NOTE 9—INCOME TAXES

Income (loss) before income taxes was as follows:

 

The following table summarizes the income tax expense (benefit) by jurisdiction:

 

Income tax expense (benefit) is allocated between continuing operations and discontinued operations as follows:

 

Effective Tax Rate Reconciliation

The amount of the income tax provision for continuing operations during the years ended December 31, 2016, 2015 and 2014 differs from the statutory federal income tax rate of 35% as follows:

 

Deferred Taxes

The significant components of deferred income tax assets and liabilities consist of the following:

 

We have a net deferred tax liability of $15.5 million and $15.0 million as of December 31, 2016 and December 31, 2015, respectively. The net deferred tax liabilities for the years ended December 31, 2016 and 2015 predominantly related to indefinite-lived intangibles deferred tax liabilities that cannot be used to offset deferred tax assets subject to valuation allowances. Additional valuation allowances of $16.9 million and $21.9 million were recorded against the gross deferred tax asset balances as of December 31, 2016 and December 31, 2015, respectively.

As of December 31, 2016, we would need to generate $209.7 million of future U.S. pre-tax income to realize our deferred tax assets.

The income tax benefit of the Company’s excess tax benefit related to restricted stock awards amounts to $2.6 million as of December 31, 2016. The income tax benefit related to excess tax benefits will be credited to paid-in-capital upon the adoption of ASU 2016-09.

Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2016, we have $157.9 million of federal net operating loss (“NOL”) carryforwards expiring between 2026 and 2036. We have state NOL carryforwards of $194.5 million expiring between 2017 and 2036. We have $2.7 million of foreign NOL carryforwards that will begin expiring in 2017. We have $9.6 million in foreign tax credit carryforwards expiring between 2017 and 2026.  

Under the Internal Revenue Code, the amount of and the benefits from NOL and tax credit carryforwards may be limited or permanently impaired in certain circumstances.

Valuation Allowances

We review, at least annually, the components of our deferred tax assets. This review is to ascertain that, based upon all of the information available at the time of the preparation of the financial statements, it is more likely than not, that we expect to utilize these deferred tax assets in the future. If we determine that is more likely than not that these deferred tax assets will not be utilized, a valuation allowance is recorded, reducing the deferred tax asset to the amount expected to be realized. Many factors are considered in the determination that the deferred tax assets are more likely than not will be realized, including recent cumulative earnings, expectations regarding future taxable income, length of carryforward periods, and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is determined by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and tax planning strategies.

As of December 31, 2014, we placed a significant amount of weight on the negative evidence regarding the Company’s recent history of restated cumulative pre-tax losses from its U.S. and certain foreign business operations, i.e., the operations which must generate the future taxable income in order to realize the benefits from the deferred tax assets. The rationale for us placing a significant amount of weight on the Company’s recent history of cumulative restated pre-tax losses is that this represents both clearly objective and verifiable negative evidence of the Company’s ability to use its deferred tax assets. Additionally, the accounting standards indicate that a recent history of cumulative losses is a difficult burden to overcome. Because of the Company’s history of U.S. Federal, state, and certain foreign NOL, no significant cash tax refund carryback opportunities are available to the Company.

Therefore, as of December 31, 2014, with the restated pre-tax losses generated by the U.S. and certain foreign business operations, specifically, the pre-tax losses generated in 2014 and the preceding two years, we determined the weight of the objective and verifiable negative evidence clearly indicated in the fourth fiscal quarter that a valuation allowance against all of its U.S. and certain foreign deferred tax assets was necessary. As a result, additional valuation allowances of $44.9 million were recorded against the gross deferred tax asset balances as of December 31, 2014. No additional valuation allowances prior to the fourth quarter of 2014 were required to be placed on the Company’s deferred tax assets because restated pre-tax income (loss) generated in the current quarter and prior eleven quarters of each measurement period resulted in cumulative net income.

Our valuation allowances for deferred tax assets are $86.5 million and $69.6 million as of December 31, 2016 and December 31, 2015, respectively.

Unremitted Earnings

Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our operations outside of the U.S. Pursuant to ASC Topic No. 740-30, undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income taxes. Prior to fiscal year 2015, we asserted that the undistributed earnings of our foreign subsidiaries were permanently reinvested.

In the third quarter of 2015 our European operations loaned $5.0 million to our U.S. operations in order to provide additional working capital. Primarily due to this intercompany loan and the increase in our U.S. revolver and working capital needs, we concluded that the ability to access certain amounts of foreign earnings from our Netherlands-based operations would provide greater flexibility to meet domestic cash flow needs without constraining foreign objectives. Accordingly, in the third quarter of fiscal year 2015, we withdrew the permanent reinvestment assertion on $14.3 million of earnings generated by our Netherlands-based foreign subsidiaries through fiscal year 2015. We provided for U.S. income taxes on the $14.3 million of undistributed foreign earnings, resulting in the recognition of a deferred tax liability of $2.3 million.

As a result of the withdrawal of the permanent reinvestment assertion of our foreign earnings from our Netherlands-based operations in the third quarter of fiscal 2015, we provided for U.S. income taxes on an additional $2.0 million of earnings generated by our Netherlands-based operations in fiscal 2016, resulting in the recognition of an incremental deferred tax liability of $0.3 million in fiscal 2016.

As of December 31, 2016, the Company does not have any undistributed earnings in any of its other foreign subsidiaries because all of the earnings of its other foreign subsidiaries were taxed as deemed dividends.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows (in thousands):

 

As of December 31, 2016 we provided for a liability of $4.2 million for unrecognized tax benefits related to various federal, foreign and state income tax matters, which was included in long-term deferred tax liabilities and other long-term liabilities, compared with a liability of $4.5 million for unrecognized tax benefits as of December 31, 2015. We have elected to classify interest and penalties related to uncertain income tax positions in income tax expense. As of December 31, 2016, we have accrued $2.0 million for potential payment of interest and penalties, compared with an accrual of $2.5 million as of December 31, 2015.

As of December 31, 2016, 2015 and 2014, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate are $0.5 million, $0.5 million and $0.7 million, respectively. In 2017, we anticipate we will release less than $0.4 million of accruals of uncertain tax positions as the statute of limitations related to these liabilities will lapse in 2017.

The Company files a consolidated U.S. federal income tax return. Currently, we are not under examination for income tax purposes by any taxing jurisdiction. A presentation of open tax years by jurisdiction is as follows: