7. Income Taxes
Income before income taxes by domestic and foreign locations consists of the following:
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
|||
|
Domestic |
|
$ |
29,212 |
|
|
$ |
4,448 |
|
|
$ |
33,481 |
|
|
Foreign |
|
|
41,915 |
|
|
|
29,437 |
|
|
|
17,606 |
|
|
Total |
|
$ |
71,127 |
|
|
$ |
33,885 |
|
|
$ |
51,087 |
|
|
|
The components of the provision for income taxes consist of the following:
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
14,836 |
|
|
$ |
3,525 |
|
|
$ |
8,866 |
|
|
State |
|
|
106 |
|
|
|
287 |
|
|
|
467 |
|
|
Non-US |
|
|
12,770 |
|
|
|
7,783 |
|
|
|
6,581 |
|
|
|
|
|
27,712 |
|
|
|
11,595 |
|
|
|
15,914 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(6,222 |
) |
|
|
(2,177 |
) |
|
|
572 |
|
|
State |
|
|
371 |
|
|
|
(300 |
) |
|
|
280 |
|
|
Non-US |
|
|
(2,161 |
) |
|
|
(373 |
) |
|
|
(1,022 |
) |
|
|
|
|
(8,012 |
) |
|
|
(2,850 |
) |
|
|
(170 |
) |
|
Provision for income taxes |
|
$ |
19,700 |
|
|
$ |
8,745 |
|
|
$ |
15,744 |
|
A reconciliation from tax at the U.S. federal statutory rate to the Company’s provision for income taxes is as follows:
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
|||
|
Tax at US federal income tax rate |
|
$ |
24,896 |
|
|
$ |
11,871 |
|
|
$ |
17,881 |
|
|
Deferred tax impact of U.S. tax reform |
|
|
(7,819 |
) |
|
|
— |
|
|
|
— |
|
|
State taxes, net of federal income tax effect |
|
|
903 |
|
|
|
(141 |
) |
|
|
578 |
|
|
Other changes in tax rate |
|
|
(249 |
) |
|
|
(102 |
) |
|
|
32 |
|
|
Foreign reorganization |
|
|
— |
|
|
|
— |
|
|
|
(710 |
) |
|
Foreign taxes |
|
|
(3,051 |
) |
|
|
(2,593 |
) |
|
|
(2,050 |
) |
|
Transition tax (repatriation) |
|
|
7,374 |
|
|
|
— |
|
|
|
— |
|
|
Adjustments to accrued income tax liabilities and uncertain tax positions |
|
|
(451 |
) |
|
|
47 |
|
|
|
(18 |
) |
|
Valuation allowance |
|
|
(421 |
) |
|
|
118 |
|
|
|
1,218 |
|
|
Tax credits and incentives |
|
|
(495 |
) |
|
|
(296 |
) |
|
|
(420 |
) |
|
Domestic manufacturing deduction |
|
|
(762 |
) |
|
|
(486 |
) |
|
|
(1,051 |
) |
|
Other |
|
|
(225 |
) |
|
|
327 |
|
|
|
284 |
|
|
Provision for income taxes |
|
$ |
19,700 |
|
|
$ |
8,745 |
|
|
$ |
15,744 |
|
The Company and its subsidiaries file a consolidated federal income tax return in the United States, as well as consolidated and separate income tax returns in various states. The Company and its subsidiaries also file consolidated and separate income tax returns in various non-U.S. jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in all of these jurisdictions. With the exception of certain foreign jurisdictions, the Company is no longer subject to income tax examinations for the tax years prior to 2014. Additionally, the Company has indemnification agreements with the sellers of the Guardian, Svendborg, Lamiflex, Bauer and Stromag entities that provide for reimbursement to the Company for payments made in satisfaction of income tax liabilities relating to pre-acquisition periods.
A reconciliation of the gross amount of unrecognized tax benefits excluding accrued interest and penalties is as follows:
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
|||
|
Balance at beginning of period |
|
$ |
409 |
|
|
$ |
409 |
|
|
$ |
434 |
|
|
Increases related to prior year tax positions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Decrease related to prior year tax positions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Increases related to current year tax positions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Settlements |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Lapse of statute of limitations |
|
|
(409 |
) |
|
|
— |
|
|
|
(25 |
) |
|
Balance at end of period |
|
$ |
0 |
|
|
$ |
409 |
|
|
$ |
409 |
|
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties were not material in the period presented.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Post-retirement obligations |
|
$ |
3,283 |
|
|
$ |
2,833 |
|
|
Tax credits |
|
|
787 |
|
|
|
1,693 |
|
|
Expenses not currently deductible |
|
|
8,461 |
|
|
|
12,987 |
|
|
Net operating loss carryover |
|
|
3,670 |
|
|
|
5,228 |
|
|
Other |
|
|
1,045 |
|
|
|
994 |
|
|
Total deferred tax assets |
|
|
17,246 |
|
|
|
23,735 |
|
|
Valuation allowance for deferred tax assets |
|
|
(3,311 |
) |
|
|
(6,183 |
) |
|
Net deferred tax assets |
|
|
13,935 |
|
|
|
17,552 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
17,279 |
|
|
|
21,982 |
|
|
Intangible assets |
|
|
38,982 |
|
|
|
39,044 |
|
|
Basis difference - convertible debt |
|
|
— |
|
|
|
7,670 |
|
|
Goodwill |
|
|
7,316 |
|
|
|
7,430 |
|
|
Total deferred liabilities |
|
|
63,577 |
|
|
|
76,126 |
|
|
Net deferred tax liabilities |
|
$ |
49,642 |
|
|
$ |
58,574 |
|
On December 31, 2017 the Company had state net operating loss (NOL) carry forwards of $11.2 million, which expire between 2023 and 2033, and non U.S. NOL and capital loss carryforwards of $13.7 million, of which substantially all have an unlimited carryforward period. The NOL carryforwards available are subject to limitations on their annual usage. The Company also has federal and state tax credits of $1.0 million available to reduce future income taxes that expire between 2018 and 2031.
Valuation allowances are established for deferred tax assets when management believes it is more likely than not that the associated benefit may not be realized. The Company periodically reviews the adequacy of its valuation allowances and recognizes tax benefits only as reassessments indicate that it is more likely than not the benefits will be realized. Valuation allowances have been established due to the uncertainty of realizing the benefits of certain net operating losses, capital loss carryforwards, tax credits, and other tax attributes. The valuation allowances are primarily related to certain non-U.S. NOL carryforwards, capital loss carryforwards, and U.S. federal foreign tax credits.
The 2017 Tax Act, which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as global intangible low-taxed income (GILTI). These changes are effective beginning in 2018.
The 2017 Tax Act eliminates the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on undistributed foreign earnings. The Transition Toll Tax is assessed on the U.S. shareholder's share of the foreign corporation's accumulated foreign earnings that have not previously been taxed. Earnings in the form of cash and cash equivalents will be taxed at a rate of 15.5% and all other earnings will be taxed at a rate of 8.0%. As of December 31, 2017, we have accrued income tax liabilities of $7.4 million under the Transition Toll Tax, of which $0.9 million is expected to be paid within one year. The Transition Toll Tax will be paid over an eight-year period, starting in 2018, and will not accrue interest.
In prior years, we considered our earnings to be permanently reinvested outside the U.S. and have therefore not recorded deferred tax liabilities associated with a repatriation of earnings. Given the significant changes in the tax law, we have not yet concluded on whether the foreign earnings will remain permanently reinvested. For purposes of the preparation of these financial statements, we have continued to apply the assertion that the foreign earnings will remain permanently reinvested. As such, no estimate of the total withholding taxes or state taxes that may be a result of our repatriation of earnings have been recognized, and it is not practical to estimate the amount of such taxes. We will re-evaluate that assumption as we finalize the determination of the changes in the tax basis of our foreign operations arising from the Transition Tax.
Our deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled.
We have recorded a tax benefit of $7.8 million, reflecting the decrease in the U.S. corporate income tax rate and other changes to U.S. tax law to our net deferred tax liabilities. Our preliminary conclusion is that GILTI will likely not have a significant impact on our operations; however, we have not yet concluded on whether the impact of GILTI will be included in the measurement of our deferred taxes or recognized as any GILTI taxes are assessed as period costs.
Our preliminary estimate of the Transition Toll Tax and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the 2017 Tax Act, changes to certain estimates and amounts related to the earnings and profits of our foreign subsidiaries and the filing of our tax returns. There is significant complexity in developing estimates of the foreign tax credits that may be available to us arising from the Transition Tax and we have yet to finalize these computations, but we believe the amounts provided are reasonable estimates. While we do not expect that the state tax effects of the deemed repatriation of foreign earnings under the Transition Toll Tax will be material, we have not yet completed the measurement of the amounts that may be due to the various states. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the 2017 Tax Act may require further adjustments and changes in our estimates.
The final determination of the Transition Toll Tax and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.