10. Income Taxes



Income tax expense (benefit) is based on our earnings from continuing operations before income taxes as presented in the following table:











Our income tax expense (benefit) from continuing operations consists of the following components:







In addition, income tax (benefit) expense that we allocated directly to Ferro Corporation shareholders’ equity is detailed in the following table:









A reconciliation of the U.S. federal statutory income tax rate and our effective tax rate follows:







On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”), was signed into law, significantly changing the U.S. corporate income tax system.  These changes include a federal statutory rate reduction from 35% to 21% effective January 1, 2018.  Changes in tax rates and tax law are accounted for in the period of enactment.  Accordingly, the Company’s net deferred tax assets were re-measured to reflect the reduction in the federal statutory rate, resulting in a $21.5 million increase in income tax expense for the year ended December 31, 2017.  The Tax Act also changed the U.S. taxation of worldwide income.  Accordingly, we have assessed the one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries’ previously untaxed foreign earnings and profits and have preliminarily determined no tax is due.

Additional provisions of the Tax Act which may have an impact to the Company include, but are not limited to, the repeal of the domestic production deduction, limitations on interest expense, accelerated depreciation that will allow for full expensing of qualified property, provisions related to performance-based executive compensation and international provisions, which generally establish a territorial-style system for taxing foreign-source income of domestic multinational corporations.

We have recognized the provisional tax impacts related to the Tax Act under the guidance of SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  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 income tax expense in the period the amounts are determined.

We have refundable income taxes of $6.9 million at December 31, 2017, and $9.2 million at December 31, 2016, classified as Other receivables on our consolidated balance sheets. We also have income taxes payable of $8.3 million at December 31, 2017, and $15.8 million at December 31, 2016, classified as Accrued expenses and other current liabilities on our consolidated balance sheets.

The components of deferred tax assets and liabilities at December 31 were:







The amounts of foreign operating loss carryforwards, foreign tax credit carryforwards, and other credit carryforwards included in the table of temporary differences are net of reserves for unrecognized tax benefits.

At December 31, 2017, we had $2.6 million of tax benefits from domestic operating loss carryforwards and $49.3  million from foreign operating loss carryforwards, some of which can be carried forward indefinitely and others that expire in one to twenty years. At December 31, 2017, we had $35.4 million of tax benefits from tax credit carryforwards, some of which can be carried forward indefinitely. These operating loss carryforwards and tax credit carryforwards expire as follows:





We assess the available positive and negative evidence to determine if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated by jurisdiction was whether a cumulative loss over the three-year period ended December 31, 2017 had been incurred. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future income.

Based on this assessment, the Company has recorded a valuation allowance of $32.6 million in order to measure only the portion of the deferred tax assets that more likely than not will be realized. The lower valuation allowance from 2016 to 2017 primarily related to the removal of a valuation allowance in a jurisdictions where it was deemed the valuation allowance was no longer necessary and the expiration of assets with an off-setting valuation allowance. 

We classified net deferred income tax assets as of December 31 as detailed in the following table:







Activity and balances of unrecognized tax benefits are summarized below:





The total amount of unrecognized tax benefits that, if recognized, would affect the effective rate was $9.8 million at December 31, 2017, and $11.0 million at December 31, 2016. The Company recognizes interest and penalties related to unrecognized tax benefits as part of income tax expense. The Company recognized $0.7 million of expense in 2017,  $0.1 million of expense in 2016, and $0.6 million of expense in 2015 for interest, net of tax, and penalties. The Company accrued $3.8 million at December 31, 2017, and $3.1 million at December 31, 2016, for payment of interest, net of tax, and penalties.

We anticipate that $1.0 million of liabilities for unrecognized tax benefits, including accrued interest and penalties, may be reversed within the next 12 months. These liabilities relate to international tax issues and are expected to reverse due to the expiration of the applicable statute of limitations periods and the anticipation of the closure of tax examinations.

The Company conducts business globally, and, as a result, the U.S. parent company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the U.S. parent company and its subsidiaries are subject to examination by taxing authorities throughout the world. With few exceptions, we are not subject to federal, state, local or non-U.S. income tax examinations for years before 2005.

At December 31, 2017, we provided $1.2 million for deferred income taxes on $8.6 million of undistributed earnings of foreign subsidiaries. We have not provided deferred  income taxes on undistributed earnings of all our foreign subsidiaries since we intend to indefinitely reinvest the earnings and it is not practicable to estimate the additional taxes that might be payable on the eventual remittance of such earnings.