Entity information:
Income Taxes
For financial reporting purposes, income before taxes includes the following components (in thousands):
 
Years ended December 31,
 
2017
 
2016
 
2015
Domestic
$
(3,552
)
 
$
(5,285
)
 
$
(4,874
)
Foreign
24,115

 
14,892

 
5,380

 
$
20,563

 
$
9,607

 
$
506


The expense (benefit) for income taxes is comprised of (in thousands):
 
Years ended December 31,
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
(425
)
 
$
(18
)
 
$
492

State and local
89

 
30

 
(12
)
Foreign
4,615

 
2,886

 
3,007

 
4,279

 
2,898

 
3,487

Deferred:
 
 
 
 
 
Federal
(257
)
 
(1,176
)
 
10,039

State and local
(1
)
 
(9
)
 
630

Foreign
2,148

 
1,486

 
(656
)
 
1,890

 
301

 
10,013

Total income tax expense
$
6,169

 
$
3,199

 
$
13,500


A reconciliation of income tax expense (benefit) at the U.S. federal statutory income tax rate to the actual income tax provision is as follows (in thousands):
 
Years ended December 31,
 
2017
 
2016
 
2015
Tax at statutory rate
$
7,197

 
$
3,362

 
$
177

State income taxes, net of U.S. federal tax benefit
93

 
(15
)
 
383

Effect of foreign operations
(1,137
)
 
(1,418
)
 
664

Change in valuation allowance
(397
)
 
1,266

 
12,309

Change in unrecognized tax benefits, net
105

 
(899
)
 
12

Impairment of goodwill and indefinite-lived intangibles
—

 
—

 
360

Specialty tax credits
(139
)
 
(78
)
 
(216
)
Statutory rate changes
(470
)
 
(180
)
 
114

Effect of foreign exchange
(1,292
)
 
88

 
139

Prior period deferred tax adjustments
—

 
817

 
—

2017 Tax Act:


 


 


    Effects of U.S. tax reform
11,311

 
—

 
—

    Change in valuation allowance
(9,093
)
 
—

 
—

Other
(9
)
 
256

 
(442
)
Total income tax expense
$
6,169

 
$
3,199

 
$
13,500


On December 22, 2017, the Tax Cuts and Jobs Act ("2017 Tax Act") was enacted. The 2017 Tax Act significantly changes U.S. tax law by, among other things, lowering the corporate tax rate, implementing a modified territorial tax system, and imposing a one-time transition tax on post 1986 undistributed foreign earnings as of December 31, 2017. The 2017 Tax Act permanently reduces the U.S. tax rate from a maximum of 35% to a flat 21%, effective January 1, 2018. Under U.S. GAAP, changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate expected to apply to taxable income in the years in which the temporary differences are expected to recover or be settled.

Guidance issued by the Securities Exchange Commission ("SEC"), provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. Consistent with that guidance, the Company provisionally determined the tax cost of the one-time transition tax under the 2017 Tax Act to be approximately $2.2 million. This amount includes the tax benefit from the net operating loss of approximately $3.9 million because the Company intends to elect to utilize its net operating loss to reduce its provisional tax. As a result of the implementation of a modified territorial tax system, the Company reassessed its assertion with respect to certain subsidiaries that the earnings of those subsidiaries are indefinitely reinvested and recorded a deferred tax liability of $1.8 million withholding tax associated with the planned cash distribution of approximately $25.5 million of previously unremitted earnings. The deferred tax liability of $1.8 million is included in the provisional tax of $2.2 million.

On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have all the necessary information available to prepare and analyze the accounting treatment for the proper recognition of the tax impact of the 2017 Tax Act. In accordance with SAB 118 guidance, the Company has recorded the provisional tax impacts related to the deemed distribution of foreign earnings and the expense for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The final impact may differ from the provisional amount recognized, primarily due to the need for additional analysis, changes in our interpretation of the 2017 Tax Act, or issuance of additional regulatory guidance. In accordance with SAB 118, the financial reporting impact of the 2017 Tax Act will be completed in the fourth quarter of 2018.

The 2017 Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in the future years or provide for tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At December 31, 2017, because we are still evaluating the GILTI provision and our analysis of future taxable income that is subject to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements.

Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. During the fourth quarter of 2016, the Company wrote off deferred tax assets that had been recorded in periods prior to 2016, but which the Company determined did not meet the recognition criteria required by ASC 740 "Income Taxes". The deferred tax assets were recognized over a period of years. Of the amount written-off, $0.1 million was initially recognized in 2014 and the remaining $0.7 million was initially recognized in periods prior to 2014.


















Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Pension and other postretirement costs
$
4,295

 
$
4,714

Inventories
1,800

 
2,466

Net operating/capital loss carryforwards
9,523

 
11,825

Tax credit carryforwards
—

 
5,077

Deferred compensation
2,142

 
2,468

Other accruals and reserves
3,192

 
3,229

Total gross deferred tax assets
20,952

 
29,779

Less: valuation allowance
(12,434
)
 
(20,741
)
 
8,518

 
9,038

Deferred tax liabilities:
 
 
 
Tax over book depreciation
(125
)
 
(189
)
Investment in subsidiary
(2,214
)
 
(350
)
Intangible assets, including tax deductible goodwill
(713
)
 
(1,361
)
Total gross deferred tax liabilities
(3,052
)
 
(1,900
)
 
 
 
 
Net deferred tax assets
$
5,466

 
$
7,138



In 2015, the Company established a valuation allowance with respect to substantially all of its U.S. deferred tax assets due to uncertainty regarding the realization of these assets. Throughout 2016 and 2017, the Company reassessed its ability to realize its U.S. and other deferred tax assets by considering both positive and negative evidence regarding realization. The most significant negative evidence is continuing cumulative operating losses in the U.S. The impact of the acquisitions of Stress-Tek and Pacific was also considered in determining the realization of the U.S. deferred tax assets. The Pacific acquisition resulted in the establishment of deferred tax liabilities which allowed the Company to adjust its previously established valuation allowance by $1.6 million. Other aspects, such as operating results, additional interest expense and additional tax deductions related to the Stress-Tek acquisition, were also considered. The Company also considered positive evidence such as tax planning strategies and the projected benefits of our restructuring efforts. However, there was insufficient positive evidence to overcome the negative evidence.

Overall, the cumulative losses and the acquisition impacts still indicate that realization of our U.S. deferred tax assets remains uncertain such that the Company cannot conclude that it is "more likely than not" that the deferred tax assets will be recoverable. We will continue to monitor the realization of U.S. deferred tax assets and reduce the valuation allowance if, and when, sufficient positive evidence of realization exists. At December 31, 2017 and 2016, the valuation allowance on U.S. deferred tax assets was approximately $10.1 million and $18.1 million, respectively. The decrease in the valuation allowance is primarily driven by the utilization of net operating losses, tax credits and changes in tax rates.

The Company also has valuation allowances of $2.3 million and $2.6 million at December 31, 2017 and 2016, respectively, with respect to certain foreign net operating loss and capital loss carryforwards. The valuation allowance related to state tax expense was $2.1 million and $1.1 million for the years ended December 31, 2017 and 2016, respectively. Of the total $2.1 million, $1.0 million related to the 2017 Tax Act. The valuation allowance related to Israel capital losses was reduced during 2016 as a result of the sale of the Karmiel facility because the sale triggered a capital gain. Significant valuation allowances are as follows (in thousands):

 
December 31,
Jurisdiction
2017
 
2016
U.S. federal
$
3,040

 
$
13,101

U.S. state (net of U.S. federal tax benefit)
7,092

 
5,022

Israel - capital losses
1,622

 
1,486



The following table summarizes significant net operating losses and credit carryforwards as of December 31, 2017 (in thousands):

 
December 31,
 
 
Jurisdiction
2017
 
Expiring
U.S state net operating losses
12,083

 
2023 - 2036
Israel net operating losses
11,677

 
No expiration

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $120.0 million at December 31, 2017 compared to $96.5 million at December 31, 2016. As a result of the 2017 Tax Act the Company has recorded a deferred tax liability of approximately $1.8 million of withholding tax associated with the planned cash distribution of approximately $25.5 million. Other than the planned cash distribution of $25.5 million, substantially all of the remaining undistributed earnings are considered to be indefinitely reinvested and accordingly, no provision has been made for incremental foreign income taxes, state income taxes or foreign withholding taxes. If those earnings were distributed to the U.S., the Company could be subject to incremental foreign income taxes, state income taxes, and withholding taxes. Determination of the amount of unrecognized deferred tax liability is not practicable because of the uncertainty regarding the timing of any such distribution and the impact on existing valuation allowances. In addition to the $1.8 million noted above, additional withholding taxes of approximately $15.0 million are estimated to be payable upon remittance of the remaining previously unremitted earnings as of December 31, 2017.
Net income taxes paid were $4.1 million, $3.9 million, and $4.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction establishes rules that set forth the years which are subject to examination by its tax authorities. While the Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a final tax liability in a jurisdiction to be determined, particularly in the event of an audit. If an uncertain matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment, including interest and penalties.
Since the Company and its affiliates have been included in tax returns filed by Vishay Intertechnology, our former parent, for periods prior to, and including, July 6, 2010, the Company has joint and several liability in multiple tax jurisdictions with respect to those tax returns. Under the terms of the Tax Matters Agreement entered into with Vishay Intertechnology, they have agreed to indemnify us for any such liability including interest and penalties, and any similar liability related to U.S. federal, state, local, and foreign income taxes whether determined on a separate company, consolidated, combined, unitary, or similar basis for each tax period during which the Company or its subsidiaries were part of Vishay Intertechnology’s affiliated group.
As of December 31, 2017 and 2016, the Company recorded immaterial gross tax liabilities related to these uncertain tax positions. The Company has also recorded a corresponding receivable from Vishay Intertechnology.
The following table summarizes changes in the Company's gross liabilities, excluding interest and penalties, associated with unrecognized tax benefits (in thousands):
 
December 31,
 
2017
 
2016
 
2015
Balance at beginning of year
$
772

 
$
1,506

 
$
1,704

Addition based on tax positions related to current year
163

 
63

 
109

(Reduction) addition based on tax positions related to prior years
(12
)
 
66

 
13

Addition related to acquired company
—

 
297

 
—

Currency translation adjustments
14

 
16

 
(29
)
Reduction for settled tax examinations
—

 
(906
)
 
—

Reduction for payments made
—

 
—

 
(241
)
Reduction for lapses of statute of limitations
(114
)
 
(270
)
 
(50
)
Balance before indemnification receivable
823

 
772

 
1,506

Receivable from Vishay Intertechnology for indemnification
(12
)
 
(57
)
 
(107
)
Balance at end of year
$
811

 
$
715

 
$
1,399


The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued total penalties and interest of $0.1 million as of December 31, 2017, none of which was included in the indemnification receivable. As of December 31, 2016 and December 31, 2015, the Company accrued total penalties and interest of $0.3 million and $0.3 million, respectively.
Included in the balance of unrecognized tax benefits as of December 31, 2017, 2016, and 2015 is $0.8 million, $0.8 million, and $1.5 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The Company believes that it is reasonably possible that an increase in unrecognized tax benefits related to foreign exposures of between $0.1 million and $0.2 million may be necessary in 2018. As of December 31, 2017, the Company anticipates that it is reasonably possible that it will reverse up to $0.2 million of its current unrecognized tax benefits within the calendar year due to the expiration of the statute of limitations in certain jurisdictions. In addition, the Company believes it is reasonably possible that it may pay up to $0.1 million to tax authorities to settle current unrecognized tax benefits. None of the unrecognized tax benefits the Company expects to reverse in 2017 due to statute lapses are covered by the Tax Matters Agreement.
The Company and its subsidiaries file U.S. federal income tax returns, as well as income tax returns in various state, local, and foreign jurisdictions. The Company files federal, state, and local income tax returns on a combined, unitary, or stand-alone basis. The statute of limitations in those jurisdictions generally ranges from 3 to 4 years. Additionally, the Company's foreign subsidiaries file income tax returns in the countries in which they have operations and the statutes of limitations in those jurisdictions generally range from 3 to 10 years.
During the fourth quarter of 2017, the Company concluded a tax examination in Japan for one of its subsidiaries, covering the years 2014 through 2016.
During 2016, the Company concluded a tax examination in Israel for the years 2012-2014. The Company is subject to ongoing income tax audits, administrative appeals and judicial proceedings in India spanning a number of years.