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)	2015		2014			2013
United States	$	27,146	$	(15,488	)	$	23,211
Non-U.S.	971		29,018			18,489
Total income before income taxes	$	28,117	$	13,530		$	41,700

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



Year ended December 31, (dollars in thousands)	2015			2014			2013
Current:
U.S. federal	$	300		$	59		$	988
Non-U.S.	9,142			10,180			8,548
U.S. state and local	162			157			617
Total current income tax provision (benefit)	9,604			10,396			10,153

Deferred:
U.S. federal	(44,068		)	227			564
Non-U.S.	(3,078		)	(2,066		)	2,517
U.S. state and local	(674		)	10			7
Total deferred income tax provision (benefit)	(47,820		)	(1,829		)	3,088

Total:
U.S. federal	(43,768		)	286			1,552
Non-U.S.	6,064			8,114			11,065
U.S. state and local	(512		)	167			624
Total income tax provision (benefit)	$	(38,216	)	$	8,567		$	13,241

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 from income tax carryovers and credits. The significant components of our deferred income tax assets and liabilities are as follows:



December 31, (dollars in thousands)	2015			2014
Deferred income tax assets:
Pension	$	9,644		$	12,317
Non-pension postretirement benefits	21,751			24,326
Other accrued liabilities	20,432			18,726
Receivables	2,341			1,798
Net operating loss and charitable contribution carry forwards	25,754			33,531
Tax credits	10,245			10,320
Total deferred income tax assets	90,167			101,018

Deferred income tax liabilities:
Property, plant and equipment	22,882			20,986
Inventories	2,378			5,037
Intangibles and other	7,883			7,581
Total deferred income tax liabilities	33,143			33,604
Net deferred income tax asset before valuation allowance	57,024			67,414
Valuation allowance	(11,184		)	(66,486		)
Net deferred income tax asset (liability)	$	45,840		$	928

At December 31, 2015, we have prospectively adopted ASU 2015-17 which requires that deferred tax assets and liabilities be classified as non-current in the statement of financial position. 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)	2015			2014
Current deferred income tax asset	$	—		$	4,888
Non-current deferred income tax asset	48,662			5,566
Current deferred income tax liability	—			(3,633		)
Non-current deferred income tax liability	(2,822		)	(5,893		)
Net deferred income tax asset (liability)	$	45,840		$	928

The 2015 deferred income tax asset for net operating loss carry forwards of $25.5 million relates to cumulative pre-tax losses incurred in the Netherlands of $16.9 million, in Portugal of $1.8 million, in China of $1.3 million, and in the U.S. of $53.8 million for federal and $68.5 million for state and local jurisdictions. Our foreign net operating loss carry forwards of $20.0 million will expire between 2016 and 2027. Our U.S. federal net operating loss carry forward of $53.8 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 $7.4 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 $68.5 million will expire between 2016 and 2034. The 2014 deferred income tax asset for net operating loss carry forwards of $33.5 million related to 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.

The 2015 deferred tax credits of $10.2 million consist of $2.6 million U.S. federal tax credits and $7.6 million non-U.S. credits. The U.S. federal tax credits consist of $2.0 million of general business research and development credits which will expire between 2024 and 2035 and $0.6 million of alternative minimum tax credits which do not expire. The non-U.S. credit of $7.6 million, which is related to withholding tax on inter-company debt in the Netherlands, can be carried forward indefinitely. The 2014 deferred tax credits of $10.3 million consisted of $2.3 million U.S. federal tax credits and $8.0 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 deductible temporary differences reverse. As a result, we consider the historical and projected financial results of the tax paying component 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 were unusual, infrequent, or extraordinary items to be considered. We currently have valuation allowances in place on our deferred income tax assets in Portugal and the Netherlands. We intend to maintain these allowances until a period of sustainable income is achieved and management concludes it is more likely than not that those deferred income tax assets will be realized.

As of December 31, 2015, management has considered the evidence, both positive and negative, in assessing the realizability of our deferred tax assets in the U.S. The positive evidence, including achievement of cumulative income in recent years and expectations for sustainable future income, was strong enough to conclude that it is more likely than not that nearly all of our deferred tax assets are realizable and the valuation allowance was reduced accordingly.

Our European operations in the Netherlands and Portugal incurred operating losses in 2015, continue to be in cumulative loss positions in recent years, and have tax loss carry-forwards expiring unused. In addition, European economic conditions continue to be unfavorable. Accordingly, management believes it is not more likely than not that the deferred tax assets related to these operations will be realized and valuation allowances continue to be recorded for the Netherlands and Portugal as of December 31, 2015.

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



Year ended December 31, (dollars in thousands)	2015			2014		2013
Beginning balance	$	66,486		$	46,048	$	77,629
Charge (benefit) to provision for income taxes	(49,877		)	3,507		(9,302		)
Charge (benefit) to other comprehensive income	(5,425		)	16,931		(22,279		)
Ending balance	$	11,184		$	66,486	$	46,048

The valuation allowance decreased $55.3 million in 2015 from $66.5 million at December 31, 2014 to $11.2 million at December 31, 2015. The 2015 decrease of $55.3 million is primarily attributable to the reversal of substantially all of the U.S. valuation allowance, partially offset by changes in deferred tax assets in foreign jurisdictions where full valuation allowances are recorded. The 2015 valuation allowance of $11.2 million consists of $0.1 million related to U.S. foreign tax credits and $11.1 million related primarily to net operating losses and foreign tax credits in the Netherlands and Portugal. 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 was 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 2013 decrease in valuation allowance of $31.6 million was attributable to the 2013 change in deferred tax assets, primarily related to the U.S. federal net operating loss carry forward and pension.

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



Year ended December 31,	2015			2014			2013
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	(0.9	)		(25.9	)		(6.4	)
U.S. state and local income taxes, net of related U.S. federal income taxes	(2.0	)		0.8			1.0
Permanent adjustments	7.5			20.1			0.1
Foreign withholding taxes	4.7			14.8			4.8
Valuation allowance	(174.8	)		42.9			(16.8	)
Unrecognized tax benefits	(0.3	)		(9.3	)		(0.7	)
Impact of foreign exchange	(19.8	)		(14.0	)		2.6
Tax effect of intercompany capitalization	11.7			—			—
Impact of legislative changes	—			—			10.2
Other	3.0			(1.1	)		2.0
Consolidated effective income tax rate	(135.9	)	%	63.3		%	31.8		%

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside of the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary differences totaled $35.0 million as of December 31, 2015 and $33.5 million as of December 31, 2014. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation.

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 uncertain tax positions may be challenged despite our belief that the tax return positions are supportable, we record unrecognized tax benefits as liabilities in accordance with the requirements of ASC 740. When our judgment with respect to these uncertain tax positions changes as a result of a change in facts and circumstances, such as the outcome of a tax audit, we adjust these liabilities through increases or decreases to the income tax provision.

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



(dollars in thousands)	2015			2014			2013
Beginning balance	$	378		$	1,312		$	1,496
Additions based on tax positions related to the current year	293			—			325
Reductions for tax positions of prior years	—			(325		)	—
Changes due to lapse of statute of limitations	(240		)	(609		)	(509		)
Ending balance	$	431		$	378		$	1,312

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)	2015			2014			2013
Impact on the effective tax rate, if unrecognized tax benefits were recognized	$	378		$	306		$	1,198
Interest and penalties, net of tax benefit, accrued in the Consolidated Balance Sheets	$	28		$	174		$	537
Interest and penalties expense (benefit) recognized in the Consolidated Statements of Operations	$	(146	)	$	(363	)	$	(124	)

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. exposures may decrease within the next twelve months by approximately $0.1 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, 2015, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction	Open Years
Canada	2011	–	2015
China	2012	–	2015
Mexico	2010	–	2015
Netherlands	2014	–	2015
Portugal	2008	–	2015
United States (excluding 2009 which is closed)	2008	–	2015