Income Taxes

12 Months Ended

Dec. 31, 2018

14. Income Taxes

Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory accounting methods, as described in Notes 1 and 6.

Income before income taxes, as shown in the accompanying Consolidated Statements of Operations, includes the following components for the years ended December 31, 2018 and 2017:


	Year Ended December 31,
	2018		2017
Domestic	$	(34,608)	$	4,081
Foreign	7,897		5,970
(Loss) income from operations, before income taxes	$	(26,711)	$	10,051

Significant components of the provision for income taxes for the years ended December 31, 2018 and 2017 are as follows:


	Year Ended December 31,
	2018		2017
Current:
Federal	$	2,208	$	2,630
State	172		822
Foreign	3,675		2,460
Total current	6,055		5,912
Deferred:
Federal	(55)		(798)
State	(8)		17
Foreign	(1,535)		(441)
Total deferred	(1,598)		(1,222)
Total income tax expense	$	4,457	$	4,690

The reconciliation of income tax computed at statutory rates to income tax expense for the years ended December 31, 2018 and 2017 is as follows:


	Year Ended December 31,
	2018						2017
	Amount		Percent		Amount		Percent
Statutory rate	$	(5,609)	21.0	%	$	3,518	35.0	%
Foreign tax rate differential	156		(0.6)		(641)		(6.4)
State income taxes, net of federal benefit	(706)		2.6		368		3.7

Non-deductible expenses	261		(1.0)		323		3.2
Domestic production activities deduction	—		—		(405)		(4.0)
U.S. Tax Cuts and Jobs Act: remeasurement of deferred taxes	—		—		9,573		95.2
U.S. Tax Cuts and Jobs Act: deferred foreign earnings	—		—		4,009		39.9
Global intangible low-taxed income, net of tax credits	171		(0.6)		—		—
Income tax credits	(633)		2.4		(123)		(1.2)
Nondeductible executive compensation	351		(1.3)		—		—
Tax on unremitted foreign earnings	149		(0.6)		(6,712)		(66.8)
Change in valuation allowance	10,226		(38.3)		(5,354)		(53.3)
Other	91		(0.3)		134		1.3
Total income tax expense / Effective rate	$	4,457	(16.7)	%	$	4,690	46.7	%

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:


	December 31,
	2018		2017
Deferred tax assets:
Goodwill and other intangibles	$	18,756	$	19,324
Accrued settlement	11,933		—
Pension and post-retirement liability	1,524		1,532
Warranty reserve	346		2,060
Deferred compensation	2,940		2,385
Contingent liabilities	1,663		1,669
Net operating loss / tax credit carryforwards	1,602		1,816
Other	858		1,442
Total deferred tax assets	39,622		30,228
Less: valuation allowance	(30,707)		(19,553)
Net deferred tax assets	8,915		10,675
Deferred tax liabilities:
Goodwill and other intangibles	(5,020)		(5,721)
Depreciation	(6,625)		(7,079)
Unremitted earnings of foreign subsidiaries	(160)		(1,220)
Inventories	(2,125)		(3,056)
Other	(272)		(513)
Total deferred tax liabilities	(14,202)		(17,589)
Net deferred tax liabilities	$	(5,287)	$	(6,914)

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2018, we have completed our accounting for the tax effects of enactment of the Act. The tax benefit related to the remeasurement of certain deferred tax assets and liabilities was $12, and was included as a component of income tax expense from continuing operations. The tax expense related to the one-time transition tax on mandatory deemed repatriation of foreign earnings, and related items, was $3,225 based on cumulative foreign earnings of $65,680 and was also included as a component of income tax expense from continuing operations. In addition, the Company has elected to record global intangible low-taxed income (“GILTI”) as period costs if and when incurred.

Each quarter, management reviews operations and liquidity needs in each jurisdiction to assess the Company’s intent to reinvest foreign earnings outside of the United States. As of December 31, 2018, management determined that cash balances of its Canadian and United Kingdom subsidiaries exceeded projected capital needs by $3,200. Management does not intend for such amounts to be permanently reinvested outside of the United States and has therefore accrued foreign withholding taxes of $160 as of December 31, 2018. It is management's intent and practice to indefinitely reinvest other undistributed earnings outside of the United States. Determination of the amount of any unrecognized deferred income tax liability associated with these undistributed earnings is not practicable because of the complexities of the hypothetical calculation.

A valuation allowance is required to be established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company has considered all available evidence, both positive and negative, in assessing the need for a valuation allowance in each jurisdiction.

The negative evidence considered in evaluating U.S. deferred tax assets included cumulative financial losses over the three-year period ended December 31, 2018 and the inability to consistently achieve forecasted results. Positive evidence considered included the composition and reversal patterns of existing taxable and deductible temporary differences between financial reporting and tax, as well as the composition of financial losses. Cumulative financial losses over the three-year period ended December 31, 2018 were a significant piece of objective negative evidence, and typically limit a Company’s ability to consider other subjective evidence. Based on our evaluation, a valuation allowance of $30,707 was recorded as of December 31, 2018 to recognize only the amount of deferred tax assets more likely than not to be realized. The amount of deferred tax assets considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative financial losses is no longer present, and additional weight is given to subjective evidence such as our projections for growth.

As of December 31, 2018 and 2017, the tax benefit of net operating loss carryforwards available for state income tax purposes was $1,253 and $1,708, respectively. The state net operating loss carryforwards will expire in various years through 2038. We believe it is more likely than not that the tax benefit from state operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $1,253 against deferred tax assets related to state operating loss carryforwards as of December 31, 2018.

As of December 31, 2018, the Company has net operating loss carryforwards in certain foreign jurisdictions of $1,858, which may be carried forward indefinitely. The foreign jurisdictions have incurred cumulative financial losses over the three-year period ended December 31, 2018 and have projected future taxable losses. We believe it is more likely than not that the tax benefit from these loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $612, collectively, against deferred tax assets in foreign jurisdictions as of December 31, 2018.

The determination to record or not record a valuation allowance involves management judgment, based on the consideration of positive and negative evidence available at the time of the assessment. Management will continue to assess the realization of its deferred tax assets based upon future evidence, and may record adjustments to valuation allowances against deferred tax assets in future periods, as appropriate, that could materially impact net income.

The following table provides a reconciliation of unrecognized tax benefits as of December 31, 2018 and 2017:


	December 31,
	2018		2017
Unrecognized tax benefits at beginning of period:	$	599	$	619
Increases based on tax positions for prior periods	—		—
Decreases based on tax positions for prior periods	(118)		(20)

Balance at end of period	$	481	$	599

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $481 as of December 31, 2018. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. As of December 31, 2018 and 2017, the Company had accrued interest and penalties related to unrecognized tax benefits of $398 and $500, respectively. As of December 31, 2018, the Company does not expect any material increases or decreases to its unrecognized tax benefits within the next 12 months. Ultimate realization of these tax benefits is dependent upon the occurrence of certain events, including the completion of audits by tax authorities and expiration of statutes of limitations.

The Company files income tax returns in the United States and in various state, local, and foreign jurisdictions. The Company is subject to federal income tax examinations for the 2015 period and thereafter. With respect to the state, local, and foreign filings, certain entities of the Company are subject to income tax examinations for the 2014 period and thereafter.