Income Taxes

On December 22, 2017, the Act was signed into law. The Act, among other things, reduces the U.S. corporate income tax rate to 21% starting in 2018 and creates a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the Act, the Company revalued the ending net deferred tax assets and liabilities at December 31, 2017 and recorded a provisional charge of $48.7 million, included in Income tax expense on the Company’s Consolidated Statement of Operations for 2017.

The Act provides for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary E&P through 2017. Based on an analysis of E&P, no income tax expense was recorded in the Company’s Consolidated Statement of Operations for 2017.

On December 22, 2017, the SEC staff issued SAB 118 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. The Company has recognized the revaluation of deferred tax assets and liabilities and included these amounts in the consolidated financial statements for 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Act. The accounting is expected to be completed when the Company's 2017 U.S. corporate income tax return is filed in 2018.

Income (loss) from continuing operations before income taxes and equity income as reported on the Consolidated Statements of Operations consists of the following:



(In thousands)	2017		2016			2015
U.S.	$	5,694	$	(99,939	)	$	16,169
International	89,757		20,468			18,646
Total income (loss) from continuing operations before income taxes and equity income	$	95,451	$	(79,471	)	$	34,815

Income tax expense as reported on the Consolidated Statements of Operations consists of the following:



(In thousands)	2017		2016			2015
Income tax expense (benefit):
Currently payable:
U.S. federal	$	4,107	$	(4,088	)	$	408
U.S. state	372		365			546
International	21,975		18,014			23,095
Total income taxes currently payable	26,454		14,291			24,049
Deferred U.S. federal	46,470		(8,195		)	2,651
Deferred U.S. state	1,142		2,238			812
Deferred international	9,737		(1,697		)	166
Total income tax expense	$	83,803	$	6,637		$	27,678

Cash payments for income taxes were $24.9 million, $14.6 million and $18.9 million for 2017, 2016 and 2015, respectively.

A reconciliation of the normal expected statutory U.S. federal income tax expense (benefit) to the actual Income tax expense as reported on the Consolidated Statements of Operations is as follows:



(In thousands)	2017			2016			2015
U.S. federal income tax expense (benefit)	$	33,408		$	(27,815	)	$	12,185
U.S. state income taxes, net of federal income tax benefit	786			(355		)	496
U.S. domestic manufacturing deductions and credits	(1,210		)	(661		)	(2,504		)
Capital loss on sale of equity interest in Brand with no realizable tax benefit	—			16,106			—
Difference in effective tax rates on international earnings and remittances	675			2,006			5,095
Uncertain tax position contingencies and settlements	(1,517		)	(1,886		)	1,416
Changes in realization on beginning of the year deferred tax assets	2,758			1,978			923
Forward Loss Provisions in SBB Contract with no realizable tax benefits	—			15,768			—
Restructuring and impairment charges with no realizable tax benefits	—			—			8,508
U.S. non-deductible expenses	664			724			874
(Income) loss related to the Infrastructure Transaction	—			(644		)	580
Impact of U.S. tax reform	48,680			—			—
Cumulative effect of change in statutory tax rates/laws	(153		)	(388		)	340
Income from unconsolidated entities	—			2,098			62
Other, net	(288		)	(294		)	(297		)
Total income tax expense	$	83,803		$	6,637		$	27,678

At December 31, 2017, 2016 and 2015, the Company's annual effective income tax rate on income from continuing operations was 87.8%, (8.4)% and 79.5%, respectively.

The Company’s international income from continuing operations before income taxes and equity income (loss) was

$89.8 million and $20.5 million for 2017 and 2016, respectively. This includes the estimated forward loss provision related to the SBB contracts of $45.1 million in 2016, on which no tax benefit was recognized because the losses occurred in entities where it is not more likely than not that the tax benefit will be realized. In 2017, because of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Act, the Company revalued its ending net deferred tax asset related to the outside basis difference in its international branches and recognized a provisional $6.5 million tax expense in the Company’s Consolidated Statement of Operations for 2017. The increased international income from continuing operations, the additional valuation allowance on the deferred tax assets in certain jurisdictions and the provisional tax expense because of the Act increased the Company’s total international income tax expense to $31.7 million in 2017 from $16.3 million in 2016.

The Company’s differences in effective tax rates for 2017 and 2016 on international earnings and remittances was $0.7 million and $2.0 million, respectively, which included U.S tax on international deemed remittances of $6.4 million and $7.3 million, respectively. This decrease is primarily due to the change in the mix of earnings between jurisdictions.

The Company's income from continuing operations before income taxes and equity income attributable to the U.S. was $5.7 million for 2017 compared to loss from continuing operations before income taxes and equity attributable to the U.S. of $99.9 million for 2016. In 2017, due to the impact of the Act, the Company recognized a $14.9 million provisional tax expense because of revaluing the U.S. ending net deferred tax assets from 35% to the newly enacted U.S. corporate income tax rate of 21%, and established a provisional valuation allowance on the full amount of foreign tax credit carryforward of $27.3 million due to the impact the Act had on future foreign source income. In 2016, a valuation allowance of $16.1 million was established for the deferred tax asset resulting from the capital loss on the sale of the Company's equity interest in Brand, because it is not more likely than not that the benefit will be realized in the future. However, the net operating loss created by the loss on early extinguishment of debt was realized through a carryback to prior years with taxable income.

The tax effects of the temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:



	2017					2016
(In thousands)	Asset			Liability		Asset			Liability
Depreciation and amortization	$	6,616		$	—	$	—		$	10,089
Expense accruals	17,690			—		23,300			—
Inventories	4,390			—		6,611			—
Provision for receivables	649			—		1,015			—
Deferred revenue	—			979		—			1,852
Operating loss carryforwards	90,193			—		80,178			—
Foreign tax credit carryforwards	27,256			—		26,347			—
Capital loss carryforwards	11,011			—		18,163			—
Pensions	47,153			—		74,506			—
Currency adjustments	7,160			—		17,597			—
Deferred financing costs	—			2,135		—			—
Post-retirement benefits	403			—		760			—
Stock based compensation	4,761			—		5,812			—
Other	7,684			—		7,206			—
Subtotal	224,966			3,114		261,495			11,941
Valuation allowance	(174,227		)	—		(146,097		)	—
Total deferred income taxes	$	50,739		$	3,114	$	115,398		$	11,941

The deferred tax asset and liability balances recognized on the Consolidated Balance Sheets at December 31, 2017 and 2016 are as follows:



(In thousands)	2017		2016
Deferred income tax assets	$	51,574	$	106,311
Other liabilities	3,949		2,854

At December 31, 2017, the tax-effected amount of net operating loss carryforwards ("NOLs") totaled $90.2 million. Tax-effected NOLs from international operations are $73.5 million. Of that amount, $60.5 million can be carried forward indefinitely and $13.0 million will expire at various times between 2018 and 2038. Tax-effected U.S. state NOLs are $16.7 million. Of that amount, $3.9 million expire at various times between 2018 and 2022, $2.9 million expire at various times between 2023 and 2027, $4.3 million expire at various times between 2028 and 2032 and $5.6 million expire at various times between 2033 and 2038. At December 31, 2017, the tax-effected amount of capital loss carryforwards totaled $11.0 million which expire between 2018 and 2021.

Valuation allowances of $174.2 million and $146.1 million at December 31, 2017 and 2016, respectively, related principally to deferred tax assets for pension liabilities, NOLs, foreign tax credit carryforwards, capital loss carryforwards and foreign currency translation that are uncertain as to realizability. In 2017, the Company recorded a valuation allowance of $27.3 million related to foreign tax credit carryforwards due to the impact of the Act, an increase from foreign currency translation in the amount of $10.1 million and a net increase of $6.9 million related to losses in certain jurisdictions where the Company determined that it is more likely than not that these assets will not be realized. This was partially offset by a reduction related to current year pension adjustments recorded through Accumulated other comprehensive loss and a decrease related to U.S., Argentina and Belgium tax rate changes. In 2016, the Company recorded a valuation allowance of $16.1 million related to capital loss on sale of the Company's equity interest in Brand, $13.5 million related to estimated forward loss provisions related to the SBB contracts and current year pension adjustments of $19.2 million recorded through Accumulated other comprehensive loss. This was partially offset by the reduction from the effects of foreign currency translation adjustments and the decrease related to U.K. and France tax rate changes.

Based on an analysis of E&P for the Company's foreign subsidiaries, no toll charge has been recorded in 2017 related to the Act. Given the complexities of the E&P calculations and the guidance provided by SAB 118, the Company will continue to analyze this provisional amount until the Company's U.S. tax return is filed in 2018. The Company does not anticipate a change in the indefinite reinvestment assertion, as a result of the Act. However, the Company considers the indefinite reinvestment assertion to be provisional and will continue to analyze the impact of the Act on this assertion during the SAB 118 measurement period.

The Company recognizes accrued interest and penalty expense related to unrecognized income tax benefits in income tax expense. During 2016, the Company recognized an income tax benefit of $1.7 million, for interest and penalties primarily due to the expiration of statutes of limitation and resolution of examinations. The Company did not recognize any income tax expense or benefit for interest and penalties during 2017 and 2015. The Company has accrued $1.1 million, $1.1 million and $2.8 million for the payment of interest and penalties at December 31, 2017, 2016 and 2015 respectively.

A reconciliation of the change in the unrecognized income tax benefits balance from January 1, 2015 to December 31, 2017 is as follows:



(In thousands)	Unrecognized Income Tax Benefits			Deferred Income Tax Benefits			Unrecognized Income Tax Benefits, Net of Deferred Income Tax Benefits
Balances, January 1, 2015	$	12,456		$	(112	)	$	12,344
Additions for tax positions related to the current year (includes currency translation adjustment)	(483		)	(2		)	(485		)
Additions for tax positions related to prior years (includes currency translation adjustment)	1,249			(4		)	1,245
Other reductions for tax positions related to prior years	(7,846		)	—			(7,846		)
Statutes of limitation expirations	(173		)	59			(114		)
Settlements	(42		)	15			(27		)
Balance at December 31, 2015	5,161			(44		)	5,117
Additions for tax positions related to the current year (includes currency translation adjustment)	744			(1		)	743
Additions for tax positions related to prior years (includes currency translation adjustment)	358			(14		)	344
Other reductions for tax positions related to prior years	(837		)	—			(837		)
Statutes of limitation expirations	(817		)	27			(790		)
Settlements	(27		)	2			(25		)
Balance at December 31, 2016	4,582			(30		)	4,552



(In thousands)	Unrecognized Income Tax Benefits			Deferred Income Tax Benefits			Unrecognized Income Tax Benefits, Net of Deferred Income Tax Benefits
Additions for tax positions related to the current year (includes currency translation adjustment)	658			(2		)	656
Other reductions for tax positions related to prior years	(321		)	—			(321		)
Statutes of limitation expirations	(1,296		)	1			(1,295		)
Total unrecognized income tax benefits that, if recognized, would impact the effective income tax rate at December 31, 2017	$	3,623		$	(31	)	$	3,592

Included in the other reductions for tax positions related to prior year for 2015 is $7.8 million resulting from the adjustment by a foreign tax authority as a result of tax audit. The unrecognized tax benefit was related to a net operating loss carryforward that carried a full valuation allowance. As a result, the related deferred tax asset was decreased by the same amount.

Within the next twelve months, it is reasonably possible that up to $1.2 million of unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.

The Company files income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. With few exceptions, the Company is no longer subject to U.S and international income tax examinations by tax authorities through 2011.