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)	2017			2016			2015
United States	$	(65,224	)	$	29,742		$	27,146
Non-U.S.	(12,346		)	(1,958		)	971
Total income before income taxes	$	(77,570	)	$	27,784		$	28,117

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



Year ended December 31, (dollars in thousands)	2017			2016			2015
Current:
U.S. federal	$	(183	)	$	470		$	300
Non-U.S.	4,517			7,625			9,142
U.S. state and local	834			201			162
Total current income tax provision (benefit)	5,168			8,296			9,604

Deferred:
U.S. federal	9,950			9,981			(44,068		)
Non-U.S.	1,190			334			(3,078		)
U.S. state and local	(510		)	(900		)	(674		)
Total deferred income tax provision (benefit)	10,630			9,415			(47,820		)

Total:
U.S. federal	9,767			10,451			(43,768		)
Non-U.S.	5,707			7,959			6,064
U.S. state and local	324			(699		)	(512		)
Total income tax provision (benefit)	$	15,798		$	17,711		$	(38,216	)

United States Tax Reform: The Tax Cuts and Jobs Act (the Act), signed into law on December 22, 2017, changed many aspects of the U.S. tax code, by reducing the corporate income tax rate from 35 percent to 21 percent, shifting to a territorial tax system with a related one-time transition tax on accumulated, unremitted earnings of foreign subsidiaries, limiting interest deductions, allowing the current expensing of certain capital expenditures, and numerous other changes that will apply prospectively beginning in 2018. We recorded a charge of $6.7 million in the fourth quarter of 2017, principally related to re-measurement of the net U.S. deferred income tax assets at the 21 percent tax rate. The Company estimates that it will incur no material transition tax related to unremitted foreign earnings and does not anticipate material interest deduction limitations in the foreseeable future. We continue to analyze other changes to the tax code, including the Global Intangible Low Taxed Income (GILTI) provision, which could result in some level of future U.S. taxation of non-U.S. earnings that we cannot reasonably estimate at this time. Until we determine the extent to which GILTI may apply, we have not made an accounting policy decision regarding whether we will treat GILTI as a period cost or establish deferred taxes related thereto. We will continue to assess our income tax provision as we finalize our 2017 U.S. income tax return and as future guidance becomes available, but we do not currently expect that material revisions will be required. If revisions are required, they will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

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)	2017			2016
Deferred income tax assets:
Pension	$	8,108		$	11,799
Non-pension post-retirement benefits	13,385			22,810
Other accrued liabilities	13,213			19,244
Receivables	2,118			2,756
Net operating loss and charitable contribution carry forwards	16,599			16,861
Tax credits	13,288			11,502
Total deferred income tax assets	66,711			84,972
Valuation allowance	(19,076		)	(13,773		)
Net deferred income tax assets	47,635			71,199

Deferred income tax liabilities:
Property, plant and equipment	18,246			23,921
Inventories	1,639			3,866
Intangibles and other	4,708			5,255
Total deferred income tax liabilities	24,593			33,042
Net deferred income tax asset	$	23,042		$	38,157

The net deferred income tax assets and liabilities were included in the Consolidated Balance Sheets as follows:



December 31, (dollars in thousands)	2017			2016
Non-current deferred income tax asset	$	24,892		$	40,016
Non-current deferred income tax liability	(1,850		)	(1,859		)
Net deferred income tax asset	$	23,042		$	38,157

A summary of the deferred tax assets for net operating loss carry forwards is as follows:



December 31, (dollars in thousands)	2017		2016
Deferred income tax asset	$	16,599	$	16,861
Comprised of cumulative net losses from:
Netherlands	$	40,487	$	24,811
Mexico	$	1,700	$	—
China	$	1,155	$	825
Portugal	$	—	$	629
U.S. federal	$	15,578	$	23,019
U.S. state and local	$	41,812	$	58,551

Our foreign net operating loss carryforwards of $43.3 million will expire between 2018 and 2028. Our U.S. federal net operating loss carryforward of $15.6 million will expire between 2031 and 2034. The U.S. state and local net operating loss carryforward of $41.8 million will expire between 2018 and 2035.

A summary of the deferred income tax assets related to tax credits is as follows:



December 31, (dollars in thousands)	2017		2016
Netherlands foreign tax credits	$	9,082	$	7,695
U.S. general business credits	2,885		2,628
U.S. alternative minimum tax credits	1,321		1,179
Total	$	13,288	$	11,502

The non-U.S. credits can be carried forward indefinitely. The U.S. federal tax credits for general business research and development will expire between 2024 and 2037, and the alternative minimum tax credits do not expire.

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. 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 a valuation allowance in place on our deferred income tax assets in the Netherlands. We intend to maintain this allowance 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 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. In order to fully realize our deferred tax assets as of December 31, 2017 in the U.S., the Company needs to generate approximately $154.6 million of future taxable income.

Our European operations in the Netherlands incurred an operating loss in 2017, continue to be in cumulative loss positions in recent years, and have a history of tax loss carryforwards expiring unused. In addition, European economic conditions continue to be unfavorable. Accordingly, management believes it is not more likely than not that the net deferred tax assets related to these operations will be realized and a valuation allowance continues to be recorded as of December 31, 2017. The Netherlands operation added a new furnace in 2017 that achieves a much higher level of energy efficiency than the furnaces it replaced. Management is optimistic that this new furnace technology will significantly improve the profitability of the Netherlands operation. Thus, it is reasonably possible that the valuation allowance against the net operating loss deferred tax asset could be reduced within the next year.

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



Year ended December 31,	2017			2016			2015
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	1.2			(2.1	)		(0.9	)
U.S. state and local income taxes, net of related U.S. federal income taxes	0.1			(1.3	)		(2.0	)
U.S. federal credits	0.3			(2.2	)		—
Permanent adjustments	0.6			3.8			7.5
Foreign withholding taxes	(2.0	)		5.7			4.7
Valuation allowance	(4.4	)		11.1			(174.8	)
Unrecognized tax benefits	(3.9	)		10.0			(0.3	)
Impact of foreign exchange	(1.6	)		3.4			(19.8	)
Tax effect of intercompany capitalization	—			—			11.7
Impact of legislative changes	(8.7	)		—			—
Goodwill impairment	(36.0	)		—			—
Other	(1.0	)		0.3			3.0
Consolidated effective income tax rate	(20.4	)	%	63.7		%	(135.9	)	%

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 could become taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary differences totaled $11.4 million as of December 31, 2017 and $27.7 million as of December 31, 2016. 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.

The Company and its subsidiaries are subject to examination by various countries' tax authorities. These examinations may lead to proposed or assessed adjustments to our taxes. In August 2016, one of our Mexican subsidiaries received a tax assessment from the Mexican tax authority (SAT) related to the audit of its 2010 tax year. The amount assessed was approximately 3 billion Mexican pesos, which was equivalent to approximately $157 million U.S. dollars as of the date of the assessment. The Company has filed an administrative appeal with SAT requesting that the assessment be fully nullified. We are awaiting the outcome of the appeal. Management, in consultation with external legal counsel, believes that if contested in the Mexican court system, it is more likely than not that the Company would prevail on all significant components of the assessment. Management intends to continue to vigorously contest all significant components of the assessment in the Mexican courts if they are not nullified at the administrative appeal level. We believe that our tax reserves related to uncertain tax positions are adequate at this time.

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



(dollars in thousands)	2017			2016			2015
Beginning balance	$	3,521		$	431		$	378
Additions based on tax positions related to the current year	435			382			293
Additions for tax positions of prior years	1,735			3,001			—
Reductions for tax positions of prior years	(468		)	(293		)	—
Changes due to lapse of statute of limitations	279			—			(240		)
Reductions due to settlements with tax authorities	(495		)	—			—
Ending balance	$	5,007		$	3,521		$	431

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)	2017			2016		2015
Amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate	$	4,107		$	3,414	$	378
Interest, net of tax benefit, accrued in the Consolidated Balance Sheets	$	572		$	92	$	28
Penalties, accrued in the Consolidated Balance Sheets	$	38		$	181	$	—
Interest expense (benefit) recognized in the Consolidated Statements of Operations	$	506		$	64	$	(146	)
Penalties expense (benefit) recognized in the Consolidated Statements of Operations	$	(67	)	$	181	$	—

Based upon the outcome of tax examinations, judicial proceedings, other settlements with taxing jurisdictions, 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 may decrease within the next twelve months by approximately $3.6 million due to settlements with tax authorities.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. As of December 31, 2017, the tax years that remained subject to examination by major tax jurisdictions were as follows:



Jurisdiction	Open Years
Canada	2014	–	2017
China	2007	–	2017
Mexico (excluding 2011 which is closed)	2010	–	2017
Netherlands	2016	–	2017
Portugal	2014	–	2017
United States (excluding 2013 which is closed)	2011	–	2017