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)	2014			2013		2012
United States	$	(15,488	)	$	23,211	$	(17,030	)
Non-U.S.	29,018			18,489		29,705
Total income before income taxes	$	13,530		$	41,700	$	12,675

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



Year ended December 31, (dollars in thousands)	2014			2013		2012
Current:
U.S. federal	$	59		$	988	$	(18	)
Non-U.S.	10,180			8,548		9,194
U.S. state and local	157			617		(72		)
Total current income tax provision (benefit)	10,396			10,153		9,104

Deferred:
U.S. federal	227			564		1,264
Non-U.S.	(2,066		)	2,517		(4,658		)
U.S. state and local	10			7		(1		)
Total deferred income tax provision (benefit)	(1,829		)	3,088		(3,395		)

Total:
U.S. federal	286			1,552		1,246
Non-U.S.	8,114			11,065		4,536
U.S. state and local	167			624		(73		)
Total income tax provision (benefit)	$	8,567		$	13,241	$	5,709

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)	2014			2013
Deferred income tax assets:
Pension	$	12,317		$	—
Non-pension postretirement benefits	24,326			22,749
Other accrued liabilities	18,726			18,084
Receivables	1,798			1,467
Net operating loss and charitable contribution carry forwards	33,531			32,806
Tax credits	10,320			10,953
Total deferred income tax assets	101,018			86,059

Deferred income tax liabilities:
Property, plant and equipment	20,986			22,053
Inventories	5,037			4,762
Pension	—			3,031
Intangibles and other assets	7,581			10,238
Total deferred income tax liabilities	33,604			40,084
Net deferred income tax asset before valuation allowance	67,414			45,975
Valuation allowance	(66,486		)	(46,048		)
Net deferred income tax asset (liability)	$	928		$	(73	)

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)	2014			2013
Current deferred income tax asset	$	4,888		$	5,840
Non-current deferred income tax asset	5,566			5,759
Current deferred income tax liability	(3,633		)	—
Non-current deferred income tax liability	(5,893		)	(11,672		)
Net deferred income tax asset (liability)	$	928		$	(73	)

The 2014 deferred income tax asset for net operating loss carry forwards of $33.5 million relates to cumulative pre-tax losses incurred in the Netherlands of $10.3 million, in Portugal of $4.2 million, in China of $2.9 million, and in the U.S. of $75.6 million for federal and $99.1 million for state and local jurisdictions. Our foreign net operating loss carry forwards of $17.4 million will expire between 2015 and 2026. Our U.S. federal net operating loss carry forward of $75.6 million will expire between 2031 and 2034. This amount is lower than the actual amount reported on our U.S. federal income tax return by $10.8 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 $99.1 million will expire between 2015 and 2034. 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, and in the U.S. of $66.0 million for federal and $96.0 million for state and local jurisdictions.

One of our legal entities in China had a tax holiday which expired effective December 31, 2012. In 2014 and 2013, we recognized no benefit from the tax holiday. In 2012, we recognized a $0.5 million benefit.

The 2014 deferred tax credits of $10.3 million consist of $2.3 million U.S. federal tax credits and $8.0 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 2025 and 2034. The non-U.S. credit of $8.0 million, which is related to withholding tax on inter-company debt in the Netherlands, can be carried forward indefinitely. 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.

In assessing the need for a valuation allowance, management considers on a quarterly basis whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. 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.

Despite our 2013 improvement in financial results in the U.S., management has concluded that in consideration of our current year loss and cumulative U.S. operating losses and the current U.S. economic environment and competitive landscape, we have not yet achieved profitability of a duration and magnitude sufficient to release our valuation allowance against our U.S. deferred tax assets. If we generate significant pre-tax earnings in the U.S. in 2015 and expectations for 2016 and beyond indicate continued profitability and improved economic conditions, we may have sufficient evidence to release all or a portion of our valuation allowance on our U.S. net deferred tax assets in the foreseeable future.

The Netherlands financial performance improved during 2014 and its cumulative loss position is relatively small at December 31, 2014. Nonetheless, before we would change our judgment of the need for a full valuation allowance, a sustained period of operating profitability is required. Considering the duration and magnitude of our Netherlands operating losses and the current European economic environment and competitive landscape, it is our judgment that we have not yet achieved a level of sufficient profitability needed in order to release our valuation allowance against our deferred tax assets. If we generate significant pre-tax earnings in the Netherlands in 2015 and expectations for 2016 and beyond indicate continued profitability and improved economic conditions, we may have sufficient evidence to release all or a portion of our valuation allowance on our Netherlands deferred tax assets in the foreseeable future.

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



Year ended December 31, (dollars in thousands)	2014		2013			2012
Beginning balance	$	46,048	$	77,629		$	76,452
Charge (benefit) to provision for income taxes	3,507		(9,302		)	(1,805		)
Charge (benefit) to other comprehensive income	16,931		(22,279		)	2,982
Ending balance	$	66,486	$	46,048		$	77,629

The valuation allowance increased $20.4 million in 2014 from $46.0 million at December 31, 2013 to $66.5 million at December 31, 2014. The 2014 increase of $20.4 million is attributable to the 2014 change in deferred tax assets, primarily related to the U.S. operating loss and other comprehensive losses related to pensions. The 2014 valuation allowance of $66.5 million consists of $55.8 million related to U.S. entities and $10.7 million related to non-U.S. entities. 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 2012 increase in valuation allowance of $1.2 million 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,	2014			2013			2012
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	(10.5	)		(7.9	)		(43.5	)
U.S. state and local income taxes, net of related U.S. federal income taxes	0.8			1.0			(0.4	)
U.S. federal credits	—			—			(0.9	)
Permanent adjustments	(9.2	)		4.2			60.6
Foreign withholding taxes	14.8			4.8			12.0
Valuation allowance	42.9			(16.8	)		(10.6	)
Unrecognized tax benefits	(9.3	)		(0.7	)		(3.1	)
Deferred tax impact from 2014 Mexican tax reform	—			10.2			—
Other	(1.2	)		2.0			(4.1	)
Consolidated effective income tax rate	63.3		%	31.8		%	45.0		%

There was approximately $3.3 million of accumulated undistributed earnings from non-U.S. subsidiaries in 2014 and $6.9 million in 2013. We intend to reinvest any existing and 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)	2014			2013			2012
Beginning balance	$	1,312		$	1,496		$	1,266
Additions based on tax positions related to the current year	—			325			—
Reductions for tax positions of prior years	(325		)	—			—
Changes due to lapse of statute of limitations	(609		)	(509		)	230
Ending balance	$	378		$	1,312		$	1,496

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)	2014			2013			2012
Impact on the effective tax rate, if unrecognized tax benefits were recognized	$	306		$	1,198
Interest and penalties, net of tax benefit, accrued in the Consolidated Balance Sheets	$	174		$	537
Interest and penalties expense (benefit) recognized in the Consolidated Statements of Operations	$	(363	)	$	(124	)	$	(753	)

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 $0.2 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, 2014, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction	Open Years
Canada	2011	–	2014
China	2011	–	2014
Mexico	2009	–	2014
Netherlands	2013	–	2014
Portugal	2010	–	2014
United States (excluding 2009 which is closed)	2008	–	2014