Income Taxes

The components of Income from continuing operations before income taxes and Income taxes follow:



	2018			2017			2016
Income from continuing operations before income taxes:
U.S.	$	(10,719	)	$	3,082		$	34,129
International	218,214			192,617			148,492
Income from continuing operations before income taxes	$	207,495		$	195,699		$	182,621
Income tax provision:
Current:
U.S. – federal	$	3,110		$	77,799		$	7,215
U.S. – state	(623		)	1,762			755
International	57,871			48,032			41,516
	60,358			127,593			49,486
Deferred:
U.S. – federal	$	(2,206	)	$	9,596		$	6,091
U.S. – state	(826		)	819			1,060
International	(16,017		)	(1,724		)	(9,617		)
	(19,049		)	8,691			(2,466		)
Income taxes	$	41,309		$	136,284		$	47,020

On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act reduced the U.S. Corporate income tax rate from 35% to 21%, effective January 1, 2018. As required, the Company re-measured its U.S. deferred tax assets and liabilities as of December 31, 2017, applying the reduced U.S. Corporate income tax rate. As a result, the Company recorded a provisional adjustment of $4,152 to net expense, with a corresponding reduction to the U.S. net deferred asset. The Company filed the 2017 Federal Corporate Tax Return in October 2018 and claimed additional tax deductions subject to the 35% tax rate, which reduced the related tax expense to $3,399.

The Act taxed certain unrepatriated earnings and profits (“E&P”) of our foreign subsidiaries. In order to determine the Transition Tax we were required to determine, along with other information, the amount of our accumulated post 1986 E&P for our foreign subsidiaries, as well as the non U.S. income tax paid by those subsidiaries on such E&P. We were capable of reasonably estimating the Transition Tax and recorded a provisional Transition Tax expense of $86,707 in 2017. The U.S. Treasury issued certain Notices and proposed regulations ("interpretative guidance") in 2018. The interpretative guidance provided additional guidance to assist companies in calculating the one-time Transition Tax. The Company has completed the accounting and recorded a final Transition Tax of $86,858. The U.S. Treasury issued Final Regulations addressing the Transition Tax in January 2019. The Final Regulations did not impact the computation of final income tax expense. The Company was able to make a reasonable estimate of the state taxation of these earnings and recorded a provisional expense of $1,423 in 2017. In 2018, various states issued guidance related to calculating the tax impacts of the Act, as well as clarifications describing how States would tax income arising from the application of provisions within the Act. As a result of the recent guidance, the Company has reduced the tax expense related to the impact of the Act to $597 in 2018.

U.S. Tax Reform required the mandatory deemed repatriation of the undistributed earnings of the Company’s international subsidiaries as of December 31, 2017. If the earnings were distributed in the form of cash dividends, the Company would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. Under accounting standards (ASC 740) a deferred tax liability is not recorded for the excess of the tax basis over the financial reporting (book) basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria is met. On December 31, 2018, the Company's unremitted foreign earnings were approximately $1,397,056. For amounts currently expected to be repatriated, the Company recorded a provisional expense of $6,932 during 2017. In 2018 the Company repatriated $62,383 between certain foreign entities, thereby reducing the previously recorded deferred tax liability by $5,245 and repatriated $228,750 to the U.S. In 2018, the Company revised its estimates and no longer expects to repatriate foreign earnings relating to $1,185 of taxes for which a deferred tax liability was previously recorded and as such, a benefit resulted.

The Company has recognized a deferred tax liability for U.S. taxes of $502 on $10,166 of undistributed earnings of its international subsidiaries, earned before 2017 and the application of the Transition Tax implemented by the Act. All remaining earnings are considered indefinitely reinvested as defined per the indefinite reversal criterion within the accounting guidance for income taxes. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. Tax but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practicable. The Company repatriated dividends of $228,750, as noted above, and $7,250 to the U.S. from accumulated foreign earnings in 2018 and 2017, respectively. Pursuant to the Act, neither dividend was subject to tax.

Deferred income tax assets and liabilities at December 31 consist of the tax effects of temporary differences related to the following:



	2018			2017
Deferred tax assets:
Pension	$	19,025		$	13,255
Tax loss carryforwards	11,516			16,078
Inventory valuation	11,576			10,568
Other postretirement/postemployment costs	8,372			9,440
Accrued Compensation	9,384			5,743
Other	3,349			4,018
Valuation allowance	(4,366		)	(10,223		)
Total deferred tax assets	58,856			48,879
Deferred tax liabilities:
Depreciation and amortization	(122,636		)	(82,422		)
Goodwill	(9,597		)	(9,440		)
Other	(12,708		)	(18,361		)
Total deferred tax liabilities	(144,941		)	(110,223		)
Net deferred tax liabilities	$	(86,085	)	$	(61,344	)

In the first quarter of 2016, the Company prospectively adopted the amended guidance related to the balance sheet classification of deferred income taxes. The amended guidance removed the requirement to separate and classify deferred income tax liabilities and assets into current and non-current amounts and required an entity to now classify all deferred tax liabilities and assets as non-current. The provisions of the amended guidance were adopted on a prospective basis during the first quarter of 2016. Amounts related to deferred taxes in the balance sheets as of December 31, 2018 and 2017 are presented as follows:



	2018			2017
Non-current deferred tax assets	$	20,474		$	12,161
Non-current deferred tax liabilities	(106,559		)	(73,505		)
Net deferred tax liabilities	$	(86,085	)	$	(61,344	)

The standards related to accounting for income taxes require that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that the deferred tax asset will not be realized. Available evidence includes the reversal of existing taxable temporary differences, future taxable income exclusive of temporary differences, taxable income in carryback years and tax planning strategies.

Management believes that sufficient taxable income should be earned in the future to realize the net deferred tax assets principally in the United States. The realization of these assets is dependent in part on the amount and timing of future taxable income in the jurisdictions where deferred tax assets reside. The Company has tax loss carryforwards of $42,175; $3,294 which relates to U.S tax loss carryforwards which have carryforward periods up to 20 years for federal purposes and ranging from one to 20 years for state purposes; $28,458 of which relates to international tax loss carryforwards with carryforward periods ranging from one to 20 years; and $10,963 of which relates to international tax loss carryforwards with unlimited carryforward periods. In addition, the Company has tax credit carryforwards of $228 with remaining carryforward periods ranging from one year to 5 years. As the ultimate realization of the remaining net deferred tax assets is dependent upon future taxable income, if such future taxable income is not earned and it becomes necessary to recognize a valuation allowance, it could result in a material increase in the Company’s tax expense which could have a material adverse effect on the Company’s financial condition and results of operations.

Management is required to assess whether its valuation allowance analysis is affected by various components of the Act including the deemed mandatory repatriation of foreign income for the Transition Tax, future GILTI inclusions, changes to the deductibility of executive compensation and interest expense and changes to the NOL and FTC rules. The Company has determined that a valuation allowance of $206 is appropriate relating to deferred taxes recognized for stock compensation granted to executives which the Company believes will not be deductible in future years.

A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate from continuing operations follows:



	2018		2017		2016
U.S. federal statutory income tax rate	21.0	%	35.0	%	35.0	%
State taxes (net of federal benefit)	—		0.1		0.4
Transition Tax	(0.3	)	45.0		—
U.S. Corporate Tax Rate change	(0.4	)	2.1		—
Indefinite Reinvestment Assertion	(0.6	)	3.5		—
Foreign operations taxed at different rates	1.3		(11.5	)	(10.9	)
Foreign losses without tax benefit	1.5		1.5		0.7
Repatriation from current year foreign earnings	—		—		1.6
GILTI	1.2		—		—
Tax Holidays	(1.7	)	(0.8	)	(1.2	)
Stock awards excess tax benefit	(0.8	)	(1.2	)	(1.2	)
Swiss Legal Entity Reduction	—		(3.4	)	—
Reduction of Valuation Allowances	(2.5	)	—		—
Audit Settlements	—		(2.7	)	—
Other	1.2		2.0		1.3
Consolidated effective income tax rate	19.9	%	69.6	%	25.7	%

Payment of the Transition Tax assessed is required over an eight-year period. The short-term portion of the Transition Tax payable, $416, has been included within Accrued Liabilities on the Consolidated Balance Sheet as of December 31, 2018. The long-term portion of the assessment, $72,961, is included as a Long-term tax liability on the Consolidated Balance Sheet and is payable as follows: $6,949 annually in 2020 through 2022; $13,029 in 2023; $17,371 in 2024 and $21,714 in 2025.

The Aerospace and Industrial Segments were previously awarded a number of multi-year tax holidays in both Singapore and China. Tax benefits of $3,627 ($0.07 per diluted share), $1,540 ($0.03 per diluted share) and $2,245 ($0.04 per diluted share) were realized in 2018, 2017 and 2016, respectively. These holidays are subject to the Company meeting certain commitments in the respective jurisdictions. Most tax holidays expired in 2017.

Income taxes paid globally, net of refunds, were $60,576, $51,548 and $40,842 in 2018, 2017 and 2016, respectively.

As of December 31, 2018, 2017 and 2016, the total amount of unrecognized tax benefits recorded in the consolidated balance sheet was $11,594, $9,209 and $13,320, respectively, which, if recognized, would have reduced the effective tax rate in prior years, with the exception of amounts related to acquisitions. A reconciliation of the unrecognized tax benefits for 2018, 2017 and 2016 follows:



	2018			2017			2016
Balance at January 1	$	9,209		$	13,320		$	10,634
Increase (decrease) in unrecognized tax benefits due to:
Tax positions taken during prior periods	649			1,141			—
Tax positions taken during the current period	367			778			117
Acquisition	2,516			—			2,569
Settlements	—			(4,162		)	—
Lapse of the applicable statute of limitations	(1,290		)	(1,868		)	—
Foreign Currency Translation	143			—			—
Balance at December 31	$	11,594		$	9,209		$	13,320

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company recognized interest and penalties as a component of income taxes of $370, $(257), and $(337) in the years 2018, 2017 and 2016 respectively. The liability for unrecognized tax benefits includes gross accrued interest and penalties of $4,169, $1,576 and $1,838 at December 31, 2018, 2017 and 2016, respectively.

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by various taxing authorities, including the IRS in the U.S. and the taxing authorities in other major jurisdictions including China, Germany, Singapore, Sweden and Switzerland. With a few exceptions, tax years remaining open to examination in significant foreign jurisdictions include tax years 2011 and forward and for the U.S. include tax years 2015 and forward. The Company was notified that the IRS will be auditing the 2016 tax year. The Company has received the final assessment in Germany for tax years 2011 through 2015 and remains under audit for certain subsidiaries in 2015 and 2016.