Income Taxes

The provisions for income taxes were calculated based on the following components of income (loss) before income taxes:



Year ended December 31, (dollars in thousands)	2013		2012			2011
United States	$	23,211	$	(17,030	)	$	(6,662	)
Non-U.S.	18,489		29,705			31,946
Total income before income taxes	$	41,700	$	12,675		$	25,284

The current and deferred provisions (benefit) for income taxes were:



Year ended December 31, (dollars in thousands)	2013		2012			2011
Current:
U.S. federal	$	988	$	(18	)	$	484
Non-U.S.	8,548		9,194			5,732
U.S. state and local	617		(72		)	100
Total current income tax provision (benefit)	10,153		9,104			6,316

Deferred:
U.S. federal	564		1,264			(400		)
Non-U.S.	2,517		(4,658		)	(4,294		)
U.S. state and local	7		(1		)	21
Total deferred income tax provision (benefit)	3,088		(3,395		)	(4,673		)

Total:
U.S. federal	1,552		1,246			84
Non-U.S.	11,065		4,536			1,438
U.S. state and local	624		(73		)	121
Total income tax provision (benefit)	$	13,241	$	5,709		$	1,643

Deferred income tax assets and liabilities result from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and carryovers and credits for income tax purposes. The significant components of our deferred income tax assets and liabilities are as follows:



December 31, (dollars in thousands)	2013			2012
Deferred income tax assets:
Pension	$	—		$	16,526
Non-pension postretirement benefits	22,749			27,198
Other accrued liabilities	18,084			20,213
Receivables	1,467			1,445
Net operating loss and charitable contribution carry forwards	32,806			45,592
Tax credits	10,953			9,770
Total deferred income tax assets	86,059			120,744

Deferred income tax liabilities:
Property, plant and equipment	22,053			23,196
Inventories	4,762			4,377
Pension	3,031			—
Intangibles and other assets	10,238			12,392
Total deferred income tax liabilities	40,084			39,965
Net deferred income tax asset before valuation allowance	45,975			80,779
Valuation allowance	(46,048		)	(77,629		)
Net deferred income tax asset (liability)	$	(73	)	$	3,150

The net deferred income tax assets and liabilities at December 31 of the respective year-ends were included in the Consolidated Balance Sheets as follows:



December 31, (dollars in thousands)	2013			2012
Current deferred income tax asset	$	5,840		$	4,070
Non-current deferred income tax asset	5,759			9,830
Current deferred income tax liability	—			(3,213		)
Non-current deferred income tax liability	(11,672		)	(7,537		)
Net deferred income tax asset (liability)	$	(73	)	$	3,150

The 2013 deferred income tax asset for net operating loss carry forwards of $32.8 million relates to pre-tax losses incurred in the Netherlands of $17.9 million, in Portugal of $9.1 million, in China of $2.3 million, in the U.S. of $66.0 million for federal and $96.0 million for state and local jurisdictions. Our foreign net operating loss carry forwards of $29.3 million will expire between 2014 and 2022. Our U.S. federal net operating loss carry forward of $66.0 million will expire between 2031 and 2033. This amount is lower than the actual amount reported on our U.S. federal income tax return by $5.2 million. The difference is attributable to tax deductions in excess of financial statement amounts for stock based compensation. When these amounts are realized, we will record a credit to additional paid in capital. The U.S. state and local net operating loss carry forward of $96.0 million will expire between 2014 and 2033. The 2012 deferred income tax asset for net operating loss carry forwards of $44.4 million relates to pre-tax losses incurred in the Netherlands of $15.9 million, in Portugal of $9.4 million, in China of $0.2 million, and in the U.S. of $107.2 million for federal and $107.1 million for state and local jurisdictions.

One of our legal entities in China had a tax holiday which expired effective December 31, 2012. In 2013, we recognized no benefit from the tax holiday. In 2012, we recognized a $0.5 million benefit. In 2011, we recognized no benefit due to net operating losses and a full valuation allowance in place.

The 2013 deferred tax credits of $11.0 million consist of $2.4 million U.S. federal tax credits and $8.6 million non-U.S. credits. The U.S. federal tax credits consist of foreign tax credits, general business research and development credits, and alternative minimum tax credits which will expire between 2024 and 2033 The non-U.S. credit of $8.6 million, which is related to withholding tax on inter-company debt in the Netherlands, can be carried forward indefinitely. The 2012 deferred tax credits of $9.8 million consist of $2.0 million U.S. federal tax credits and $7.8 million non-U.S. credits.

In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized on a quarterly basis. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income (including reversals of deferred income tax liabilities) during the periods in which those temporary differences reverse. As a result, we consider the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset as well as all other positive and negative evidence. Examples of the evidence we consider are cumulative losses in recent years, losses expected in early future years, a history of potential tax benefits expiring unused and whether there was an unusual, infrequent, or extraordinary item to be considered. We currently have valuation allowances in place on our deferred income tax assets in the U.S., Portugal and the Netherlands. We intend to maintain these allowances until it is more likely than not that those deferred income tax assets will be realized.

Management's decision to maintain the full valuation allowance in place against its U.S. net deferred tax asset was made based on sufficient negative evidence outweighing the positive evidence. The valuation allowance in the U.S. has been maintained since 2007 and a significant piece of evidence used in our assessment has been a history of cumulative tax losses through 2012. The weight applied to the other subjective evidence, such as projected financial results, has been limited. Despite its historical losses, the U.S. moved into a three year cumulative income position during the fourth quarter of 2013. Before we would change our judgment on the need for a full valuation allowance, a sustained period of operating profitability is required. Considering the duration and magnitude of our U.S. operating losses, the current U.S. economic environment and the competitive landscape, it is our judgment that we have not yet achieved profitability of a duration and magnitude sufficient to release our valuation allowance against our deferred tax assets. If we generate significant pre-tax earnings in the U.S. in 2014 and plans for 2015 and beyond show continued profitability, we may have sufficient evidence to release all or a significant portion of our valuation allowance on our U.S. deferred tax assets during 2014.

The valuation allowance activity for the years ended December 31 is as follows:



Year ended December 31, (dollars in thousands)	2013			2012			2011
Beginning balance	$	77,629		$	76,452		$	72,327
Charge (benefit) to provision for income taxes	(9,302		)	(1,805		)	(2,313		)
Charge (benefit) to other comprehensive income	(22,279		)	2,982			6,438
Ending balance	$	46,048		$	77,629		$	76,452

The valuation allowance decreased $31.6 million in 2013 from $77.6 million at December 31, 2012 to $46.0 million at December 31, 2013. The 2013 decrease of $31.6 million is attributable to the 2013 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward and pension. The 2013 valuation allowance of $46.0 million consists of $35.0 million related to U.S. entities and $11.0 million related to non-U.S. entities. The valuation allowance increased $1.2 million in 2012 from $76.5 million at December 31, 2011 to $77.6 million at December 31, 2012. The 2012 increase in valuation allowance was attributable to the 2012 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward partially offset by the release of the Chinese valuation allowance.

Reconciliation from the statutory U.S. federal income tax rate to the consolidated effective income tax rate was as follows:



Year ended December 31,	2013			2012			2011
Statutory U.S. federal income tax rate	35.0		%	35.0		%	35.0		%
Increase (decrease) in rate due to:
Non-U.S. income tax differential	(7.9	)		(43.5	)		(14.6	)
U.S. state and local income taxes, net of related U.S. federal income taxes	1.0			(0.4	)		0.3
U.S. federal credits	—			(0.9	)		(0.3	)
Permanent adjustments	4.2			60.6			(18.6	)
Foreign withholding taxes	4.8			12.0			6.7
Valuation allowance	(16.8	)		(10.6	)		3.7
Deferred tax impact from 2014 Mexican tax reform	10.2			—			—
Other	1.3			(7.2	)		(5.7	)
Consolidated effective income tax rate	31.8		%	45.0		%	6.5		%

Income tax payments consisted of the following:



Year ended December 31, (dollars in thousands)	2013		2012		2011
Total income tax payments, net of refunds	$	13,916	$	4,399	$	15,124
Less: credits or offsets	3,061		997		4,894
Cash paid, net	$	10,855	$	3,402	$	10,230

There was approximately $6.9 million of accumulated undistributed earnings from non-U.S. subsidiaries in 2013 and none in 2012. We intend to reinvest any future undistributed earnings indefinitely into the majority of our non-U.S. operations. Determination of the net amount of unrecognized U.S. income tax and potential foreign withholdings with respect to these earnings is not practicable.

We are subject to income taxes in the U.S. and various foreign jurisdictions. Management judgment is required in evaluating our tax positions and determining our provision for income taxes. Throughout the course of business, there are numerous transactions and calculations for which the ultimate tax determination is uncertain. When management believes certain tax positions may be challenged despite our belief that the tax return positions are supportable, we establish reserves for tax uncertainties based on estimates of whether additional taxes will be due. We adjust these reserves taking into consideration changing facts and circumstances, such as an outcome of a tax audit. The income tax provision includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the requirements of ASC 740.

A reconciliation of the beginning and ending gross unrecognized tax benefits, excluding interest and penalties, is as follows:



(dollars in thousands)	2013			2012		2011
Beginning balance	$	1,496		$	1,266	$	1,129
Additions based on tax positions related to the current year	325			—		—
Changes due to lapse of statute of limitations	(509		)	230		137
Ending balance	$	1,312		$	1,496	$	1,266

We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. Other disclosures relating to unrecognized tax benefits are as follows:



December 31, (dollars in thousands)	2013			2012			2011
Impact on the effective tax rate, if unrecognized tax benefits were recognized	$	1,198		$	1,382
Interest and penalties, net of tax benefit, accrued in the Consolidated Balance Sheets	$	537		$	662
Interest and penalties expense (benefit) recognized in the Consolidated Statements of Operations	$	(124	)	$	(753	)	$	(288	)

Based upon the outcome of tax examinations, judicial proceedings, or expiration of statutes of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. It is also reasonably possible that gross unrecognized tax benefits related to U.S. and foreign exposures may decrease within the next twelve months by approximately $0.5 million to $0.8 million due to expiration of statutes of limitations.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of December 31, 2013, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction	Open Years
Canada	2010	–	2013
China	2010	–	2013
Mexico	2008	–	2013
Netherlands	2012	–	2013
Portugal	2009	–	2013
United States	2010	–	2013