INCOME TAXES

Consolidated income before income taxes consisted of:



(Dollars in thousands)	2016		2015		2014
Domestic	$	10,888	$	14,832	$	9,604
International	71,392		51,341		71,620
Total	$	82,280	$	66,173	$	81,224

Foreign earnings repatriated to the U.S. previously reported as U.S. income have been reclassified in 2014 to conform to the current year presentation.

The income tax expense in the consolidated statements of operations consisted of:



(Dollars in thousands)	Current		Deferred			Total
2016
Domestic	$	2,078	$	3,376		$	5,454
International	24,537		4,006			28,543
Total	$	26,615	$	7,382		$	33,997

2015
Domestic	$	993	$	4,272		$	5,265
International	15,192		(604		)	14,588
Total	$	16,185	$	3,668		$	19,853

2014
Domestic	$	2,205	$	6,984		$	9,189
International	17,172		1,451			18,623
Total	$	19,377	$	8,435		$	27,812

Deferred tax assets and liabilities as of December 31, 2016 and 2015, were comprised of the following:



(Dollars in thousands)	2016			2015
Deferred tax assets
Accrued employee benefits and compensation	9,899			9,284
Postretirement benefit obligations	3,335			5,434
Tax loss and credit carryforwards	7,146			9,318
Reserves and accruals	6,361			6,225
Other	2,792			3,474
Total deferred tax assets	29,533			33,735
Less deferred tax asset valuation allowance	(6,388		)	(6,202		)
Total deferred tax assets, net of valuation allowance	23,145			27,533
Deferred tax liabilities
Depreciation and amortization	14,965			17,492
Unremitted earnings	7,239			1,150
Other	190			187
Total deferred tax liabilities	22,394			18,829
Net deferred tax asset	$	751		$	8,704

At December 31, 2016, the Company had state net operating loss carryforwards ranging from $0.4 million to $6.4 million in various state taxing jurisdictions, which expire between 2017 and 2036. We also had approximately $8.0 million of credit carryforwards in Arizona, which will expire between 2017 and 2031, and a $1.3 million capital loss carryforward, which will expire in 2017. We believe that it is more likely than not that the benefit from the state net operating loss carryforwards, state credits and capital loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $6.4 million relating to these carryforwards.

We currently have approximately $6.3 million of foreign tax credits that begin to expire in 2021, $7.0 million of research and development credits that begin to expire in 2026, and $0.5 million of minimum tax credits that can be carried forward indefinitely.

As a result of certain realization requirements, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2016 for which the benefit thereof was postponed by tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Those deferred tax assets include foreign tax credits of $6.3 million, research and development credits of $6.7 million and minimum tax credits of $0.4 million. Equity will be increased by these amounts if and when such deferred tax assets are ultimately realized by a reduction of taxes payable.

We had a valuation allowance of $6.4 million at December 31, 2016 and $6.2 million at December 31, 2015, against certain of our deferred tax assets, primarily carryforwards expected to expire unused. In 2015, we reversed the valuation allowance on California deferred tax assets due to positive factors from the Arlon acquisition. No valuation allowance has been provided on our other deferred tax assets, as we believe it is more likely than not that all such assets will be realized in the applicable jurisdictions. We reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future taxable income exclusive of reversing temporary differences and carryforwards in the respective jurisdictions or entities. Differences between forecasted and actual future operating results or changes in carryforward periods could adversely impact the amount of deferred tax asset considered realizable.

In appropriate circumstances we have the opportunity to undertake a tax planning strategy to ensure that our tax credit carryforwards do not expire unutilized. This strategy is based upon our ability to make a federal tax election to capitalize certain expenses that will result in generating taxable income to allow us to utilize our tax credit carryforwards before they expire. We would undertake such a strategy to realize these tax credit carryforwards prior to expiration as it is reasonable, prudent, and feasible.

Income tax expense differs from the amount computed by applying the United States federal statutory income tax rate to income before income taxes. The reasons for this difference were as follows:



(Dollars in thousands)	2016			2015			2014
Tax expense at Federal statutory income tax rate	$	28,798		$	23,161		$	28,429
International tax rate differential	(2,260		)	(4,792		)	(6,772		)
Foreign source income, net of tax credits	7,559			2,449			5,195
State tax, net of federal	(200		)	(416		)	—
Unrecognized tax benefits	(5,555		)	148			603
General business credits	(1,125		)	(908		)	(604		)
Acquisition related expenses	—			453			590
Taxes on unremitted earnings	6,089			—			—
Valuation allowance change	171			(1,489		)	388
Other	520			1,247			(17		)
Income tax expense (benefit)	$	33,997		$	19,853		$	27,812

The Company’s effective tax rate for 2016 was 41.3% compared to 30.0% in 2015 and 34.2% in 2014. The increase from 2015 is primarily related to withholding taxes on off-shore cash movements, a change to our assertion that certain foreign earnings are permanently reinvested and a change in the mix of earnings attributable to higher-taxing jurisdictions, offset by benefits associated with an increase in the reversal of reserves for uncertain tax positions. This increase was offset by the prior year being unfavorably impacted by adjustments related to finalization of 2014 income tax year returns. The prior year also included a benefit due to a change of the state tax rate as a result of a legal reorganization and release of valuation allowance on certain state tax attributes. Included in the 2016 effective tax rate are releases of reserves for uncertain tax positions for which an indemnity receivable had been recorded. The reversal of the receivable has been recorded in “Other income (expense), net”.

Historically our intention was to permanently reinvest the majority of our foreign earnings indefinitely or to distribute them only when it is tax efficient to do so. As a result of changes in business circumstances and our long-term business plan, with respect to offshore distributions, we modified our assertion of certain accumulated foreign subsidiary earnings considered permanently reinvested during 2016. This change resulted in accrual of a deferred tax liability of $6.1 million associated with distribution related foreign taxes on undistributed earnings of our Chinese subsidiaries that are no longer considered permanently reinvested. In the event that we distributed these funds to other offshore subsidiaries, these taxes would become due. In addition, we incurred $6.3 million of withholding taxes related to distributions from China.

U.S. income taxes have not been provided on $210.9 million of undistributed earnings of foreign subsidiaries since it is the Company’s intention to permanently reinvest such earnings offshore or to repatriate them only when it is tax efficient to do so. It is impracticable to estimate the total tax liability, if any, that would be created by the future distribution of these earnings. If circumstances change and it becomes apparent that some, or all of these undistributed earnings as of December 31, 2016 will not be indefinitely reinvested, the provision for the tax consequence, if any, will be recorded in the period when circumstances change. As of each of December 31, 2016 and 2015, $1.1 million of U.S. income taxes had been provided on undistributed earnings of foreign subsidiaries that are not considered permanently reinvested.

Income taxes paid, net of refunds, were $24.0 million, $18.7 million, and $14.5 million in 2016, 2015, and 2014, respectively.

Unrecognized tax benefits, excluding potential interest and penalties, for the years ended December 31, 2016 and December 31, 2015, were as follows:



(Dollars in thousands)	2016			2015
Beginning balance	$	10,571		$	9,368
Gross increases - current period tax positions	520			4,229
Gross increases - tax positions in prior periods	—			1,428
Gross decreases - tax positions in prior periods	(498		)	—
Foreign currency exchange	(137		)	(475		)
Lapse of statute of limitations	(4,573		)	(3,979		)
Ending balance	$	5,883		$	10,571

Included in the balance of unrecognized tax benefits as of December 31, 2016 were $5.9 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefit as of December 31, 2016 were $0.2 million of tax benefits that, if recognized, would result in adjustments to other tax accounts; primarily deferred taxes.

We recognize interest accrued related to unrecognized tax benefit as income tax expense. Related to the unrecognized tax benefits noted above, at December 31, 2016 and 2015, we had accrued potential interest and penalties of approximately $0.4 million and $1.3 million, respectively. We have recorded a net tax benefit of $0.9 million during 2016 and net income tax expense of $0.1 million and $0.1 million during 2015 and 2014, respectively. It is possible that up to $1.7 million of our currently unrecognized tax benefits could be recognized within 12 months as a result of projected resolutions of worldwide tax disputes or the expiration of the statute of limitations.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. Our tax years from 2012 through 2016 are subject to examination by the tax authorities. With few exceptions, we are no longer subject to U.S. federal, state, local and foreign examinations by tax authorities for the years before 2012.