CAMBREX CORP

(

)

Income Taxes

Income before income taxes consists of the following:

	December 31,
	2017		2016		2015

Domestic	$	117,273	$	91,597	$	71,323
International		24,552		35,942		18,242
Total	$	141,825	$	127,539	$	89,565

The provision for income taxes consist of the following provisions

/(benefits):

	December 31,
	2017			2016		2015
Current:
Federal	$	25,201		$	21,167	$	2,577
International		5,674			10,491		10,076
Total current		30,875			31,658		12,653

Deferred:
Federal	$	7,615		$	8,350	$	22,005
International		(429	)		206		(2,269	)
Total deferred		7,186			8,556		19,736
Total income tax expense	$	38,061		$	40,214	$	32,389

The

provision for income taxes differs from the statutory federal income tax rate of

35%

for

2017,

2016

and

2015

as follows:

	December 31,
	2017			2016			2015

Income tax provision at U.S federal statutory rate	$	49,639		$	44,638		$	31,347
State and local taxes, net of federal income tax benefit		(207	)		(2,310	)		(2,450	)
Effect of foreign income taxed at rates other than the U.S. federal statutory rate		(1,989	)		(1,154	)		989
Foreign income inclusions		-			-			5,017
Tax credits		(100	)		(200	)		(4,685	)
Net change in valuation allowance		(315	)		1,673			3,134
Domestic production deduction		(3,347	)		(2,327	)		(1,958	)
Share-based payment compensation		(5,236	)		-			-
Changes in tax laws		117			-			-
Permanent items and other		(501	)		(106	)		995
Total	$	38,061		$	40,214		$	32,389

Foreign income inclusions in

2015

represent distributions from foreign subsidiaries which gave rise to federal foreign tax credits. Share-based payment compensation represents the impact of

applying ASU

2016

09,

which requires recognition immediately in the tax provision of certain effects of share-based payments that were possibly deferred under the previous guidance. Changes in tax laws represents the impact of TCJA.

TCJA tax reform legislation enacted on

December 22, 2017

makes major changes to the U.S. corporate income tax system, including lowering the U.S. federal corporate income tax rate to

21%

from

35%,

transitioning the U.S. from a worldwide tax system to a modified territorial system whereby accumulated foreign earnings are subject to a

one

-time toll charge at reduced rates in

2017

but future repatriations of foreign earnings will generally be exempt from U.S. tax, limiting or eliminating many existing tax deductions, credits and incentives, and allowing immediate expensing of capital expenditures through

2022,

among other items.

ASC

740

requires companies to recognize the effect

s of tax law changes in the period of enactment, which for Cambrex is the

fourth

quarter of

2017,

even though the effective date of most provisions of TCJA is

January 1, 2018.

Staff Accounting Bulletin

118

(“SAB

118”

) allows a company to recognize provisional amounts when it does

not

have the necessary information available, prepared or analyzed, including computations, in reasonable detail to complete its accounting for the change in tax law. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond

one

year. During the measurement period, adjustments for the effects of the law will be recorded to the extent a reasonable estimate for all or a portion of the effects of the law can be made. Companies will adjust their provisional amounts when they obtain, prepare or analyze additional information about facts and circumstances that existed at the enactment date that, if known, would have affected the amounts that were initially reported as provisional amounts.

SAB

118

summarizes a

three

-step process that companies should apply each reporting period. First, a company should record the effects of the change in tax law for which the accounting is complete. Those completed amoun

ts are

not

provisional amounts. Second, a company should report provisional amounts, or adjustments to provisional amounts in future periods, for the effects of the tax law change for which the accounting is

not

complete, but for which a reasonable estimate can be determined. Companies should record the provisional amounts and adjustments to those amounts in income tax expense or benefit from continuing operations in the period they are identified. Third, if a reasonable estimate cannot be made for a specific effect of the tax law change, a company should

not

record a provisional amount and should continue to apply ASC

740

based on the tax law in effect just before the enactment of TCJA.

Certain of TCJA

’s provisions require interpretation, which

may

be clarified through issuances of guidance by the U.S. Treasury Department, regulations, or future technical corrections. The Treasury recently issued Notice

2018

and Notice

2018

which provide preliminary guidance related to the toll charge and indicate plans to issue future regulations, and additional guidance on several aspects of the toll charge.

TCJA

resulted in significant changes to the Company’s

fourth

quarter

2017

income tax provision, including recording a provisional toll charge on accumulated foreign earnings at

15.5%

for cash and cash equivalents and

for illiquid assets and revaluing domestic federal deferred tax balances, and will materially impact the Company’s current and deferred tax provision in future years due to the reduction in the U.S. corporate income tax rate, the transition to a modified territorial tax system, and changes to the deductibility or tax treatment of certain items.

The Company recorded a

provisional toll charge which is payable over

eight

years of

$2,105

on the deemed repatriation of accumulated foreign earnings, offset by a benefit of

$3,599

to remove the deferred tax liability that the Company had previously provided on certain undistributed foreign earnings. Additionally, TCJA’s reduction in the U.S. federal corporate income tax rate to

21%

from

35%

effective

January 1, 2018

resulted in the Company recording a non-cash charge of

$1,611

to revalue its domestic federal deferred tax balances.

The Comp

any’s toll charge on accumulated foreign earnings is

not

complete and those amounts are provisional. The Company has

not

obtained, prepared and analyzed the information necessary to finalize its computations and accounting for the toll charge. Taxes payable of

$2,105

as a result of the toll charge is

not

complete because guidance needed to interpret and apply the complex toll charge rules, including guidance in determining the application of the

15.5%

and

tax rates to cash and illiquid assets, respectively, has

not

yet been issued by the Treasury Department. This additional information needs to be obtained and analyzed to complete the computations of the toll charge. In future periods within the

one

year measurement period, the Company will disclose when the accounting for the income tax effects of TCJA has been completed.

The Company

’s revaluation of domestic federal deferred tax balances to reflect the

21%

tax rate, resulting in a

$1,611

reduction in deferred tax balances, is complete and those amounts are

not

provisional.

January 2018

the FASB indicated that t

hey plan to issue a proposed ASU addressing a limited scope exception to accounting for residual tax effects lodged in other comprehensive income (“OCI”). The Board expects to propose requiring companies to reclassify from OCI to retained earnings the residual tax effects arising from TCJA. The proposal is expected to be effective for all entities for annual and interim periods in fiscal years beginning after

December 15, 2018,

with early adoption permitted. Cambrex expects to follow this guidance once issued and will make the necessary reclassification in each period in which the effects of TCJA are recognized.

The components of deferred tax assets and liabilities as of

December 31,

201

and

2016

relate to temporary differences and carryforwards as follows:

	December 31,
	2017			2016
Deferred tax assets:
Inventory	$	1,522		$	2,769
Environmental		3,635			5,776
Net operating loss carryforwards		11,447			13,272
Employee benefits		11,245			16,155
Property, plant and equipment		5,007			4,448
Other		3,712			7,352
Total gross deferred tax assets		36,568			49,772
Valuation allowance		(11,824	)		(11,459	)
Total deferred tax assets	$	24,744		$	38,313

Deferred tax liabilities:
Property, plant and equipment		(15,275	)		(17,709	)
Intangibles and other		(8,537	)		(10,583	)
Unremitted foreign earnings		-			(635	)
Foreign tax allocation reserve		(2,710	)		(2,471	)
Other		(2,830	)		(775	)
Total deferred tax liabilities	$	(29,352	)	$	(32,173	)
Net deferred tax assets	$	(4,608	)	$	6,140


Classified as follows in the consolidated balance sheet:
Non-current deferred tax asset		3,198			13,061
Non-current deferred tax liability		(7,806	)		(6,921	)
Total	$	(4,608	)	$	6,140

he Company expects to maintain a domestic valuation allowance against state NOLs, state tax credits and state deferred tax assets due to restrictive rules regarding realization and recent history of state losses. The Company expects to maintain a valuation allowance against certain foreign deferred tax assets, primarily NOL carryforwards, until such time as the Company attains an appropriate level of future profitability in the appropriate jurisdictions and is able to conclude that it is more likely than

not

that its foreign deferred tax assets are realizable.

The domestic valuation allowance for the years ended

December 31, 2017,

2016

and

2015

increased

64,

$2,294

and

2,450,

respectively. The

2017,

2016

and

2015

increases in the domestic valuation allowance are due to domestic state items.

The foreign valuation allowance for the years ended

December 31, 2017,

2016

and

2015

increased $

101,

decreased

$698,

and decreased

$1,531,

respectively. The

2017

increase in the foreign valuation allowance was allocated as follows: the valuation allowance increased

$51

for foreign losses and increased

$50

for currency translation adjustments included in OCI. The

2016

decrease in the foreign valuation allowance was allocated as follows: the valuation allowance decreased

$621

for foreign income and decreased

$77

for currency translation adjustments included in other OCI. The

2015

decrease in the foreign valuation allowance was allocated as follows: the valuation allowance increased

$684

for foreign loss and decreased

$2,215

for deferred tax amounts, the reclass of Zenara valuation allowance for assets held for sale into other current liabilities, and currency translation adjustments included in OCI.

Under the tax laws of the various jurisdictions in which the Company operates, NOLs

may

be carried forward or back, subject to statutory limitations, to reduce taxable income in future or prior years. Domestic federal

and state NOLs acquired in the CHP stock acquisition are

$7,439

and

$6,092,

respectively, and will expire in

2023

through

2035.

The federal NOLs can be utilized against U.S. consolidated taxable income, subject to annual limitations. A full valuation allowance has been recorded against domestic state NOLs totaling approximately

$108,292

as of

December 31, 2017

which will expire in

2029

through

2037.

A full valuation allowance has been recorded against foreign NOLs totaling approximately

$2,507

which in most foreign jurisdictions will carry forward indefinitely.

2015,

the Company repatriated

$9,850

of cash from its foreign subsidiaries in order to reduce its credit and currency exposure for cash held in foreign currencies or in non-U.S. banks

and utilized the excess cash for debt reduction. Due in part to a continuing desire to limit credit and currency exposure related to cash held in foreign currencies or in non-U.S. banks, the Company determined that it is likely that a portion of the undistributed earnings of its foreign subsidiaries will be repatriated to the U.S. in the future.

In prior periods, the Company provided deferred taxes on certain undistributed foreign earnings. Under TCJA’s transition to a modified territorial tax system whereby all previously untaxed undistributed foreign earnings are subject to a

one

-time toll charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. tax, the Company wrote off the existing deferred tax liability on undistributed foreign earnings and recorded the impact of the new toll charge on foreign earnings. The Company will continue to monitor available evidence and its plans for foreign earnings and expects to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts

not

considered permanently reinvested.

The following table summarizes the activity related to the Company’s unrecognized tax benefits as of

December 31, 2017,

2016

and

2015:

	2017			2016			2015

Balance at January 1	$	1,778		$	1,492		$	1,643
Gross increases related to current period tax positions		215			687			281
Gross decreases related to prior period tax positions		(52	)		(84	)		(52	)
Expirations of statute of limitations for the assessment of taxes		(353	)		(257	)		(241	)
Settlements		(134	)		-			-
Foreign currency translation		200			(60	)		(139	)
Balance at December 31	$	1,654		$	1,778		$	1,492

Of the total balance of unrecognized tax benefits at

December 31, 2017,

$1,654,

if recognized, would affect the effective tax rate.

Gross interest and penalties at

December 31,

2017,

2016,

and

2015,

$412,

$455,

and

$475,

respectively, related to the above unrecognized tax benefits are

not

reflected in the table above. In

2017,

2016,

and

2015,

the Company accrued

$153,

$63,

and

$58,

respectively, of interest and penalties in the income statement. Consistent with prior periods, the Company recognizes interest and penalties within its income tax provision.

Tax years

2012

and forward in the U.S. are open to examination by the IRS.

The Company is also subject to examinations in its material non-U.S. jurisdictions for

2011

and later years.

The Company is also subject to audits in various states for various years in which it has filed income tax returns.

Previous state audits have resulted in immaterial adjustments. In the majority of states where the Company files, the Company is subject to examination for tax years

2012

and forward.

During the

fourth

quarter of

201

the Company entered into a final agreement with a tax authority, without any admission of fault or breach of laws, to settle an examination of its

2014

tax return. The settlement required the Company to pay

$38

in tax and interest during the

fourth

quarter of

2017

in full satisfaction of all liabilities for this matter. The settlement did

not

impose any penalties on the Company. Therefore, in the

fourth

quarter of

2017

the Company decreased its remaining reserve for unrecognized tax benefits for this matter by

$270.