INCOME TAXES

Income (loss) before income taxes, consisted of the following for the years set forth below (amounts in thousands):



	2016			2015			2014
Domestic	$	(52,716	)	$	(31,810	)	$	(47,730	)
Foreign	19,860			(20,196		)	(104,514		)
	$	(32,856	)	$	(52,006	)	$	(152,244	)

The income tax provision (benefit) was as follows for the years set forth below (amounts in thousands):



	2016			2015			2014
Current
Federal	$	(2,040	)	$	3,143		$	(2,753	)
State	(62		)	55			258
Foreign	6,063			7,114			5,476
	3,961			10,312			2,981
Deferred
Federal	—			28,283			(11,670		)
State	—			3,599			(1,205		)
Foreign	(680		)	(3,913		)	(11,925		)
	(680		)	27,969			(24,800		)
Income tax provision (benefit)	$	3,281		$	38,281		$	(21,819	)

The income tax provision differs from the amount of income tax determined by applying the statutory U.S. federal income tax rate to pre-tax income (loss) as a result of the following:



	2016		2015		2014
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Unrecognized tax positions	7.2		—		0.7
Impact of foreign income	29.8		13.5		(0.4	)
Goodwill impairment	—		—		(10.6	)
Valuation allowance	(77.8	)	(144.0	)	(11.3	)
State taxes, net	0.1		(7.0	)	0.8
Debt conversion expense	—		—		1.5
Benefit from a U.S. check-the-box election	—		35.5		—
Debt forgiveness	—		(2.2	)	—
Nondeductible royalty	(2.1	)	(1.6	)	—
Other, net	(2.2	)	(2.8	)	(1.4	)
Effective tax rate	(10.0	)%	(73.6	)%	14.3	%

The effective tax rate for the year ended December 31, 2016, was a negative 10.0% as compared to a negative 73.6% for the year ended December 31, 2015. The Company recorded a pre-tax loss in each of 2016 and 2015 and had a negative effective tax rate which represents tax expense in the consolidated financial statements.

The 2016 effective tax rate was unfavorably impacted by the recording of a valuation allowance and the rate was also favorably impacted by foreign earnings in jurisdictions where the statutory rate was less than 35%. The 2015 effective tax rate was favorably impacted by a foreign exchange loss upon the outbound transfer of Brazil assets for U.S. tax purposes (U.S. check the box election) and unfavorably impacted by the recording of a valuation allowance. The rate was also favorably impacted by foreign earnings in jurisdictions where the statutory rate was less than 35%.

In jurisdictions where the Company operates its businesses, management analyzes the ability to utilize its deferred tax assets arising from losses in its cyclical business. The Company continues to record a valuation allowance in several jurisdictions, including the U.S., various U.S. states, Italy, Australia, and Luxembourg as these amounts remain more likely than not that the deferred tax assets would not be utilized. For 2016, the Company recorded a valuation allowance of $25.6 million on the net deferred tax asset compared to $74.9 million in 2015. This amount is primarily related to net operating losses generated from operations in these certain countries.

In addition, the Company adjusted its uncertain tax positions primarily related to a final Internal Revenue Service (IRS) audit report which resulted in a net tax benefit of $2.4 million. The Company is involved in various tax matters, for some of which the outcome is uncertain. The IRS issued a final audit report on August 1, 2016, for the tax years 2010 through 2014 and a notice of proposed adjustment for $6.5 million. The Company does not agree with certain proposed adjustments and responded by filing a formal protest letter with the IRS Office of Appeals. Therefore the Company recorded an increase to certain tax positions from prior years and a decrease to certain tax positions from prior years to properly reflect the final audit report. The Company believes that it has adequate tax reserves to address these tax matters acknowledging that the outcome and timing of these events are uncertain.

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 Company’s deferred tax assets and liabilities at December 31, 2016 and 2015, were as follows (amounts in thousands):



	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	119,748		$	103,490
Pension	8,236			8,580
Inventory	5,407			6,163
Warranty	6,237			8,056
Employee benefits and related costs	18,882			16,578
Allowance for bad debts	186			639
Prepaid royalties	5,173			4,381
Other	21,974			15,780
Deferred tax assets	185,843			163,667
Deferred tax liabilities:
Fixed assets	(41,757		)	(43,663		)
Intangible assets	(4,214		)	(4,418		)
Other	(4,543		)	(3,958		)
Deferred tax liabilities	(50,514		)	(52,039		)
Subtotal	135,329			111,628
Valuation allowance	(143,849		)	(120,170		)
Net deferred tax liability	$	(8,520	)	$	(8,542	)

As of December 31, 2016 and 2015, certain tax loss carryforwards of $119.7 million and $103.5 million were available with $1.7 million expiring between 2017 and 2021 and $118.0 million expiring after 2021. At December 31, 2016, a valuation allowance of $143.8 million has been established. The net change in the valuation allowance was $23.7 million and $74.9 million for 2016 and 2015, respectively. The Company has $120.8 million of Federal net operating loss carryforward, a portion of which expires starting in 2034. Additionally, the Company has $164.1 million of state net operating losses and $266.8 million of foreign loss carryforwards. The majority of the valuation allowance is related to deferred tax assets in the U.S., Italy, Australia, Russia, and Luxembourg.

At December 31, 2016, U.S. income taxes had not been provided on approximately $115 million of unremitted earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to the Company or a U.S. affiliate, or if the Company were to sell its stock in the subsidiaries. It is not practical to estimate the amount of deferred tax liability on such earnings.

The Company or one of its subsidiaries files income tax returns in the U.S., Federal and State, and various foreign jurisdictions. The Company’s major locations are in the U.S., Italy, Australia, Russia, and Brazil. The IRS issued a final audit report in 2016 for the 2010-2014 U.S. Federal tax returns and the Company adjusted its uncertain tax reserves. These years remain open as the Company has filed a formal protest letter with the IRS Office of Appeals. In addition, the Company has ongoing tax audits with non-U.S. jurisdictions. Italy has open tax years from 2011-2016. Russia has open tax years from 2014-2016. Australia has open tax years from 2012-2016 and Brazil has open tax years from 2012-2016.

The Company has applied the provisions of ASC 740, “Income Taxes” related to unrecognized tax benefits. No adjustment was made to retained earnings in adopting these provisions in 2007. At December 31, 2016, 2015, and 2014, the unrecognized tax benefits were $16.1 million, $18 million, and $18.1 million, respectively. As of December 31, 2016, $16.1 million of unrecognized tax benefits would have affected income tax expense if the tax benefits were recognized. The majority of these recognized tax benefits would result in a net operating loss carryforward which would require a valuation allowance. The majority of the accrual in unrecognized tax benefits relates to potential state tax exposures. Although management cannot predict with any degree of certainty the timing of ultimate resolution of matters under review by various taxing jurisdictions, it is unlikely that the Company’s gross unrecognized tax benefits balance will change significantly within the next twelve months.

A reconciliation of the total amounts of unrecognized tax benefits at December 31 were as follows (amounts in thousands):



	2016			2015			2014
Balance at January 1	$	14,698		$	15,320		$	15,363
Increases to tax positions taken during the current year	288			7			190
Increases to tax positions taken during the prior years	3,201			591			3,131
Decreases to tax positions taken during prior years	(5,257		)	(534		)	(1,806		)
Decreases due to lapse of statutes of limitations	(4		)	(492		)	(802		)
Settlements	(476		)	(175		)	(656		)
Foreign exchange	18			(19		)	(100		)
Balance at December 31	$	12,468		$	14,698		$	15,320

The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense. The amount of interest and penalties related to unrecognized tax benefits recorded in income tax expense was $0.4 million, $0.5 million, and $0.3 million at December 31, 2016, 2015, and 2014. The reconciliation of unrecognized tax benefits above does not include accrued interest and penalties of $3.6 million, $3.3 million, and $2.8 million, at December 31, 2016, 2015, and 2014, respectively.