Income Taxes

12 Months Ended

Dec. 31, 2019

The following table summarizes the U.S. and non-U.S. components of income (loss) from continuing operations before Provision (benefit) for income taxes:



	For the Year Ended December 31,
	2019		2018			2017
	(Dollars in thousands)
U.S.	$	85,365	$	(68,032	)	$	(26,981	)
Non-U.S.	757,462		970,840			30,412
	$	842,827	$	902,808		$	3,431

Income tax expense (benefit) consists of the following:



	For the Year Ended December 31,
	2019		2018			2017

U.S income taxes:
Current	$	16,589	$	787		$	(1,066	)
Deferred	5,690		(52,145		)	38
	22,279		(51,358		)	(1,028		)
Non-U.S. income taxes:
Current	64,134		85,252			5,924
Deferred	11,812		15,026			(15,677		)
	75,946		100,278			(9,753		)
Total income tax expense (benefit)	$	98,225	$	48,920		$	(10,781	)

The tax expense changed from a benefit of $(10.8) million for the year ended December 31, 2017 to expense of $48.9 million and $98.2 million for the years ended December 31, 2018 and 2019, primarily due to the increase in earnings, the shift in the jurisdictional mix of earnings and losses from year to year. Partially offsetting these items was a partial release, both in 2018 and in 2019, of a valuation allowance recorded against the deferred tax asset related to certain foreign and U.S. federal and state tax attributes. Certain jurisdictions shifted from pre-tax losses in 2017 to pre-tax earnings in 2018 and 2019.

Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly revises the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures which have the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI. In general, these changes were effective beginning in 2018. The Tax Act also includes a one-time mandatory deemed repatriation or transition tax on the accumulated previously untaxed foreign earnings of our foreign subsidiaries.

For the fourth quarter of 2017, we were able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and re-measurement of certain deferred tax asset and liabilities.

Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118. SAB No. 118 allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 also provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Act. On October 15, 2018, the Company’s U.S. tax returns for 2017 were filed and the changes to the provisional tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 were recorded in 2018. These adjustments were immaterial to the Company’s financial statements.

On August 1, 2018, the U.S. Department of Treasury and the U.S. Internal Revenue Service (IRS) issued proposed regulations under code section 965 and on January 15, 2019, the IRS issued final 965 regulations. The Company continues to analyze the effects of the Tax Act and newly issued final regulations on its financial statements. The final impact of the Tax Act and the regulations may differ from the amounts that have been recognized, due to, among other things, changes in the Company’s interpretation of the Tax Act, additional legislative or administrative actions to clarify the intent of the statutory language provided that they differ from the Company’s current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. We estimate that any change will be immaterial to the Company’s financial statements at this time.

The Company also continues to evaluate the impact of the GILTI provisions under the Tax Act which are complex and subject to continuing regulatory interpretation by the IRS. The Company is required to make an accounting policy election of either (1) the period cost method or (2) the deferred method. As of December 31, 2018, the Company’s accounting policy will be to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred.

Income tax expense (benefit) differed from the amount computed by applying the U.S, federal income tax rate of 21% for years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to income before Provision (benefit) expense for income taxes as set forth in the following table:



	For the Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Tax at statutory U.S. federal rate	$	176,994		$	189,590		$	1,201
Impact of U.S. Tax Act - GILTI	65,531			93,739			—
Impact of the 2017 Tax Act - transition tax	—			—			39,628
Impact of the 2017 Tax Act - tax rate change	—			—			52,228
Impact of Tax Receivable Agreement	713			18,160			—
Valuation allowance	(14,548		)	(93,125		)	(89,269		)
State taxes, net of federal tax benefit	4,231			1,529			3,437
U.S. tax impact of foreign earnings (net of foreign tax credits)	2,181			792			1,151
Establishment/resolution of uncertain tax positions	(1,293		)	(345		)	(840		)
Adjustment for foreign income taxed at different rates	(76,922		)	(95,822		)	(2,359		)
Foreign tax credits	(56,171		)	(65,046		)	(17,956		)
Other	(2,491		)	(552		)	1,998
Provision (benefit) for income taxes	$	98,225		$	48,920		$	(10,781	)

The company has been granted a tax holiday in Brazil, which expires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities as of December 31, 2019 and December 31, 2018 are set forth in the following table.



	As of December 31,
	2019			2018
	(Dollars in thousands)
Deferred tax assets:
Postretirement and other employee benefits	$	18,256		$	18,395
Foreign tax credit and other carryforwards	55,103			111,325
Capitalized research and experimental costs	5,566			7,695
Environmental reserves	1,110			976
Inventory adjustments	14,863			14,251
Long-term contract option amortization	1,080			1,144
Provision for rationalization charges	232			351
Other	1,872			4,270
Total gross deferred tax assets	98,082			158,407
Less: valuation allowance	(13,736		)	(58,446		)
Total deferred tax assets	84,346			99,961
Deferred tax liabilities:
Fixed assets	$	56,659		$	59,521
Inventory	12,778			7,751
Goodwill and acquired intangibles	6,996			3,668
Other	2,468			3,138
Total deferred tax liabilities	78,901			74,078
Net deferred tax asset	$	5,445		$	25,883

Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $71.7 million as of December 31, 2018 and $55.2 million as of December 31, 2019. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $45.8 million as of December 31, 2018 and $49.8 million as of December 31, 2019.

We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused. In circumstances where the significant positive evidence does not outweigh the negative evidence in regards to whether or not a valuation allowance is required, we have established and maintained valuation allowances on those net deferred tax assets. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.

Valuation allowance activity for the years ended December 31, 2018 and 2019 was as follows:



	(Dollars in thousands)
Balance as of December 31, 2017	$	150,839
Credited to income	(93,125		)
Translation adjustment	(302		)
Changes attributable to movement in underlying assets	1,034
Balance as of December 31, 2018	$	58,446
Credited to income	(14,548		)
Changes attributable to write-off of underlying assets	(30,138		)
Translation adjustment	(24		)
Balance as of December 31, 2019	$	13,736

In the fourth quarter of 2017, with the enactment of the Tax Act, additional taxable income was derived as a result of inclusion of accumulated previously untaxed foreign earnings of GrafTech’s foreign subsidiaries. This additional taxable income led to the utilization of the U.S. net operating loss carryforward in 2017 and a partial release of the valuation allowance against the U.S. deferred tax assets. The valuation allowance was further reduced by the U.S. tax rate decrease from 35% to 21% as a result of the Tax Act. During 2018, we determined that sufficient positive evidence existed that allowed us to conclude that a full valuation allowance was no longer required to be recorded against the deferred tax assets related to the U.S. tax attributes. This positive evidence was primarily supplied by the Company exiting a cumulative loss period in the U.S. as well as sufficient U.S. current and forecasted taxable income that would utilize the U.S. tax attributes. As a result, a partial release (to reflect only the economic benefit of the attributes) of the valuation allowance against federal net operating losses and state losses was recorded in 2018 while a full release of the valuation allowance against the federal foreign tax credit carryforward, other federal deferred tax assets was also recorded. A valuation allowance of $35.8 million is included in the December 31, 2018 balance reflected above as there was not sufficient positive evidence that the deferred tax asset related to the U.S. federal net operating loss would generate more than its estimated economic benefit. This valuation allowance and the related deferred tax asset were subsequently released to the income statement in 2019.

In March of 2017, $19.5 million of foreign tax credits expired. During the fourth quarter of 2017, we increased our foreign tax credit carryforward by $37.7 million, as a result of additional foreign taxable income derived in connections with the new U.S. tax legislation that was enacted on December 22, 2017. As of December 31, 2019, we have a total foreign tax credit carryforward of $31.3 million. As indicated above, a valuation allowance is no longer recorded against this foreign tax credit carryforward. These tax credit carryforwards begin to expire as of March 15, 2025. In addition, we have state net operating loss carryforwards of $250.0 million (net of federal benefit), which can be carried forward from 5 to 20 years. These state net operating loss carryforwards generated a deferred tax asset of $14.9 million as of December 31, 2019. We also have U.S. state tax credits of $2.3 million as of December 31, 2019.

We have foreign loss carryforwards on a gross basis of $16.8 million as of December 31, 2019, which can be carried forward indefinitely.

During the fourth quarter of 2017, GrafTech Switzerland moved from a cumulative loss position to a cumulative profit position, as well as a current year utilization of its net operating loss carryforward. This positive evidence and utilization led to a full release of the valuation allowance against the GrafTech Switzerland deferred tax asset in 2018.

As of December 31, 2019, we had unrecognized tax benefits of $0.2 million, which, if recognized, would have a favorable impact on our effective tax rate. We have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.8 million as of December 31, 2017, and $0.9 million as of December 31, 2018 (an increase of $0.1 million). We had no accrued interest and penalties as of December 31, 2019 (a decrease of $0.9 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	(Dollars in thousands)

Balance as of December 31, 2017	$	2,492
Reductions for tax positions of prior years	(100		)
Lapse of statutes of limitations	(373		)
Foreign currency impact	(21		)
Settlements	(8		)
Balance as of December 31, 2018	$	1,990
Settlements	(1,383		)
Reductions for tax positions of prior years	(421		)
Foreign currency impact	(2		)
Balance as of December 31, 2019	$	184

It is reasonably possible that a reduction of unrecognized tax benefits of up to $0.2 million may occur within 12 months due to settlements and the expiration of statutes of limitation.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2016 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2013.

As of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.5 billion. Because $1.3 billion of such earnings have previously been subject to taxation by way of the transition tax on foreign earnings required by the Tax Act, as well as the current and previous years’ GILTI inclusion, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.