Note 14 – Income Taxes

The “Income before income tax expense” line item in the consolidated statements of operations consisted of:



(Dollars in thousands)	2018		2017		2016
Domestic	$	14,381	$	39,751	$	10,888
International	96,208		93,174		71,392
Total	$	110,589	$	132,925	$	82,280

The “Income tax expense” line item in the consolidated statements of operations consisted of:



(Dollars in thousands)	Current			Deferred			Total
2018
Domestic	$	(341	)	$	(3,007	)	$	(3,348	)
International	26,604			(318		)	26,286
Total	$	26,263		$	(3,325	)	$	22,938

2017
Domestic	$	7,535		$	21,936		$	29,471
International	27,418			(4,423		)	22,995
Total	$	34,953		$	17,513		$	52,466

2016
Domestic	$	2,078		$	3,376		$	5,454
International	24,537			4,006			28,543
Total	$	26,615		$	7,382		$	33,997

Deferred tax assets and liabilities as of December 31, 2018 and 2017, were comprised of the following:



(Dollars in thousands)	2018			2017
Deferred tax assets
Accrued employee benefits and compensation	$	4,269		$	8,410
Tax loss and credit carryforwards	18,604			7,905
Reserves and accruals	4,935			4,699
Other	1,953			2,977
Total deferred tax assets	29,761			23,991
Less deferred tax asset valuation allowance	(16,889		)	(8,754		)
Total deferred tax assets, net of valuation allowance	12,872			15,237
Deferred tax liabilities
Depreciation and amortization	8,335			14,300
Postretirement benefit obligations	3,234			2,311
Unremitted earnings	1,778			3,100
Other	2,094			224
Total deferred tax liabilities	15,441			19,935
Net deferred tax asset (liability)	$	(2,569	)	$	(4,698	)

As of December 31, 2018, the Company had state net operating loss carryforwards ranging from $3.7 million to $6.1 million in various state taxing jurisdictions, which expire between 2021 and 2038 and approximately $8.4 million of credit carryforwards in Arizona, which will expire between 2019 and 2033. The Company also had $8.3 million of federal research and development credit carryforwards that begin to expire in 2026. We believe that it is more likely than not that the benefit from certain of the state net operating loss, state credits and federal research and development credits carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $16.9 million relating to these carryforwards.

We currently have approximately $3.7 million of foreign tax credits that begin to expire in 2027 and $0.5 million of minimum tax credits that can be utilized or refunded by tax year 2021.

We had a valuation allowance of $16.9 million as of December 31, 2018 and $8.8 million as of December 31, 2017, against certain of our deferred tax assets, primarily carryforwards expected to expire unused and deferred tax assets that are capital in nature. 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.

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)	2018			2017			2016
Tax expense at Federal statutory income tax rate	$	23,224		$	46,529		$	28,798
International tax rate differential	826			(9,603		)	(2,260		)
Foreign source income, net of tax credits (excluding U.S. Tax Reform)	(197		)	1,087			1,215
State tax, net of federal	121			279			(200		)
Unrecognized tax benefits	(869		)	2,874			(5,555		)
U.S. Tax Reform	209			13,683			—
Equity compensation excess tax deductions	(2,238		)	(3,867		)	—
General business credits	(2,172		)	(1,080		)	(1,125		)
Distribution related foreign taxes	1,916			2,173			12,433
Valuation allowance change (excluding U.S. Tax Reform)	602			1,393			171
Other	1,516			(1,002		)	520
Income tax expense (benefit)	$	22,938		$	52,466		$	33,997

Our effective income tax rate for 2018 was 20.7% compared to 39.5% for 2017. The 2018 rate decrease was primarily due to a lower U.S. statutory tax rate in 2018 and the absence of the one-time impact from the enactment of the Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform) in 2017, an increase in reversal of reserves associated with uncertain tax positions and lower foreign tax impact on remitted and unremitted foreign earnings and profits.

The Company did not make any changes in 2018 to its position on the permanent reinvestment of its earnings from foreign operations. With the exception of certain Chinese subsidiaries, the Company continues to assert that historical foreign earnings are indefinitely reinvested. As of December 31, 2018 and 2017, the Company had recorded a deferred tax liability of $1.8 million and $3.1 million, respectively, for Chinese withholding tax on undistributed earnings that are not indefinitely reinvested. The other remaining foreign subsidiaries have both the intent and ability to indefinitely reinvest their undistributed earnings and the Company does not expect that these undistributed earnings should give rise to significant additional tax liabilities as a result of distribution of such earnings.

On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued 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 U.S. Tax Reform. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, we completed our analysis based on currently available legislative updates relating to the U.S. Tax Reform, as well as a more detailed analysis of the post-1986 undistributed earnings and profits that required further adjustment, resulting in a tax expense of $0.2 million in the fourth quarter of 2018 and a total tax expense of $0.2 million for the year ended December 31, 2018. The total tax expense included a $7.5 million benefit related to adjustments to the transition tax and a $7.7 million expense related to the establishment of a valuation allowance against deferred tax assets associated with carried over research and development credits. There were no significant adjustments recorded with respect to finalization of the impact of the U.S. Tax Reform on state taxes and the remeasurement of certain deferred tax assets and liabilities.

Unrecognized tax benefits, excluding potential interest and penalties, for the years ended December 31, 2018 and December 31, 2017, were as follows:



(Dollars in thousands)	2018			2017
Beginning balance	$	14,565		$	5,883
Gross increases - current period tax positions	2,583			7,056
Gross increases - tax positions in prior periods	505			3,243
Gross decreases - tax positions in prior periods	—			(375		)
Foreign currency exchange	(142		)	467
Lapse of statute of limitations	(7,710		)	(1,709		)
Ending balance	$	9,801		$	14,565

Included in the balance of unrecognized tax benefits as of December 31, 2018 were $9.6 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, 2018 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, 2018 and 2017, we had accrued potential interest and penalties of approximately $0.5 million and $0.6 million, respectively. We have recorded a net income tax benefit of $0.1 million during 2018, net income tax expense of $0.2 million during 2017 and $0.9 million net income tax benefit during 2016. It is possible that up to $1.8 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 United States and various state and foreign jurisdictions. Our tax years from 2014 through 2018 are subject to examination by the tax authorities. With few exceptions, we are no longer subject to United States federal, state, local and foreign examinations by tax authorities for the years before 2014.