Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following table summarizes the U.S. and non-U.S. components of income (loss) before provision (benefit) for income taxes:

	Predecessor						Successor
	For the Year Ended December 31, 2014			For the Period January 1  Through August 14, 2015			For the Period August 15 Through December 31, 2015			For the Year Ended December 31, 2016
	(Dollars in thousands)
U.S.	$	(127,707	)	$	(84,599	)	$	(16,827	)	$	(44,971	)
Non-U.S.	(30,603		)	(10,919		)	(4,916		)	(71,450		)
	$	(158,310	)	$	(95,518	)	$	(21,743	)	$	(116,421	)

Income tax expense (benefit) consists of the following:

	Predecessor						Successor
	For the Year Ended December 31, 2014			For the Period January 1  Through August 14, 2015			For the Period August 15 Through December 31, 2015			For the Year Ended December 31, 2016
	(Dollars in thousands)
U.S income taxes:
Current	$	(1,261	)	$	(20	)	$	(52	)	$	(878	)
Deferred	(537		)	403			686			1,152
	(1,798		)	383			634			274
Non-U.S. income taxes:
Current	11,474			5,547			1,566			5,389
Deferred	(15,466		)	522			4,682			(13,215		)
	(3,992		)	6,069			6,248			(7,826		)
Total income tax benefit	$	(5,790	)	$	6,452		$	6,882		$	(7,552	)

Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income before provision (benefit) for income taxes as set forth in the following table:

	Predecessor						Successor
	For the Year Ended December 31, 2014			For the Period January 1  Through August 14, 2015			For the Period August 15 Through December 31, 2015			For the Year Ended December 31, 2016
	(Dollars in thousands)
Tax at statutory U.S. federal rate	$	(55,409	)	$	(33,431	)	$	(7,610	)	$	(40,747	)
U.S. valuation allowance, net	26,175			21,532			7,355			35,091
State taxes, net of federal tax benefit	(4,387		)	(2,005		)	(697		)	(2,324		)
U.S. tax return adjustments to     estimated taxes	(368		)	—			—			—
Resolution of uncertain tax positions	(513		)	71			64			(513		)
Adjustment for foreign income     taxed at different rates	10,408			11,136			7,120			12,738
U.S. tax credits	(1,000		)	—			—			—
Non-U.S. tax exemptions,     holidays and credits	—			(691		)	228			(175		)
Goodwill impairment	17,161			8,026			—			—
Capital loss expiration	2,422			—			—			—
Investment in subsidiary impairment     deduction	—			—			—			(10,111		)
Other	(279		)	1,814			422			(1,511		)
Total income tax (benefit) expense	$	(5,790	)	$	6,452		$	6,882		$	(7,552	)

The Company has been granted a tax holiday in Brazil, which expires in 2024. The availability of the tax holiday in Brazil did not have a significant impact on the current tax year.

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2015, and December 31, 2016 are set forth in the following table:

	As of December 31,
	2015			2016
	(Dollars in thousands)
Deferred tax assets:
Fixed assets	$	10,128		$	41,677
Postretirement and other employee benefits	34,713			32,275
Foreign tax credit and other carryforwards	115,163			153,169
Capitalized research and experimental costs	21,592			18,146
Environmental reserves	4,273			4,237
Inventory	12,719			15,227
Original issue discount	—			6,461
Long-term contract option amortization	2,138			2,074
Provision for rationalization charges	5,967			7,498
Other	1,005			3,391
Total gross deferred tax assets	207,698			284,155
Less: valuation allowance	(165,539		)	(244,841		)
Total deferred tax assets	42,159			39,314
Deferred tax liabilities:
Fixed assets	$	64,278		$	47,346
Debt discount amortization / Deferred financing fees	7,666			6,544
Inventory	4,985			3,482
Goodwill and acquired intangibles	2,686			2,295
Other	4,647			2,751
Total deferred tax liabilities	84,262			62,418
Net deferred tax (liability) asset	$	(42,103	)	$	(23,104	)

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which requires deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will only have one net noncurrent deferred tax asset or liability. This ASU does not change the existing requirement that only permits offsetting within a jurisdiction. The amendments in the update may be applied either prospectively or retrospectively to all prior periods presented. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We adopted the amendments as of December 31, 2015 on a prospective basis. Adoption of the amendments resulted in the presentation of all deferred income tax assets as noncurrent deferred income tax assets in our Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted and the adoption of the amendments had no impact on our consolidated results of operations or cash flows.  Net non-current deferred tax assets are separately stated as deferred income taxes in the amount of $15.3 million as of December 31, 2015 and $19.8 million as of December 31, 2016. Net non-current deferred tax liabilities are separately stated as deferred income taxes in the amount of $57.4 million at December 31, 2015 and $42.9 million at December 31, 2016.

We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Examples of positive evidence would include a strong earnings history, an event or events that would increase our taxable income through a continued reduction of expenses, and tax planning strategies that would indicate an ability to realize deferred tax assets. Examples of negative evidence would include cumulative losses in recent years and history of tax attributes expiring unused.

GrafTech impaired the fixed assets and announced exiting of certain product lines in our Advanced Graphite Material ("AGM") product group, in the Company’s second quarter Form 10-Q of 2014. During the third quarter of 2014, we announced the conclusion of another phase of our on-going companywide cost savings assessment. This resulted in changes to the Company’s operating and management structure in order to streamline, simplify and decentralize the organization. The impairment charges and other rationalization related charges were incurred primarily in the U.S. jurisdiction. As a result, we determined that it is no longer “more likely than not” that we will generate sufficient future U.S. taxable income to realize our deferred tax assets related to U.S. foreign tax credits and state net operating loss carryforwards, as well as our net U.S. deferred tax assets. With the additional significant negative evidence of recent losses, the Company recognized a $73.4 million non-cash charge to the Statement of Operations in 2014 to reflect a full valuation allowance against these U.S. deferred income tax assets. The recognition of the valuation allowance does not result in or limit the Company's ability to utilize these tax assets in the future.

During 2016, an affiliate of  Brookfield, our parent company, purchased on the open market in aggregate approximately $53 million of GrafTech’s traded senior notes. This related party transaction generated a gain due to the discount at which the senior note was trading. This gain is taxable to GrafTech in 2016 and generates a deferred tax asset for an original issuance discount of approximately $6.5 million.

Valuation allowance activity for the years ended December 31, 2014, 2015 and 2016 is as follows:

Predecessor	(Dollars in thousands)
Balance as of January 1, 2014	$	20,411
(Credited) / charged to income	74,157
Translation adjustment	(800		)
Changes attributable to movement in underlying assets	1,953
Balance at December 31, 2014	$	95,721
(Credited) / charged to income	29,363
Translation adjustment	(1,467		)
Changes attributable to movement in underlying assets	(8,168		)
Balance as of August 14, 2015	$	115,449
Successor
Balance as of August 15, 2015	$	115,449
(Credited) / charged to income	6,780
Translation adjustment	(101		)
Changes attributable to movement in underlying assets	43,411
Balance as of December 31, 2015	$	165,539
(Credited) / charged to income	78,469
Translation adjustment	583
Changes attributable to movement in underlying assets	250
Balance as of December 31, 2016	$	244,841

We have total foreign tax credit carryforwards of $19.7 million as of December 31, 2016, for which a full valuation allowance is recorded. These tax credit carryforwards begin to expire as of March 15, 2017. In addition, we have a federal net operating loss carryforward of $244.6 million and state net operating losses carryforwards of $290.5 million, which can be carried forward from 5 to 20 years. These net operating losses carryforwards generate a deferred tax asset of $95.5 million as of December 31, 2016. We also have U.S. non-net operating loss related deferred tax assets of $100.9 million as of December 31, 2016. The federal net operating loss carryforward and foreign tax credit utilization will be limited by IRC §382 and §383, respectively.

We have assessed the need for valuation allowances against these deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance, including existing level of profitability and recently available projections of future taxable income, which are comparable with current year results.

Based upon the levels of historical federal and state taxable income and projections of future federal and state taxable income over the periods during which the carryforwards can be utilized, we do not believe it is more likely than not that we will realize the tax benefits of these deferred tax assets. Until we determine that we will generate sufficient jurisdictional taxable income to realize our net operating losses and deferred tax assets, these assets will continue to be fully reserved.

We have non-U.S. loss and tax credit carryforwards on a gross tax effected basis of $34.3 million, which can be carried forward from 7 years to indefinitely.

As of December 31, 2016, we had unrecognized tax benefits of $3.3 million, $3.0 million of which, if recognized, would have a favorable impact on our effective tax rate. We have elected to report interest and penalties related to uncertain tax positions as income tax expense. Accrued interest and penalties were $0.5 million as of December 31, 2014 (a reduction of $0.1 million), $0.7 million as of December 31, 2015 (an increase of $0.2 million) and $0.8 million as of December 31, 2016 (an increase of $0.1 million). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Predecessor	(Dollars in thousands)
Balance at January 1	$	7,203
Additions based on tax positions related to the current year	268
Additions for tax positions of prior years	232
Reductions for tax positions of prior years	(1,204		)
Lapse of statutes of limitations	(1,180		)
Settlements	(1,503		)
Foreign currency impact	(106		)
Balance at December 31, 2014	$	3,710
Foreign currency impact	(21		)
Balance as of August 14, 2015	$	3,689
Successor
Balance as of August 15, 2015	$	3,689
Additions for tax positions of prior years	301
Foreign currency impact	(69		)
Balance as of December 31, 2015	$	3,921
Lapse of statutes of limitations	(603		)
Foreign currency impact	20
Balance as of December 31, 2016	$	3,338

It is reasonably possible that a reduction of unrecognized tax benefits of up to $1.0 million may occur within 12 months due to settlements and the expiration of statutes of limitation.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. All U.S. federal tax years prior to 2013 are generally closed by statute or have been audited and settled with the applicable domestic tax authorities. All other jurisdictions are still open to examination beginning after 2010.

The Company has not provided for U.S. income taxes or foreign withholding taxes on the differences between the financial reporting basis in our foreign investments, and the tax basis in such investments, estimated to be $472.8 million, which are considered to be permanently reinvested as of December 31, 2016. Any outside basis difference would be taxable upon the sale or liquidation of the foreign subsidiaries, or upon the remittance of dividends. The measurement of the unrecognized U.S. income taxes, if any, that may be associated with these outside basis differences, is not practicable.