Income Taxes

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the "Tax Reform Act"). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on undistributed foreign earnings. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 provides a measurement period, not to exceed one year from the enactment of the Tax Reform Act. In accordance with SAB 118, the Company is required to reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting is complete. To the extent there are areas that are incomplete, but are capable of reasonable estimates, a provisional amount is required to be recorded by the Company. If a reasonable estimate is unable to be calculated, the Company is required to disclose why. The Company has recognized provisional tax impacts related to the one-time mandatory repatriation of foreign earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions, additional regulatory guidance from Treasury, the Internal Revenue Service and State Governments, and actions the Company may take as a result of the Tax Reform Act.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for 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 reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $4.5 million tax benefit in the Company's consolidated statement of operations for the year ended December 31, 2017.

The Tax Reform Act also provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits ("E&P") through the year ended December 31, 2017. The Company had an estimated $12.0 million of undistributed foreign E&P subject to the one-time mandatory repatriation and recognized a provisional $0.5 million of income tax expense in the Company's consolidated statement of operations for the year ended December 31, 2017. The Company's undistributed earnings for which it had previously made an indefinite reinvestment assertion under ASC 740-30 are approximately $6.2 million. The Company has not yet made a determination to remain permanently reinvested outside of the United States in response to the Tax Reform Act. As a result, the Company has not included a provisional tax cost related to this balance at this time as a reasonable estimate has not been determined.

The Tax Reform Act also made certain changes to section 162(m) of the Internal Revenue Code which impacts the deductibility of performance based stock compensation paid to executives after January 1, 2018. As a result, the Company has recorded a provisional reserve of $0.3 million against a portion of its deferred tax assets related to stock based compensation, as future realization of the assets is not reasonably assured.

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017. The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017. Starting January 1, 2018, the Company will account for BEAT in the period in which it is incurred to the extent this expectation changes.

The provision for income taxes consists of the following:



	For the years ended December 31,
In thousands	2017			2016			2015
Current:
Federal	$	11,526		$	15,376		$	18,291
State	956			1,513			1,204
Foreign	2,425			2,104			1,684
Total Current	$	14,907		$	18,993		$	21,179
Deferred:
Federal	$	(2,472	)	$	(594	)	$	1,583
State	256			601			1,696
Foreign	(717		)	(1,179		)	306
Total Deferred	(2,933		)	(1,172		)	3,585
Provision for income taxes	$	11,974		$	17,821		$	24,764

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory tax rate on earnings:



	For the years ended December 31,
	2017		2016		2015
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes	1.6		2.1		2.9
Valuation allowances for deferred tax assets, including state	0.1		1.3		1.3
Research and development credits	(1.0	)	(1.2	)	(1.5	)
Capitalized transaction costs	—		0.7		—
Domestic production activities deduction	(1.8	)	(2.7	)	(1.6	)
Stock based compensation	(4.4	)	(2.1	)	(0.2	)
German Cartel settlement	—		2.2		—
Foreign operations and intercompany financing	(2.8	)	(3.5	)	(1.3	)
Reserves for uncertain tax positions	(1.7	)	(0.1	)	(0.4	)
Repatriation of foreign undistributed earnings	1.3		—		—
Revaluation of deferred tax liabilities due to federal rate change	(7.3	)	—		—
Other	0.5		0.7		0.7
Effective income tax rate	19.5	%	32.4	%	34.9	%

In 2017, in addition to the Tax Reform Act, which favorably impacted the effective tax rate by a net $3.7 million, the effective tax rate of 19.5% was impacted by a favorable mix of taxable income generated from foreign operations and intercompany financing, resulting in a tax benefit of $1.7 million, net of $0.7 million of expense to correct a foreign tax error in prior years. The Company also recorded a tax benefit of $1.1 million attributable to the Domestic Production Activities Deduction, a tax benefit of $2.7 million related to stock based compensation and a tax benefit of $1.5 million attributable to the release of certain reserves for uncertain tax positions from the settlement of the IRS tax audit that closed in the third quarter of 2017. These favorable adjustments were partially offset by tax expense of $0.3 million against certain deferred tax assets in China, as future realization of the assets is not reasonably assured.

In 2016, the effective tax rate of 32.4% was positively impacted by a favorable mix of taxable income generated from countries with lower tax rates compared to that of the United States, resulting in a tax benefit of $1.3 million. The Company also recorded a tax benefit of $1.5 million attributable to the Domestic Production Activities Deduction and a tax benefit of $1.1 million related to stock based compensation. These favorable adjustments were partially offset by tax expense of $1.2 million related to a nondeductible German Cartel settlement and a net increase in valuation allowance against certain deferred tax assets of $0.7 million, primarily related to tax valuation allowances of $0.5 million recorded against certain net deferred tax assets in the Netherlands and China, as future realization of the assets is not reasonably assured.

In 2015, the effective tax rate of 34.9% was positively impacted by a favorable mix of taxable income generated from countries with lower tax rates compared to that of the United States, resulting in a tax benefit of $1.0 million. The Company also recorded a tax benefit of $1.2 million attributable to the Domestic Production Activities Deduction and a tax benefit of $1.1 million related to research and development credits. These favorable adjustments were partially offset by tax expense of $0.9 million related to a net increase in valuation allowance against certain deferred tax assets and by a $0.6 million reduction to state deferred tax assets as a result of state tax law changes that led the Company to deem the asset unrealizable in future periods. The net increase in valuation allowance against certain deferred tax assets of $0.9 million in 2015 was primarily related to tax valuation allowances of $0.8 million recorded against certain net deferred tax assets in the Netherlands and China, as future realization of the assets is not reasonably assured.

The Company maintains valuation allowances against certain deferred tax assets where realization is not reasonably assured. The Company evaluates the likelihood of the realization of deferred tax assets and reduces the carrying amount to the extent it believes a portion will not be realized. The Company’s effective tax rates in future periods could be affected by earnings being lower or higher than anticipated in countries where tax rates differ from the United States federal rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, completion of acquisitions or divestitures, changes in tax rates or tax laws and the outcome of tax audits.

The following schedule presents net current and net long-term deferred tax assets and liabilities by tax jurisdiction as of December 31, 2017 and 2016:



	2017				2016
	Deferred Tax Assets				Deferred Tax Assets
In thousands	Current		Long-term		Current		Long-term
Federal	$	—	$	—	$	—	$	—
State	—		—		—		—
Foreign	—		1,146		—		248
Totals	$	—	$	1,146	$	—	$	248



	2017				2016
	Deferred Tax Liabilities				Deferred Tax Liabilities
In thousands	Current		Long-term		Current		Long-term
Federal	$	—	$	7,288	$	—	$	7,705
State	—		424		—		531
Foreign	—		7,002		—		7,613
Totals	$	—	$	14,714	$	—	$	15,849

Net deferred tax assets (liabilities) consist of the following as of December 31, 2017 and 2016:



	December 31,
In thousands	2017			2016
Deferred tax assets:
Accounts receivable	$	132		$	225
Inventories	164			743
Net operating loss carryforwards	5,339			3,851
Other accrued liabilities	1,053			4,592
Pension	1,482			3,545
Tax Credits	1,735			1,687
Total deferred tax assets	9,905			14,643
Deferred tax liabilities:
Intangible assets	2,073			4,224
Property, plant and equipment	15,691			21,117
Total deferred tax liabilities	17,764			25,341
Valuation allowance	5,709			4,903
Net deferred tax liabilities	$	(13,568	)	$	(15,601	)

For the years ended December 31, 2017, 2016 and 2015, income before income taxes was derived from the following sources:



	For the years ended December 31,
In thousands	2017		2016		2015
United States	$	54,212	$	53,356	$	64,923
Foreign	7,107		1,583		6,100
Total income before income taxes	$	61,319	$	54,939	$	71,023

At December 31, 2017, the Company had approximately $4.0 million of state net operating loss carryforward which expires in 2035 and 2036. The Company has not recorded a deferred tax asset for this carryforward as the Company anticipates paying a non-income based franchise tax for the foreseeable future in the applicable jurisdiction. In addition, at December 31, 2017, the Company had $2.2 million of state tax credit carry forwards that expire between 2018 and 2033. As of December 31, 2017, the Company has provided a valuation reserve against $2.2 million of its state tax credit carryforwards. The Company also has $6.0 million of foreign net operating loss carryovers in China, $5.2 million of net operating loss carryovers in Germany and $10.0 million of net operating loss carryovers in the Netherlands. The Netherlands’ net operating losses expire between the years 2018 and 2025 and the China net operating losses expire between the years 2018 and 2022. The Company has recorded a full valuation allowance against all of its net operating losses in the Netherlands and China, as future realization is not reasonably assured. The Company evaluates and weighs the positive and negative evidence present at each period. The Company will continue to monitor the realization criteria based on future operating results.

The Company and its subsidiaries file a consolidated federal income tax return, as well as returns required by various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including such major jurisdictions as the United States, China, France, Germany, Hong Kong, the Netherlands, Canada and the United Kingdom. Within the next fiscal year, the Company expects to conclude certain income tax matters through the year ended December 31, 2014 and it is reasonably expected that net unrecognized benefits of $0.2 million may be recognized. The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized is $2.5 million as of December 31, 2017. However, $1.5 million of the unrecognized tax benefits, if recognized, would be offset in pre-tax income by the reversal of indemnification assets due to the Company. The Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2013, and non-U.S. income tax examinations for years before 2003.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



In thousands	2017			2016
Unrecognized tax benefits at beginning of year	$	3,219		$	1,657
Decreases relating to positions taken in prior periods	—			(63		)
Increases relating to positions taken in prior periods	221			—
Increases relating to current period	475			1,678
Decreases due to settlements with tax authorities	(1,372		)	—
Decreases due to lapse of statute of limitations	(17		)	(53		)
Unrecognized tax benefits at end of year	$	2,526		$	3,219

The Company recognizes the interest accrued and the penalties related to unrecognized tax benefits as a component of tax expense.