Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. As a result of the Tax Act, we recognized a $51.8 million net tax benefit in 2017, which included the estimate of transition tax and the remeasurement of our domestic deferred taxes from 35% to 21%.

As of December 31, 2018, the Company considers the accounting under Staff Accounting Bulletin No. 118 for the impacts of the Tax Act to be complete. In preparing the amounts as of December 31, 2018, the Company considered notices, revenue procedures, and proposed regulations issued by the Internal Revenue Service and authoritative accounting guidance to date. In 2018, the Company recognized an adjustment to the 2017 net tax benefit which decreased earnings by $0.8 million. This adjustment was primarily related to the one-time transition tax on deferred foreign income, change in valuation of deferred tax assets associated with tax law changes, and remeasurement of deferred taxes.

On February 5, 2019, the Department of the Treasury and Internal Revenue Service published final regulations pertaining to the transition tax enacted as part of the Tax Act. The Company is still in the process of analyzing the impact of these regulations, which were issued subsequent to the balance sheet date of December 31, 2018. Based upon a preliminary analysis of the final regulations, we anticipate an increase to tax expense of approximately $6.0 million for the year ended December 31, 2019. The Company's analysis is on-going and the adjustment will be recorded in 2019 during the period of enactment of the regulations.

Loss from continuing operations before benefit for income taxes was as follows:



	Year Ended December 31,
	2018			2017			2016
Loss from continuing operations before benefit for income taxes and share of net income from joint venture
United States	$	(263,499	)	$	(71,603	)	$	(39,160	)
Foreign	2,465			12,730			8,294
Total	$	(261,034	)	$	(58,873	)	$	(30,866	)

Total income tax benefit was as follows:



	Year Ended December 31,
	2018			2017			2016
Current taxes:
U.S. Federal	$	8,150		$	(47,916	)	$	(2,595	)
State	584			(12,226		)	679
Foreign	3,086			4,310			2,004
Total current tax expense (benefit)	11,820			(55,832		)	88
Deferred taxes:
U.S. Federal	$	(16,129	)	$	(25,017	)	$	(9,679	)
State	(780		)	3,009			(6,406		)
Deferred tax valuation allowance	(3,565		)	710			1,882
Foreign	(2,303		)	(1,896		)	(1,323		)
Total deferred tax benefit	(22,777		)	(23,194		)	(15,526		)
Total income tax benefit	$	(10,957	)	$	(79,026	)	$	(15,438	)

A reconciliation of income taxes based on the U.S. federal statutory income tax rate is summarized as follows:



	Year Ended December 31,
	2018		2017		2016
U.S federal statutory income tax rate	21.0	%	35.0	%	34.0	%
Change in valuation allowance	(0.9	)%	(1.2	)%	(6.1	)%
Foreign tax credits, exclusive of tax reform	—	%	(13.8	)%	8.2	%
State taxes, net of federal taxes, exclusive of tax reform	0.4	%	9.1	%	5.7	%
Non-U.S. earnings taxed at different rates	1.2	%	1.7	%	4.8	%
Non-deductible mergers and acquisitions costs	(0.2	)%	—	%	—	%
GILTI	(0.3	)%	—	%	—	%
Goodwill impairment	(15.5	)%	—	%	—	%
R&D Tax credit	0.3	%	0.3	%	0.9	%
Change in uncertain tax positions	0.3	%	(0.4	)%	3.2	%
Impact of Tax Reform
Toll Charge, net of foreign tax credit	0.6	%	(11.5	)%	—	%
Remeasurement of deferred taxes pursuant to tax reform	(0.9	)%	65.6	%	—	%
Tax Reform impact on divestiture of business segment	—	%	33.9	%	—	%
Section 199/Domestic Production Deduction	—	%	0.8	%	—	%
Divestiture of Business Segment, exclusive of tax reform	(0.9	)%	13.6	%	—	%
Return to provision	(0.8	)%	—	%	—	%
Prior period revisions	—	%	0.5	%	4.2	%
Foreign JV net income	—	%	—	%	(4.1	)%
Other adjustments, net	(0.1	)%	0.6	%	(0.8	)%
Effective tax rate	4.2	%	134.2	%	50.0	%

The 2018 effective tax rate of 4.2% differs from the U.S. federal statutory income tax rate of 21% due to permanent differences including the impact of the goodwill impairment, most of which is treated as a permanent difference for income tax purposes.

The 2017 effective tax rate of 134.2% was heavily influenced by the remeasurement of our ending domestic deferred balances, an estimate of the one-time transition tax (net of foreign tax credits) on earnings of our foreign subsidiaries in accordance with the Tax Act, and the impact of the Tax Act on the divestiture of the PBC Business.

The principal components of the deferred tax assets and liabilities are as follows:



	As of December 31,
	2018			2017
Deferred income tax liabilities:
Tax in excess of book depreciation	$	37,425		$	34,143
Goodwill	—			58
Intangible assets	80,623			50,688
Other deferred tax liabilities	794			389
Total deferred income tax liabilities	118,842			85,278
Deferred income tax assets:
Interest expense limitation	9,968			—
Goodwill	1,441			2,067
Inventories	2,745			2,248
Pension/Personnel accruals	1,317			1,596
Net operating loss carry forwards	9,321			6,950
Foreign tax credits	5,345			—
Credit carry forwards	4,130			3,427
Accruals and reserves	1,531			2,015
Other deferred tax assets	4,022			3,019
Deferred income tax assets before Valuation Allowance	39,820			21,322
Valuation allowance on deferred tax assets	(14,460		)	(7,608		)
Total deferred income tax assets	25,360			13,714
Net deferred income tax liabilities ⁽¹⁾	$	93,482		$	71,564

________________________


(1)	In accordance with the Tax Act, our ending domestic deferred balances have been remeasured to 21% for the year ended December 31, 2017.

During the year ended December 31, 2018, we finalized our accounting policy decision with respect to the new GILTI tax rules and have concluded that GILTI will be treated as a periodic charge in the year in which it arises. Therefore, we will not record deferred taxes for the basis associated with GILTI earnings.

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.

The following table summarizes our total valuation allowances:



	Year Ended December 31,
	2018		2017		2016
Balance at beginning of year	$	7,608	$	4,090	$	2,376
Additions	6,852		3,518		1,882
Recoveries	—		—		(168		)
Balance at end of year	$	14,460	$	7,608	$	4,090

During 2018, the valuation allowance increased by approximately $6.9 million, as a result of an increase in foreign and state NOL’s and U.S. foreign tax credits.

During 2017, the valuation allowance increased by approximately $3.5 million, consisting of a $2.3 million increase due to the uncertainty of realizing certain state NOL carryforwards, and a $1.2 million increase for foreign NOL’s.

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 NOL carryforwards offset by a decrease of $0.2 million related to 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.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:



	Year Ended December 31,
	2018			2017			2016
Balance at beginning of year	$	5,655		$	4,741		$	5,724
Additions for tax positions of prior years	304			1,404			179
Reductions for tax positions of prior years	(1,350		)	(490		)	(1,162		)
Balance at end of year	$	4,609		$	5,655		$	4,741

As of December 31, 2018, the $4.6 million of unrecognized tax benefits would, if recognized, impact our effective tax rate by $4.0 million. The 2018 reduction is related to expiring statutes of limitations in certain US state and foreign jurisdictions.

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 Consolidated Statements of Operations and Comprehensive Income (Loss). During 2018, we released less than $0.1 million of previously accrued foreign interest and released $0.2 million of previously accrued U.S. interest. During 2017, we released $0.2 million of previously accrued U.S. interest. During 2016, we released less than $0.1 million of previously accrued foreign interest and accrued $0.2 million in U.S. interest.

Management believes that it is reasonably possible that the amount of unrecognized income benefits and interest may decrease during the next twelve months by approximately $1.8 million, related to the expiration of the statutes of limitations.

As of December 31, 2018, the Company has $101.6 million of state NOL carryovers. The state NOL’s begin to expire in 2030. We also have $10.7 million of foreign NOL carryovers at December 31, 2018. The foreign NOL’s have an indefinite life. The Company has $4.1 million of tax credits in foreign jurisdictions at December 31, 2018. The tax credits in foreign jurisdictions begin to expire in 2026. The Company has foreign tax credit carryforwards for federal income tax purposes of $5.3 million at December 31, 2018. The foreign tax credit carryforwards begin to expire in 2024. The state NOL’s, tax credits in foreign jurisdictions, and foreign tax credits for federal income tax purposes have a full valuation allowance. These amounts are included in the valuation allowance table on the previous page.

We or our subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. During the third quarter of 2017, the Internal Revenue Service commenced an examination of the federal tax return for the pre-acquisition period of January 1, 2015, through October 19, 2015, for Precision Engineered Products, LLC, our wholly-owned subsidiary. The examination was completed during the 4th quarter of 2018.

The Company is no longer subject to federal examinations by tax authorities for years before 2012. The Company is also subject to examination by various state and international tax authorities. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the outcomes of both ongoing and future examinations for the current or prior years to ensure the Company’s provision for income taxes is sufficient. The Company recognizes liabilities based on estimates of whether additional taxes will be due and believes its reserves are adequate in relation to any potential assessments. The outcome of any one examination, some of which may conclude during the next twelve months, is not expected to have a material impact on the Company’s financial position or results of operations.

We operate under tax holidays in other countries, which are effective through December 31, 2026, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of these tax holidays decreased foreign taxes by $0.8 million and $0.7 million for 2017 and 2016, respectively. The benefit of the tax holidays on net income per share (diluted) was $0.03 and $0.03 for 2017, and 2016, respectively. The tax holidays had no impact on our 2018 foreign taxes.