federal tax: As a result of the Tax Reform Act, the corporate alternative minimum tax (AMT) was repealed. In addition, tax payers with AMT carryforwards in excess of their regular tax liability may have the credits refunded over years from 2018 to 2022. The Company has $1.3 million of AMT credit carryforward which has been reclassified to non-current federal tax receivable.

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)	2018	2017	2018		2017
Noncurrent deferred tax assets:
Accounts receivable	$686	$557	$1,224		$1,341
Inventories	442	1,109	829		961
Deferred compensation	4,460	3,300	1,053		1,362
Depreciation and amortization	-	-	4,252		3,211
Postretirement benefits	14,759	18,286	1,667		1,464
Tax loss carryforwards	1,199	1,368	21,890		22,639
Tax credit carryforwards	30,523	41,920	1,197		1,654
Other	5,834	3,891	-		-
Noncurrent deferred tax assets
before valuation allowance	57,903	70,431	32,112		32,632
Less: valuation allowance	-	-	(8,389	)	(16,057	)
Total noncurrent deferred tax assets	57,903	70,431	23,723		16,575
Total deferred tax assets	$57,903	$70,431	$23,723		$16,575

Noncurrent deferred tax liabilities:
Unrepatriated foreign earnings	$4,028	$914	$-	$-
Depreciation and amortization	12,848	20,170	-	-
Deferred gain	3,762	4,169	-	-
Other	1,162	81	4,750	2,597
Total noncurrent deferred tax liabilities	$21,800	$25,334	$4,750	$2,597
Net deferred tax liabilities	$21,800	$25,334	$4,750	$2,597
Net deferred tax asset	$36,103	$45,097	$18,973	$13,978

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 2018, the Company recorded the following movements in its valuation allowance: $0.2 million decrease in a valuation allowance due to a net reduction in the related deferred tax assets, $6.6 million decrease due to the elimination of previously recorded valuation allowances, and $0.9 million decrease due to the effect of the changes in currency translation rates.

At December 31, 2018, the Company had available approximately $103.2 million of net operating loss carryforwards, for which the Company has a deferred tax asset of $23.1 million, with expiration dates ranging from one year to indefinite that may be applied against future taxable income. The Company believes that it is more likely than not that certain benefits from these net operating loss carryforwards will not be realized and, accordingly, the Company has recorded a valuation allowance of $7.8 million as of December 31, 2018. 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 carryforward is approximately $19.4 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 $24.3 million that will begin to expire in 2020, U.S. and non-U.S. research and development credit carryforwards of $6.2 million and $1.2 million, respectively, that will begin to expire in 2025.

The Company reported a U.S. net deferred tax asset of $36.1 million at December 31, 2018, which contained $31.7 million of tax attributes with limited lives. Although the Company is in a cumulative book income

position for the three-year period ending December 31, 2018, 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 more likely than not will generate income of sufficient character to utilize the remaining tax attributes. Accordingly, no valuation allowance has been established for the 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 Company has targeted for repatriation $82.4 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 $3.0 million and state income taxes of $1.0 million which have already been recorded.

The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S. were approximately $171.3 million, and are intended to remain indefinitely invested in foreign operations.

No additional income taxes have been provided on the indefinitely invested foreign earnings at December 31, 2018. If these earnings were distributed, the Company could be subject to 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 practical.

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)	2018		2017		2016
Unrecognized tax benefits balance at January 1st	$4,509		$4,183		$19,606
Increase in gross amounts of tax positions related to prior years	2,008		480		62
Decrease in gross amounts of tax positions related to prior years	(358	)	(50	)	(2,129	)
Increase in gross amounts of tax positions related to current years	-		-		585
Decrease due to settlements with tax authorities	(1,626	)	(381	)	(14,029	)
Decrease due to lapse in statute of limitations	(479	)	(29	)	(163	)
Currency translation	(264	)	306		251
Unrecognized tax benefits balance at December 31	$3,790		$4,509		$4,183

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 $0.2 million or less in each of 2018, 2017, and 2016. As of December 31, 2018, 2017, and 2016 the Company had approximately $0.1 million, $0.4 million, and $0.3 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 2018. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to Canada, and Italy. In 2018, the Company recorded a net decrease of $1.6 million for tax audit settlements.

As of December 31, 2018, and 2017, current income taxes prepaid and receivable consisted of the following:

(in thousands)	2018	2017
Prepaid taxes	$ 4,859	$ 4,872
Taxes receivable	2,614	1,394
Total current income taxes prepaid and receivable	$ 7,473	$ 6,266

As of December 31, 2018, and 2017, noncurrent deferred taxes and other liabilities consisted of the following: 

(in thousands)	2018	2017
Deferred income taxes	$ 7,547	$ 9,573
Other liabilities	875	1,418
Total noncurrent deferred taxes and other liabilities	$ 8,422	$ 10,991

Taxes paid, net of refunds, amounted to $28.1 million in 2018, $23.7 million in 2017 and $23.4 million in 2016.