INCOME TAXES

For the twelve months ended December 31, 2016, the seven months ended December 31, 2015, and the twelve months ended May 31, 2015 and 2014, we were taxed on income (loss) from continuing operations at an effective tax rate of 20%, 34%, 36% and 35%, respectively. Our income tax provision (benefit) on continuing operations for twelve months ended December 31, 2016, the seven months ended December 31, 2015, and the twelve months ended May 31, 2015 and 2014, was $(3.1) million, $4.6 million, $22.8 million and $16.2 million, respectively, and includes federal, state and foreign taxes. The components of our tax provision (benefit) on continuing operations were as follows (in thousands):



	Current			Deferred			Total
Twelve months ended December 31, 2016:
U.S. Federal	$	(2,048	)	$	(5,262	)	$	(7,310	)
State & local	(1,338		)	206			(1,132		)
Foreign jurisdictions	4,529			820			5,349
	$	1,143		$	(4,236	)	$	(3,093	)
Seven months ended December 31, 2015:
U.S. Federal	$	(4	)	$	1,667		$	1,663
State & local	90			187			277
Foreign jurisdictions	2,128			505			2,633
	$	2,214		$	2,359		$	4,573
Twelve months ended May 31, 2015:
U.S. Federal	$	17,183		$	606		$	17,789
State & local	2,634			(141		)	2,493
Foreign jurisdictions	3,598			(1,087		)	2,511
	$	23,415		$	(622	)	$	22,793
Twelve months ended May 31, 2014:
U.S. Federal	$	11,933		$	358		$	12,291
State & local	1,759			319			2,078
Foreign jurisdictions	3,573			(1,706		)	1,867
	$	17,265		$	(1,029	)	$	16,236

The components of pre-tax income (loss) from continuing operations for the twelve months ended December 31, 2016, the seven months ended December 31, 2015, and the twelve months ended May 31, 2015 and 2014 were as follows (in thousands):



	Twelve Months Ended December 31,			Seven Months Ended December 31,		Twelve Months Ended May 31,
	2016			2015		2015		2014
Domestic	$	(25,488	)	$	6,627	$	51,784	$	38,214
Foreign	9,830			6,824		11,506		8,171
	$	(15,658	)	$	13,451	$	63,290	$	46,385

Income tax expense (benefit) attributable to income (loss) from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to pre-tax income (loss) from continuing operations as a result of the following (in thousands):



	Twelve Months Ended December 31,			Seven Months Ended December 31,			Twelve Months Ended May 31,
	2016			2015			2015			2014
Pre-tax income (loss) from continuing operations	$	(15,658	)	$	13,451		$	63,290		$	46,385
Computed income taxes at statutory rate	(5,481		)	$	4,710		$	22,153		$	16,235
State income taxes, net of federal benefit	(713		)	258			1,670			1,505
Foreign tax rate differential	(707		)	(648		)	(1,318		)	(1,004		)
Production activity deduction	—			(10		)	(136		)	(174		)
Deferred taxes on investment in foreign subsidiaries	1,777			(335		)	819			(1,133		)
Non-deductible expenses	871			335			513			510
Foreign tax credits	(2,302		)	(19		)	(11		)	(1,942		)
Other tax credits	(1,033		)	(446		)	(223		)	(244		)
Dividend from foreign subsidiaries	2,021			—			—			2,062
Valuation allowance	1,986			771			(394		)	414
Other	488			(43		)	(280		)	7
Total provision (benefit) for income tax on continuing operations	$	(3,093	)	$	4,573		$	22,793		$	16,236

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):



	December 31,
	2016			2015
Deferred tax assets:
Accrued compensation and benefits	$	12,559		$	4,023
Receivables	3,856			739
Inventory	3,539			552
Stock options	1,526			2,241
Foreign currency translation and other equity adjustments	6,359			5,189
Other accrued liabilities	5,811			1,473
Tax credit carry forward	4,769			—
Net operating loss carry forwards	25,061			1,420
Other	4,227			1,174
Deferred tax assets	67,707			16,811
Less: Valuation allowance	(13,168		)	(857		)
Deferred tax assets, net	54,539			15,954
Deferred tax liabilities:
Property, plant and equipment	(28,700		)	(11,840		)
Goodwill and intangible costs	(43,737		)	(10,496		)
Unremitted earnings of foreign subsidiaries	(51,087		)	(1,669		)
Prepaids	(775		)	(580		)
Other	(827		)	(499		)
Deferred tax liabilities	(125,126		)	(25,084		)
Net deferred tax liability	$	(70,587	)	$	(9,130	)

As of December 31, 2016, we had a valuation allowance of $13.2 million to reduce our deferred tax assets to an amount more likely than not to be recovered. This valuation allowance relates primarily to net operating loss carry forwards related to various foreign subsidiaries in the amount of $41.0 million. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider factors including the reversal of future taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment.

As of December 31, 2016, we had net foreign net operating loss carry forwards totaling $4.3 million that were expected to be realized in the future periods. A total of $3.4 million has an unlimited carry forward period and will therefore not expire.

At December 31, 2016, we also have net operating loss carry forwards for U.S. federal income tax purposes of $30.7 million, which are available, subject to certain limitations, to offset future taxable income, if any, through the year 2034. In addition, we have alternative minimum tax credit carry forwards of approximately $1.2 million, which are available to reduce future regular federal income taxes, if any, over an indefinite period.

At December 31, 2016, undistributed earnings of foreign operations totaling $16.4 million were considered to be permanently reinvested. We have recognized no deferred tax liability for the remittance of such earnings to the U.S. since it is our intention to utilize those earnings in the foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. Determination of the unrecognized deferred U.S. income tax liability is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits.

At December 31, 2016, we have established liabilities for uncertain tax positions of $0.9 million, inclusive of interest and penalties. To the extent these uncertainties are ultimately resolved favorably, the resulting reduction of recorded liabilities would have an effect on our effective tax rate. In accordance with ASC 740-10, our policy is to recognize interest and penalties related to unrecognized tax benefits through the tax provision.

We file income tax returns in the U.S. with federal and state jurisdictions as well as various foreign jurisdictions. With few exceptions, we are no longer subject to U.S. Federal, state and local or non-U.S. income tax examinations by tax authorities for years prior to 2015. We are currently in the examination phase of IRS audits for the tax years ended May 31, 2015 and December 31, 2015. The income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make certain subjective assumptions and judgments regarding our tax positions that may have a material effect on our results of operations, financial position or cash flows. We believe, however, that there is appropriate support for the income tax positions taken, and to be taken, on our returns, and that our accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

Set forth below is a reconciliation of the changes in our unrecognized tax benefits associated with uncertain tax positions (in thousands):



	Twelve Months Ended December 31,			Year Ended Seven Months Ended December 31,		Twelve Months Ended May 31,
	2016			2015		2015			2014
Balance at beginning of year	$	539		$	477	$	715		$	697
Acquisition of Furmanite uncertain tax positions	660			—		—			—
Additions based on current year tax positions	464			—		—			—
Additions based on tax positions related to prior years	96			62		68			110
Reductions based on tax positions related to prior years	(564		)	—		(306		)	—
Settlements	(337		)	—		—			—
Reductions resulting from a lapse of the applicable statute of limitations	—			—		—			(92		)
Balance at end of year	$	858		$	539	$	477		$	715

We believe that in the next twelve months it is reasonably possible that $0.4 million of liabilities recorded for tax uncertainties will be effectively settled.

Recent Legislation

The Protecting Americans From Tax Hikes Act of 2015 (the “PATH Act”) was signed into law on December 18, 2015 and included an extension of the 50% bonus depreciation allowance, with a phase down of the bonus percentage amount for later years. The extended provision for 50% bonus depreciation specifically applies to qualifying property placed in service after December 31, 2014 and before January 1, 2018. The acceleration of deductions for the year ended December 31, 2016 and the seven months ended December 31, 2015 on qualifying capital expenditures resulting from the bonus depreciation provision had no impact on our current period effective tax rate because the acceleration of deductions does not result in permanent differences between asset bases for financial reporting purposes and income tax purposes. However, the ability to accelerate depreciation deductions decreased our cash taxes for the year ended December 31, 2016 and the seven-month period ended December 31, 2015 by approximately $3.9 million and $1.7 million, respectively. Taking the accelerated tax depreciation will result in increased cash taxes in subsequent periods when the deductions for these capital expenditures would have otherwise been taken. The PATH Act also reinstated and made permanent the research and development credit retroactively from January 1, 2015. This change in legislation resulted in a permanent decrease in income tax expense for the year ended December 31, 2016 and seven months ended December 31, 2015 of $0.8 million and $0.4 million, respectively.