5. Income Taxes



The income tax expense (benefit) included in the accompanying consolidated statement of operations represents federal, state and foreign income taxes.  The components of income (loss) before income taxes and the provision for income taxes consist of the following:





A reconciliation of the Company’s effective income tax rate to the statutory federal tax rate is as follows:





The Company recognized income tax expense (benefit) of $7,533 or 14.3%,  $(36,389) or (92.8)% and $(547) or (2.7)% of income (loss) before income taxes for federal, state and foreign income taxes for the years ended December 31, 2017, 2016 and 2015, respectively.  The change in tax expense for the year ended December 31, 2017 compared to the same period for 2016 was predominantly due to the release of the U.S. federal, certain state and foreign valuation allowances in 2016 and the impact of the enactment of the Tax Cuts and Jobs Act (“Tax Legislation”) in the United States on December 22, 2017.



The Tax Legislation significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.  The impact of the Tax Legislation was a tax benefit of $(9,062), consisting of an increase in tax expense of $6,207 due to the one-time deemed repatriation tax, offset by the favorable impact of the reduced tax rate on the Company’s net deferred tax liabilities and other deferred tax adjustments of $(15,269) related to certain earnings included in the one-time transition tax.  Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Tax Legislation for which measurement could be reasonably estimated.  Although the Company continues to analyze certain aspects of the Tax Legislation and refine its assessment, the ultimate impact of the Tax Legislation may differ from these estimates due to continued analysis or further regulatory guidance that may be issued as a result of the Tax Legislation.  Pursuant to SAB 118, adjustments to the provisional amounts recorded by the Company as of December 31, 2017 that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined.



The increase in tax benefit for the year ended December 31, 2016 compared to the same period for 2015 was due to the release of the U.S. federal, certain state and foreign valuation allowances in the fourth quarter of 2016.    



The Company has not provided deferred taxes related to the undistributed earnings of foreign subsidiaries for which management does not intend to indefinitely reinvest, as these earnings are subject to the one-time transition tax and are not subject to additional U.S. tax upon repatriation. Any foreign tax on repatriation of earnings not intended to be indefinitely reinvested is expected to be immaterial. At December 31, 2017, the aggregate undistributed earnings of our foreign subsidiaries amounted to $47,860. 



Significant components of the Company’s deferred tax assets and liabilities were as follows:





The balance sheet classification of our net deferred tax asset is shown below:  





Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at December 31, 2017, a valuation allowance continues to be recorded against certain deferred tax assets based upon the conclusion that it was more likely than not they would not be realized. The valuation allowance at December 31, 2017 and 2016 relates primarily to PST.



In 2016, the financial results for the U.S. operation improved significantly due to the earnings growth of Control Devices segment as well as a significant reduction in interest expense as a result of the Company’s refinancing activities in the fall of 2014. The U.S. operation was in a three year cumulative income position at December 31, 2016. Based on the available positive and negative evidence and the weight accorded to that evidence at December 31, 2016, the Company determined that the significant positive evidence outweighed the negative evidence. Therefore, the Company concluded that it was more likely than not that the U.S. federal deferred tax assets would be realized (including those that carry expiration dates) and accordingly would no longer provide a valuation allowance against its domestic deferred tax assets. In addition, the Company concluded that it was more likely than not that the certain state and foreign, deferred tax assets would be realized, and as such the previously provided valuation allowances were released. 



The Company has net operating loss carry forwards of $42,571 and $35,075 for U.S. state and foreign tax jurisdictions, respectively.  The U.S. state net operating losses expire at various times and the foreign net operating losses expire at various times or have indefinite lives.  The Company has general business and foreign tax credit carry forwards of $27,336,  $1,753 and $1,023 for U.S. federal, state and foreign jurisdictions respectively.  The U.S. federal general business credits, if unused, begin to expire in 2023, and the state and foreign tax credits expire at various times.



The Company is required to provide a deferred tax liability corresponding to the difference between the financial reporting basis (which was remeasured to fair value upon the acquisition of an additional 24% of PST in 2011) and the tax basis in the previously held 50% ownership interest in PST (the “outside” basis difference). At December 31, 2017, the outside basis difference was reduced by $8,100 as a result of the one-time transition tax.  In 2017, the Company acquired the remaining 26% interest in PST. This outside basis difference will generally remain fixed until (1) dividends from the subsidiary exceed the parent’s share of earnings subsequent to the date it became a subsidiary or (2) there is a transaction that affects the Company’s ownership of PST.



The following is a reconciliation of the Company’s total gross unrecognized tax benefits:



At December 31, 2017, the Company has classified $444 as a noncurrent liability and $3,218 as a reduction to non-current deferred income tax assets. The amount of unrecognized tax benefits is not expected to change significantly during the next 12 months.  Management is currently unaware of issues under review that could result in a significant change or a material deviation in this estimate.



If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, the amount that would affect the Company’s effective tax rate is approximately $3,645 and $3,821 at December 31, 2017 and 2016, respectively.



The Company classifies interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense (benefit).  For the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately  $(33),  $(59) and $(90) of gross interest and penalties, respectively.  The Company has accrued approximately $32 and $64 for the payment of interest and penalties at December 31, 2017 and 2016, respectively.



The Company conducts business globally and, as a result, files 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 taxing authorities throughout the world. The following table summarizes the open tax years for each jurisdiction: