Note G - Income Taxes

Income before income taxes was derived from the following sources:

	2016		2015		2014
United States	$	3,501	$	4,421	$	11,810
Foreign		17,452		7,285		9,600
	$	20,953	$	11,706	$	21,410

The components of income taxes for the year ended December 31 are as follows:

	2016			2015			2014
Current
Federal	$	(1,698	)	$	2,679		$	4,718
Foreign		5,115			2,951			5,081
State and local		32			345			447
		3,449			5,975			10,246
Deferred
Federal		2,986			(611	)		(425	)
Foreign		(914	)		(309	)		(1,110	)
State and local		177			(24	)		(162	)
		2,249			(944	)		(1,697	)
Income taxes	$	5,698		$	5,031		$	8,549

The differences between the provision for income taxes at the U.S. federal statutory rate and the tax shown in the Statements of Consolidated Income for the year ended December 31 are summarized as follows:

	2016			2015			2014
U. S. federal statutory tax rate		35%			35%			35%

Federal tax at statutory rate	$	7,334		$	4,097		$	7,494
State and local taxes, net of federal benefit		20			89			290
U.S. federal permanent items		400			251			208
Domestic production activities deduction	0				(321	)		(536	)
Foreign earnings and related tax credits		716			700			700
Non-U.S. tax rate variances		(1,484	)		(685	)		(1,313	)
Unrecognized tax benefits		(195	)		(768	)		186
Valuation allowance		(414	)		1,754			1,925
Tax credits		(252	)		(212	)		(184	)
Other, net		(427	)		126			(221	)
	$	5,698		$	5,031		$	8,549

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax basis of assets and liabilities and their carrying value for financial statement purposes. The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities at December 31 are as follows:

	2016			2015
Deferred tax assets:
Accrued compensation and benefits	$	1,250		$	1,199
Inventory valuation reserves		3,422			3,080
Allowance for doubtful accounts		471			335
Benefit plan reserves		11,130			10,878
Net operating loss carryforwards		3,358			3,851
Tax credit carryforwards	0				534
Other accrued expenses		2,445			2,350
Unrealized foreign exchange		2,812			3,179
Gross deferred tax assets		24,888			25,406
Valuation allowance		(3,805	)		(5,209	)
Net deferred tax assets		21,083			20,197

Deferred tax liabilities:
Depreciation and other basis differences		(8,341	)		(5,841	)
Intangibles		(2,887	)		(2,959	)
Undistributed foreign earnings		(1,642	)		(1,094	)
Other		(83	)		(67	)
Deferred tax liabilities		(12,953	)		(9,961	)
Net deferred tax assets	$	8,130		$	10,236

	2016			2015
Change in net deferred tax assets:
Deferred income tax expense	$	(2,249	)	$	944
Items of other comprehensive income (loss)		(48	)		(464	)
Currency translation		191			18
Total change in net deferred tax assets	$	(2,106	)	$	498

Deferred taxes are recorded at a rate at which such items are expected to reverse, based on currently enacted tax rates for temporary differences between the financial reporting and income tax basis of assets and liabilities and operating loss and tax credit carryforwards.

At December 31, 2016, the Company had $10.8 million of foreign net operating loss carryforwards of which $10.0 million will have an indefinite carryforward and $.8 million will expire between the years 2024 and 2026. At December 31, 2016, the Company had $.2 million of tax benefits related to state net operating losses which will expire in 2036.

The Company assesses the available positive and negative evidence to determine if it is more likely than not sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction. Based on this evaluation, the Company has established a valuation allowance of $3.8 million at December 31, 2016 in order to measure only the portion of the deferred tax asset that is more likely than not to be realized. The net decrease in valuation allowance during the year was $1.4 million, all of which impacts the income tax provision.

The Company has not established a deferred tax liability associated with approximately $88.5 million of its undistributed foreign earnings at December 31, 2016 as these earnings are considered to be permanently reinvested outside the U.S. These earnings would be taxable upon the sale or liquidation of these foreign subsidiaries, or upon the remittance of such earnings. While the measurement of the unrecognized U.S. income taxes with respect to these earnings is not practicable, foreign tax credits would be available to offset some or all of such earnings that would be remitted as dividends.

Income taxes paid net of refunds were approximately $6.9 million in 2016, $12.3 million in 2015 and $7.7 million in 2014.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2016, with few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2013 and state, local or foreign examinations by tax authorities for years before 2010.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, for the year ended December 31:

	2016			2015			2014
Balance at January 1	$	178		$	794		$	608
Additions for tax positions of prior years	0			0				186
Reductions for tax positions of prior years	0				(616	)		0
Expiration of statutes of limitations		(178	)	0				0
Balance at December 31	$	0		$	178		$	794

The Company records accrued interest as well as penalties related to unrecognized tax benefits as part of the provision for income taxes. The Company recognized less than $.1 million, net of the amount reversed due to expiring statutes, during each of the years ended December 31, 2016, 2015 and 2014. During the year ended December 31, 2016, the Company reduced previously unrecognized tax benefits by $.2 million, primarily due to expiration of statutes of limitations. The Company had approximately $0, less than $.1 million, and $.6 million accrued for the payment of interest for the years ended December 31, 2016, 2015 and 2014, respectively. The Company had approximately $0, $.2 million, and $.2 million accrued for the payment of penalties for the years ended December 31, 2016, 2015 and 2014, respectively. If recognized, approximately $0, $.2 million and $.2 million of unrecognized tax benefits would affect the tax rate for the year ended December 31, 2016, 2015 and 2014, respectively. The Company does not anticipate a change in the unrecognized tax benefits within the next twelve months.