Income Taxes

Earnings before income taxes consist of the following:



	Years Ended December 31,
	2017		2016		2015
U.S.	$	9,315	$	25,746	$	(141	)
Non-U.S.	30,938		31,499		12,402
Total	$	40,253	$	57,245	$	12,261

Significant components of income tax provision/(benefit) are as follows:



	Years Ended December 31,
	2017			2016			2015
Current:
U.S.	$	1,635		$	(1,312	)	$	329
Non-U.S.	7,150			13,729			12,482
Total Current	8,785			12,417			12,811
Deferred:
U.S.	17,597			13,245			(15,795		)
Non-U.S.	(577		)	(2,797		)	8,291
Total Deferred	17,020			10,448			(7,504		)
Total provision for income taxes	$	25,805		$	22,865		$	5,307

Significant components of our deferred tax assets and liabilities are as follows:



	As of December 31,
	2017			2016
Post-retirement benefits	$	1,160		$	1,798
Inventory reserves	1,128			1,834
Loss carry-forwards	5,401			7,279
Credit carry-forwards	10,793			22,743
Nondeductible accruals	7,062			11,629
Research expenditures	20,002			31,380
Stock compensation	1,803			2,681
Foreign exchange loss	1,373			1,780
Other	220			648
Gross deferred tax assets	48,942			81,772
Depreciation and amortization	9,819			9,960
Pensions	12,387			16,024
Subsidiaries' unremitted earnings	1,662			1,292
Gross deferred tax liabilities	23,868			27,276
Net deferred tax assets	25,074			54,496
Deferred tax asset valuation allowance	(8,182		)	(11,024		)
Total net deferred tax assets	$	16,892		$	43,472

The long-term deferred tax assets and long-term deferred tax liabilities are as follows below:



	As of December 31,
	2017		2016
Non-current deferred tax assets	20,694		45,839
Non-current deferred tax liabilities	(3,802	)	(2,367	)
Total net deferred tax assets	16,892		43,472

In 2016, we elected to early adopt ASU 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", on a retrospective basis allowing for all deferred tax items to be classified as non-current. Certain non-current deferred tax assets and non-current deferred tax liabilities were not netted since these items relate to different tax jurisdictions.

At each reporting date, we weigh all available positive and negative evidence to assess whether it is more-likely-than-not that the Company's deferred tax assets, including deferred tax assets associated with accumulated loss carryforwards and tax credits in the various jurisdictions in which it operates, will be realized. As of December 31, 2017, and 2016, we recorded deferred tax assets related to certain U.S. state and non-U.S. income tax loss carryforwards of $5,401 and $7,279, respectively, and U.S. and non-U.S. tax credits of $10,793 and $22,743, respectively. The deferred tax assets expire in various years primarily between 2022 and 2035.

The Company remeasured its U.S. deferred tax assets and liabilities at the applicable federal tax rate of 21% in accordance with the Tax Cuts and Jobs Act of 2017. The remeasurement resulted in a total decrease in these assets of $6,267.

Generally, we assess if it is more-likely-than-not that our net deferred tax assets will be realized during the available carry-forward periods. As a result, we have determined that valuation allowances of $8,182 and $11,024 should be provided for certain deferred tax assets at December 31, 2017, and 2016, respectively. As of December 31, 2017, the valuation allowances relate to certain U.S. state and non-U.S. loss carry-forwards and certain U.S. state tax credits that management does not anticipate will be utilized. The increase in the valuation allowance from December 31, 2015, to December 31, 2016, is primarily due to the June 2016 restructuring activities and changes in management's judgment regarding realizability of the related assets.

No valuation allowance was recorded in 2017 against the U.S. federal foreign tax credit carryforwards of $3,711, which expire in 2024 and 2025 as well as the research and development tax credits of $7,249. which expire in varying amounts between 2022 and 2037. We assessed the anticipated realization of those tax credits utilizing future taxable income projections. Based on those projections, management believes it is more-likely-than-not that we will realize the benefits of these credit carryforwards.

The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate:



	Years Ended December 31,
	2017		2016		2015
Taxes at the U.S. statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	1.1	%	1.4	%	(0.1	)%
Non-U.S. income taxed at rates different than the U.S. statutory rate	(9.0	)%	(7.5	)%	(16.7	)%
Foreign source income, net of associated foreign tax credits	0.1	%	5.3	%	6.9	%
Benefit of tax credits	(1.4	)%	(1.0	)%	(4.6	)%
Non-deductible expenses	1.5	%	0.7	%	1.3	%
Stock compensation - excess tax benefits	(1.5	)%	(0.8	)%	—	%
Adjustment to valuation allowances	(4.4	)%	3.8	%	37.8	%
Benefit from prior period foreign tax credits	—	%	—	%	(133.0	)%
Change in unrecognized tax benefits	2.0	%	3.3	%	59.5	%
Impacts of unremitted foreign earnings	0.9	%	0.6	%	60.8	%
Impacts related to the 2017 Tax Cuts and Jobs Act	44.7	%	—	%	—	%
Other	(4.9	)%	(0.9	)%	(3.6	)%
Effective income tax rate	64.1	%	39.9	%	43.3	%

During 2015, we changed our position regarding the U.S. federal tax treatment of foreign taxes paid. We claimed a foreign tax credit on our 2014 and 2015 U.S. federal income tax returns and filed amended tax returns for 2006 through 2013 in order to claim non-U.S. taxes paid as a credit against income tax, rather than as a deduction. The filing of the amended returns reduced the deferred tax asset for federal loss carryforwards by $8,214, and increased our available foreign tax credit carryforward by $24,519, resulting in a net tax benefit of $16,305, recorded in 2015.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the Act in its year-end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing, and as a result has recorded $18,001 as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $6,267. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $11,734.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $6,267 of deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $11,734 of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings are provisional amounts and reasonable estimates at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

In general, outside of Canada and the United Kingdom, it is our historical practice to permanently reinvest the earnings of our non-U.S. subsidiaries in those operations. Although we plan to permanently reinvest the earnings of our Chinese facilities outside the U.S., we have determined that we will not maintain those earnings in China in order to mitigate future currency risk. Therefore, as of December 31, 2017, a provision for the expected tax expense on repatriation of those earnings of $370 was recorded. However, as a result of the Act, we can repatriate our cumulative undistributed foreign earnings to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation charge. We will continue to evaluate whether to repatriate all or a portion of the cumulative undisributed foreign earnings based on expansion needs and as circumstances change. We are still evaluating whether to change our indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as a change in estimate related to the enactment of the Act.

The Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed in general at a 10.5% tax rate. Because of the complexity of these provisions, we have not completed our analysis of their potential impact to our deferred tax assets and liabilities, or whether to (i) account for GILTI as a component of tax expense in the period in which the company is subject to the rules (the “period cost method”), or (ii) account for GILTI in the company’s measurement of deferred taxes (the “deferred method”). We continue to evaluate the impacts of GILTI as we further understand its implications as well as related, and yet to be issued, regulatory rules, regulations and interpretations.

We recognize the financial statement benefit of a tax position when it is more-likely-than-not, based on its technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit recognized in the financial statements. As of December 31, 2017, we have approximately $7,306 of unrecognized tax benefits, which if recognized, would impact the effective tax rate. We do not anticipate any significant changes in our unrecognized tax benefits within the next 12 months.

A reconciliation of the beginning and ending unrecognized tax benefits is provided below:



	2017			2016
Balance at January 1	$	12,347		$	11,008
Increase related to current year tax positions	—			1,088
Increase related to prior year tax positions	1,290			251
Decrease related to settlements with taxing authorities	(6,331		)	—
Balance at December 31	$	7,306		$	12,347

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2017, and 2016, $2,596 and $1,772, respectively, of interest and penalties were accrued.

We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2013 through 2016; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2008 through 2016 based on local statutes.