13)

Income Taxes

Income (loss) before provision (benefit) for income taxes for the years ended December 31, 2016, 2015 and 2014 was as follows:


	Year ended December 31,
	2016			2015			2014
Income (loss) before provision (benefit) for income taxes:
United States	$	(32,498	)	$	(42,450	)	$	(9,341	)
Foreign		25,189			19,500			22,513

Total	$	(7,309	)	$	(22,950	)	$	13,172

The loss of $32.5 million from domestic operations during 2016, was primarily driven from an increase in interest expense due to higher debt levels associated with the 2015 PEP acquisition.

The loss of $42.5 million from domestic operations during 2015, was primarily driven from acquisition related charges (included in selling, general and administrative of $11.7 million, cost of products sold $7.5 million and write-off of debt issuance costs of $18.7 million) of which approximately $3.8 million was non-deductible as these costs were directly facilitative to the acquisitions.

The loss of $9.3 million from domestic operations during 2014, was primarily driven from acquisition related charges of $14.8 million (included in selling, general and administrative, cost of products sold, and interest expense) of which approximately $6.0 million were non-deductible as these costs were directly facilitative to the acquisitions.

Total income tax expense (benefit) for the years ended December 31, 2016, 2015, and 2014 was as follows:


	Year ended December 31,
	2016			2015			2014
Current:
U.S. Federal	$	—		$	—		$	—
State		1,017			420			37
Foreign		6,968			5,940			7,082

Total current expense	$	7,985		$	6,360		$	7,119

Deferred:
U.S. Federal	$	(11,033	)	$	(13,391	)	$	1,625
State		(6,440	)		(1,869	)		(382	)
U.S. deferred tax valuation allowance		1,882			—			(1,434	)
Foreign		(1,707	)		(1,618	)		(1,142	)

Total deferred expense (benefit)		(17,298	)		(16,878	)		(1,333	)

Total expense (benefit) (a)	$	(9,313	)	$	(10,518	)	$	5,786

(a)

During the year ended December 31, 2016, the Company identified certain prior period tax expense (benefit) errors. The Company has determined that such errors were not material to the previously issued financial statements and therefore has corrected for such errors as out of period adjustments in 2016, resulting in $998 of tax benefit being recognized in 2016 that should have been recognized in 2015.

A reconciliation of income taxes based on the U.S. federal statutory rate of 34% for each of the years ended December 31, 2016, 2015 and 2014 is summarized as follows:


	Year ended December 31,
	2016			2015			2014
Income taxes at the federal statutory rate	$	(2,490	)	$	(7,803	)	$	4,478
Decrease in U.S. valuation allowance		1,882			—			(1,434	)
Foreign tax credit (additions) expiration		(2,545	)		(1,343	)		2,736
State taxes, net of federal taxes		(1,558	)		(1,592	)		(362	)
Non-U.S. earnings taxed at different rates		(2,938	)		(2,308	)		(1,714	)
Non-deductible mergers and acquisition costs		—			1,299			1,971
R&D Tax credit		(282	)		(623	)		(529	)
Change in uncertain tax positions		(994	)		—			—
Other permanent differences, net		(388	)		1,852			640

	$	(9,313	)	$	(10,518	)	$	5,786

The 2016 effective tax rate of 127% reflects the impact of foreign earnings taxed at lower rates. The higher 2016 effective tax rate was driven by a unique mix of lower U.S. losses with higher earnings attributed to foreign subsidiaries. Excluding the effect of foreign earnings, the 2016 effective tax rate would have been 45%.

The 2015 effective tax rate of 46% primarily reflects the impact of foreign earnings being taxed at lower rates.

The 2014 effective tax rate of 44% reflects the impact of two items related to the merger and acquisition activity in 2014, including: (1) $2.0 million for non-deductible third party merger and acquisition costs, as these costs were directly facilitative to the acquisitions; and (2) $1.3 million for the expiration of foreign tax credits that could not be utilized during 2014 because of the merger related acquisition costs as discussed below. In addition, the rate reflects an offset to the items above for the impact of foreign earnings taxed at lower rates of $1.7 million.

The tax effects of the temporary differences as of December 31, 2016, 2015 and 2014 are as follows:


	December 31,
	2016			2015			2014
Deferred income tax liabilities:
Tax in excess of book depreciation	$	43,336		$	42,345		$	35,411
Goodwill		1,580			1,554			1,949
Intangible assets		86,492			91,947			15,944
Other deferred tax liabilities		1,771			897			1,924

Gross deferred income tax liabilities		133,179			136,743			55,228
Deferred income tax assets:
Goodwill		1,165			1,666			2,411
Inventories		960			4,490			2,035
Pension/Personnel accruals		1,602			2,778			3,029
Net operating loss carry forwards		10,296			8,313			1,196
Foreign tax credits		5,759			3,242			290
Guarantee claim deduction		414			1,141			1,141
Credit carry forwards		4,581			4,958			1,853
Accruals and reserves		1,741			—			—
Other deferred tax assets		11,160			2,510			1,926

Gross deferred income tax assets		37,678			29,098			13,881
Valuation allowance on deferred tax assets		(4,090	)		(2,376	)		—

Net deferred income tax assets		33,588			26,722			13,881

Net deferred income tax assets (liabilities) (b)	$	(99,591	)	$	(110,021	)	$	(41,347	)

(b)

During the year ended December 31, 2016, the Company identified certain prior period errors related to the initial recognition of goodwill and deferred taxes in purchase accounting (see Note 10) as well as prior period errors in the 2015 tax provision as further described above. The Company has determined that such errors were not material to the previously issued financial statements and therefore has corrected for such errors in 2016. The impact of these purchase accounting and tax provision errors resulted in an understatement (overstatement) of net deferred income tax liabilities of $4,469 and $(1,444) as of December 31, 2015 and 2014.

With the PEP Acquisition during 2015, we assumed $87.6 million in net deferred tax liabilities primarily related to book and tax basis difference in fixed assets and intangibles (excluding goodwill).

With the Autocam acquisition during 2014, we assumed $43.8 million in net deferred tax liabilities primarily related to book and tax basis differences in fixed assets and intangibles (excluding goodwill).

As realization of certain deferred tax assets is not assured, management believes it is more likely than not that those net deferred tax assets will be realized. However, the amount of the deferred tax assets considered realizable could be reduced based on changing conditions. Below is a summary of the activity in the total valuation allowances during the years ended December 31, 2016, 2015 and 2014:


	Balance at Beginning of Year		Additions		Recoveries			Balance at End of Year
2016	$	2,376	$	1,882	$	(168	)	$	4,090
2015	$	—	$	2,376	$	—		$	2,376
2014	$	1,434	$	—	$	(1,434	)	$	—

During 2016, the valuation allowance increased by approximately $1.7 million, consisting of a $1.9 million increase due to the uncertainty of realizing certain state net operating loss carryforwards and a decrease of $0.2 million. The decrease reflects the Company’s expectation that it is more likely than not that it will generate future taxable income to utilize this amount of net deferred tax assets.

During 2015, the valuation allowance increased by approximately $2.4 million, consisting solely of an increase due to the uncertainty of realizing certain local tax credits of a foreign subsidiary.

During 2014, the valuation allowance of $1.4 million on our previously recognized foreign tax credits was reduced by the full $1.4 million for credits which expired as of December 31, 2014. In addition to the foreign tax credits with the full valuation allowance, $1.3 million in foreign tax credits expired unused as of December 31, 2014. These foreign tax credits were not utilized during 2014, as management expected, due to the large amount of non-deductible mergers and acquisition costs incurred related to the four acquisitions completed in 2014. The remaining foreign tax credits, net operating loss and credit carry forwards are expected to be utilized before expiration. We record a valuation allowance when it is “more likely than not” that some portion or all of the deferred income tax assets will not be realized. In reaching this determination, we consider the future reversals of taxable temporary differences, future taxable income, exclusive of taxable temporary differences and carry forwards, taxable income in prior carryback years and tax planning strategies.

Unremitted earnings of subsidiaries outside the U.S. are considered to be reinvested indefinitely at December 31, 2016. It is not practicable to determine the deferred tax liability for temporary differences related to those unremitted earnings. There has been no change in our long term international expansion plans as of December 31, 2016, and our intent and ability is to indefinitely reinvest our foreign earnings. We base this assertion on two factors. The first factor is our intention to invest in foreign countries that are strategically important to our Precision Bearing Components, Precision Engineered Products and Autocam Precision Components Groups. With the acquisitions completed in 2015 and 2014, we have significantly expanded our international base of operations adding subsidiaries in Mexico, Bosnia and Herzegovina, Brazil, Poland, France and China which will require more foreign investment. Second, we have sufficient access to funds in the U.S. through projected free cash flows and the availability of our U.S. credit facilities to fund currently anticipated domestic operational and investment needs.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties for the years ended December 31, 2016, 2015 and 2014 is as follows:


	2016			2015			2014
Beginning balance	$	5,724		$	3,834		$	873
Additions for tax positions of prior years		179			2,516			3,589
Reductions for tax positions of prior years		(1,162	)		(626	)		(628	)

Ending balance	$	4,741		$	5,724		$	3,834

As of December 31, 2016, the $4.7 million of unrecognized tax benefits would, if recognized, impact our effective tax rate. The addition for tax positions of prior years was added as part of the purchase price allocation of PEP in 2015 of $2.2 million and Autocam in 2014 of $2.8 million and was included in the fair value of assets acquired and liabilities assumed. (See Note 2 of Notes to Consolidated Financial Statements.)

Interest and penalties related to federal, state, and foreign income tax matters are recorded as a component of the provision for income taxes in our Statements of Operations. During 2016, we released $65 thousand of previously accrued foreign interest and accrued $0.2 million in U.S. interest. During 2015, we accrued $30 thousand in foreign interest and $0.3 million in U.S. interest. During 2014, we accrued $31 thousand in foreign interest and $17 thousand in U.S. interest. As of December 31, 2016, the total amount accrued for interest and penalties was $ 1.1 million.

We or our subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local income tax examinations by tax authorities for years before 2013. We are no longer subject to non-U.S. income tax examinations within various European Union countries for years before 2011. We do not foresee any significant changes to our unrecognized tax benefits within the next twelve months.

In November 2015, the FASB issued ASU 2015-17, intended to improve how deferred taxes are classified on organizations’ balance sheets. The guidance eliminates the requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations are required to classify all deferred tax assets and liabilities as noncurrent. The new standard is effective for the Company in the first quarter of 2017, and may be applied retrospectively or prospectively. The Company has elected to adopt the standard early, beginning in the first quarter of 2016, and applies prospectively. The adoption of the new accounting rules does not have a material effect on the Company’s financial condition, results of operations or cash flows.