Income Taxes

The components of Income from continuing operations before income taxes and Income taxes follow:



	2017			2016			2015
Income from continuing operations before income taxes:
U.S.	$	3,082		$	34,129		$	11,525
International	192,617			148,492			146,421
Income from continuing operations before income taxes	$	195,699		$	182,621		$	157,946
Income tax provision:
Current:
U.S. – federal	$	77,799		$	7,215		$	(210	)
U.S. – state	1,762			755			2,019
International	48,032			41,516			32,217
	127,593			49,486			34,026
Deferred:
U.S. – federal	$	9,596		$	6,091		$	7,670
U.S. – state	819			1,060			(1,137		)
International	(1,724		)	(9,617		)	(3,993		)
	8,691			(2,466		)	2,540
Income taxes	$	136,284		$	47,020		$	36,566

On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act reduced the U.S. Corporate income tax rate from 35% to 21%, effective January 1, 2018. As required, the Company re-measured its U.S. deferred tax assets and liabilities as of December 31, 2017, applying the reduced U.S. Corporate income tax rate. As a result, the Company recorded a provisional adjustment of $4,152 to net expense, with a corresponding reduction to the U.S. net deferred asset. The Company was capable of reasonably estimating the impact of the reduction to the U.S. Corporate tax rate on the deferred tax balances, however the estimate may be affected by other aspects of the Act, such as the calculation of deferred foreign income and the state effect of adjustments made to federal temporary differences.

The Act taxes certain unrepatriated earnings and profits (“E&P”) of our foreign subsidiaries. In order to determine the Transition Tax we must determine, along with other information, the amount of our accumulated post 1986 E&P for our foreign subsidiaries, as well as the non U.S. income tax paid by those subsidiaries on such E&P. We were capable of reasonably estimating the Transition Tax and recorded a provisional Transition Tax expense of $86,707. However, we continue to gather information which may adjust the computed Transition Tax. Furthermore, certain provisions of the Act are ambiguous as to the details of the computation of the Transition tax, thereby requiring us to await further guidance from the U.S. Treasury Department and the Internal Revenue Service.

As a result of the Transition Tax the Company will be recording income as if the earnings had been repatriated. This income may be subject to additional taxation at the state level. We were able to make a reasonable estimate of the state taxation of these earnings and recorded a provisional expense of $1,423. While we were able to make a reasonable estimate of the impact of state taxation on the deemed repatriation of deferred foreign income, it may be affected by changes in the computation resulting from the gathering of additional information as well as future guidance provided by the state tax authorities.

U.S. Tax Reform required the mandatory deemed repatriation of certain undistributed earnings of the Company’s international subsidiaries as of December 31, 2017. If the earnings were distributed in the form of cash dividends, the Company would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. Under accounting standards (ASC 740) a deferred tax liability is not recorded for the excess of the tax basis over the financial reporting (book) basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria is met. On December 31, 2017, the Company's unremitted foreign earnings were $1,228,170. Pursuant to SAB 118, if an entity has completed all or portions of its assessment and has made a decision to repatriate and has the ability to reasonably estimate the effects of that assessment, that entity should record a provisional expense and disclose the status of its efforts. The Company is continuing to evaluate its indefinite assertions related to its foreign earnings, but expects to repatriate certain earnings which would be subject to withholding and foreign income tax. For amounts currently expected to be repatriated, the Company recorded a provisional expense of $6,932. These amounts are provisional in nature given the uncertainty related to the taxation of the distributions under the Act and the finalization of the Company’s analysis on its indefinite reinvestment assertion. During 2017, the Company repatriated a dividend from a portion of current year foreign earnings to the U.S. in the amount of $7,250. The dividend was not taxable in the U.S. as the amount was included within the Transition Tax.

Deferred income tax assets and liabilities at December 31 consist of the tax effects of temporary differences related to the following:



	2017			2016
Deferred tax assets:
Pension	$	13,255		$	27,410
Tax loss carryforwards	16,078			16,686
Inventory valuation	10,568			15,518
Other postretirement/postemployment costs	9,440			14,071
Accrued Compensation	5,743			10,121
Other	4,018			6,489
Valuation allowance	(10,223		)	(14,957		)
Total deferred tax assets	48,879			75,338
Deferred tax liabilities:
Depreciation and amortization	(82,422		)	(89,198		)
Goodwill	(9,440		)	(14,871		)
Other	(18,361		)	(12,282		)
Total deferred tax liabilities	(110,223		)	(116,351		)
Net deferred tax liabilities	$	(61,344	)	$	(41,013	)

In the first quarter of 2016, the Company prospectively adopted the amended guidance related to the balance sheet classification of deferred income taxes. The amended guidance removed the requirement to separate and classify deferred income tax liabilities and assets into current and non-current amounts and required an entity to now classify all deferred tax liabilities and assets as non-current. The provisions of the amended guidance were adopted on a prospective basis during the first quarter of 2016. Amounts related to deferred taxes in the balance sheets as of December 31, 2017 and 2016 are presented as follows:



	2017			2016
Non-current deferred tax assets	$	12,161		$	25,433
Non-current deferred tax liabilities	(73,505		)	(66,446		)
Net deferred tax liabilities	$	(61,344	)	$	(41,013	)

The standards related to accounting for income taxes require that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that the deferred tax asset will not be realized. Available evidence includes the reversal of existing taxable temporary differences, future taxable income exclusive of temporary differences, taxable income in carryback years and tax planning strategies.

Management believes that sufficient taxable income should be earned in the future to realize the net deferred tax assets principally in the United States. The realization of these assets is dependent in part on the amount and timing of future taxable income in the jurisdictions where deferred tax assets reside. The Company has tax loss carryforwards of $62,285; $3,224 which relates to U.S tax loss carryforwards which have carryforward periods up to 20 years for federal purposes and ranging from one to 20 years for state purposes; $46,255 of which relates to international tax loss carryforwards with carryforward periods ranging from one to 20 years; and $12,806 of which relates to international tax loss carryforwards with unlimited carryforward periods. In addition, the Company has tax credit carryforwards of $144 with remaining carryforward periods ranging from one year to 5 years. As the ultimate realization of the remaining net deferred tax assets is dependent upon future taxable income, if such future taxable income is not earned and it becomes necessary to recognize a valuation allowance, it could result in a material increase in the Company’s tax expense which could have a material adverse effect on the Company’s financial condition and results of operations.

Management is required to assess whether its valuation allowance analysis is affected by various components of the Act including the deemed mandatory repatriation of foreign income for the Transition Tax, future GILTI inclusions and changes to the NOL and FTC rules. Since the Company has recorded provisional amounts related to certain portions of the Act, any corresponding determination of the need for or change in a valuation allowance would be provisional.

A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate from continuing operations follows:



	2017		2016		2015
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes (net of federal benefit)	0.1		0.4		0.2
Transition Tax	45.0		—		—
U.S. Corporate Tax Rate change	2.1		—		—
Indefinite Reinvestment Assertion	3.5		—		—
Foreign operations taxed at different rates	(11.5	)	(10.9	)	(12.9	)
Foreign losses without tax benefit	1.5		0.7		1.1
Repatriation from current year foreign earnings	—		1.6		4.3
Tax withholding refund	—		—		(1.9	)
Tax Holidays	(0.8	)	(1.2	)	(3.2	)
Stock awards excess tax benefit	(1.2	)	(1.2	)	—
Swiss Legal Entity Reduction	(3.4	)	—		—
Audit Settlements	(2.7	)	—		—
Other	2.0		1.3		0.6
Consolidated effective income tax rate	69.6	%	25.7	%	23.2	%

Payment of the Transition Tax assessed is required over an eight-year period. The short-term portion of the Transition Tax payable, $6,937, has been included within Accrued Liabilities on the Consolidated Balance Sheet as of December 31, 2017. The long-term portion of the assessment, $79,770, is included as a Long-term tax liability on the Consolidated Balance Sheet and is payable as follows: $6,937 annually in 2019 through 2022; $13,005 in 2023; $17,341 in 2024 and $21,676 in 2025.

The Aerospace and Industrial Segments were previously awarded a number of multi-year tax holidays in both Singapore and China. Tax benefits of $1,540 ($0.03 per diluted share), $2,245 ($0.04 per diluted share) and $5,000 ($0.09 per diluted share) were realized in 2017, 2016 and 2015, respectively. These holidays are subject to the Company meeting certain commitments in the respective jurisdictions. Most tax holidays expired in 2017.

Income taxes paid globally, net of refunds, were $51,548, $40,842 and $31,895 in 2017, 2016 and 2015, respectively.

As of December 31, 2017, 2016 and 2015, the total amount of unrecognized tax benefits recorded in the consolidated balance sheet was $9,209, $13,320 and $10,634, respectively, which, if recognized, would have reduced the effective tax rate in prior years, with the exception of amounts related to acquisitions. A reconciliation of the unrecognized tax benefits for 2017, 2016 and 2015 follows:



	2017			2016		2015
Balance at January 1	$	13,320		$	10,634	$	8,560
Increase (decrease) in unrecognized tax benefits due to:
Tax positions taken during prior periods	1,141			—		1,691
Tax positions taken during the current period	778			117		—
Acquisition	—			2,569		598
Settlements	(4,162		)	—		—
Lapse of the applicable statute of limitations	(1,868		)	—		(215		)
Balance at December 31	$	9,209		$	13,320	$	10,634

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company recognized interest and penalties as a component of income taxes of $(257), $(337), and $616 in the years 2017, 2016 and 2015 respectively. The liability for unrecognized tax benefits includes gross accrued interest and penalties of $1,576, $1,838 and $1,923 at December 31, 2017, 2016 and 2015, respectively.

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by various taxing authorities, including the IRS in the U.S. and the taxing authorities in other major jurisdictions including China, Germany, Singapore, Sweden and Switzerland. With a few exceptions, tax years remaining open to examination in significant foreign jurisdictions include tax years 2010 and forward and for the U.S. include tax years 2014 and forward. The Company has received the audit report but not the final assessment in Germany for tax years 2010 to 2014 and is also under audit in several states for the period 2013 to 2014.