Income Taxes

For financial reporting purposes, income before taxes includes the following components (in thousands):



	Years ended December 31,
	2015			2014			2013
Domestic	$	(4,874	)	$	(3,575	)	$	(4,212	)
Foreign	5,380			9,446			9,955
	$	506		$	5,871		$	5,743

The expense (benefit) for income taxes is comprised of (in thousands):



	Years ended December 31,
	2015			2014			2013
Current:
Federal	$	492		$	1,934		$	127
State and local	(12		)	36			164
Foreign	3,007			4,205			3,181
	3,487			6,175			3,472
Deferred:
Federal	10,039			(3,376		)	586
State and local	630			(46		)	(35		)
Foreign	(656		)	(140		)	(2,772		)
	10,013			(3,562		)	(2,221		)
Total income tax expense	$	13,500		$	2,613		$	1,251

A reconciliation of income tax expense (benefit) at the U.S. federal statutory income tax rate to the actual income tax provision is as follows (in thousands):



	Years ended December 31,
	2015			2014			2013
Tax at statutory rate	$	177		$	2,055		$	2,010
State income taxes, net of U.S. federal tax benefit	383			(10		)	83
Effect of foreign operations	803			(1,026		)	(1,657		)
Residual U.S. tax on foreign earnings	—			2,426			(190		)
Change in valuation allowance	12,309			(1,361		)	2,113
Change in unrecognized tax benefits, net	12			273			150
Impairment of goodwill and indefinite-lived intangibles	360			303			—
Specialty tax credits	(216		)	(362		)	(341		)
Statutory rate changes	114			(166		)	(1,324		)
Other	(442		)	481			407
Total income tax expense	$	13,500		$	2,613		$	1,251

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 for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2015			2014
Deferred tax assets:
Pension and other postretirement costs	$	4,843		$	5,093
Inventories	2,275			2,286
Net operating/capital loss carryforwards	9,482			7,362
Tax credit carryforwards	4,712			4,550
Deferred compensation	2,392			2,055
Other accruals and reserves	3,480			3,704
Intangible assets, including tax deductible goodwill	784			—
Total gross deferred tax assets	27,968			25,050
Less: valuation allowance	(19,144		)	(5,768		)
	8,824			19,282
Deferred tax liabilities:
Tax over book depreciation	(255		)	(508		)
Intangible assets, including tax deductible goodwill	—			(166		)
Total gross deferred tax liabilities	(255		)	(674		)

Net deferred tax assets	$	8,569		$	18,608

During the fourth quarter of 2015, the Company established a valuation allowance with respect to substantially all of its U.S. deferred tax assets due to uncertainty regarding the realization of these assets. The Company analyzes its ability to realize its deferred tax assets on a regular basis, including a review of both positive and negative evidence regarding realization. The most significant negative evidence is cumulative operating losses in the U.S. In addition, our recent Stress-Tek acquisition will result in additional interest expense and will generate significant tax deductions in future years. Both the cumulative losses and additional deductions make utilization of our U.S. net operating loss and foreign tax credit carryforwards uncertain. The Company also considered positive evidence such as tax planning strategies and the projected benefits of our restructuring efforts. However, there was insufficient positive evidence to overcome the negative evidence. We will continue to monitor the realization of U.S. deferred tax assets and reduce the valuation allowance if, and when, sufficient positive evidence of realization exists. At December 31, 2015, the valuation allowance on U.S. deferred tax assets was approximately $16.7 million. The Company also has valuation allowances of $2.5 million at December 31, 2015 with respect to certain foreign net operating loss and capital loss carryforwards. At December 31, 2014, the Company had valuation allowances of $5.8 million with respect to state net operating losses, certain foreign net operating loss and capital loss carryforwards, and a partial valuation allowance with respect to U.S. foreign tax credits. Significant valuation allowances are as follows (in thousands):



	December 31,
Jurisdiction	2015		2014
U.S. federal	$	12,454	$	365
U.S. state (net of U.S. federal tax benefit)	4,206		3,034
Israel - capital losses	1,783		1,799

The following table summarizes significant net operating losses and credit carryforwards as of December 31, 2015 (in thousands):



	December 31,
Jurisdiction	2015		Expiring
U.S. federal net operating losses	$	4,826	2035
U.S. foreign tax credit	4,411		2020-2024
U.S state net operating losses	50,038		2023-2035
Israel net operating losses	17,835		No expiration

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $89.2 million at December 31, 2015 compared to $101.5 million at December 31, 2014. Substantially all of the undistributed earnings are considered to be indefinitely reinvested and accordingly, no provision has been made for U.S. federal and state income taxes. If those earnings were distributed to the U.S., the Company could be subject to U.S. income taxes, state income taxes, incremental foreign income taxes, and withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the uncertainty regarding the timing of any such distribution, the impact on existing valuation allowances, and complexities associated with the U.S. foreign tax credit rules. Withholding taxes of approximately $14.5 million are estimated to be payable upon remittance of all previously unremitted earnings as of December 31, 2015.

Net income taxes paid were $4.5 million, $3.1 million, and $3.4 million for the years ended December 31, 2015, 2014, and 2013, respectively.

The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction has its own rules that determine which years are subject to examination by its tax authorities. While the Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a tax liability in a jurisdiction to be finally determined, particularly in the event of an audit. If the matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment, including interest and penalties.

Since the Company and its affiliates have been included in tax returns filed by Vishay Intertechnology, our former parent, for periods prior to, and including, July 6, 2010, the Company has joint and several liability in multiple tax jurisdictions with respect to those tax returns. Under the terms of the Tax Matters Agreement entered into with Vishay Intertechnology, they have agreed to indemnify us for any such liability including interest and penalties, and any similar liability related to U.S. federal, state, local, and foreign income taxes whether determined on a separate company, consolidated, combined, unitary, or similar basis for each tax period during which the Company or its subsidiaries were part of Vishay Intertechnology’s affiliated group.

During 2015, the Company received $0.2 million from Vishay Intertechnology under this agreement. As of December 31, 2015, the Company recorded a gross tax liability of $0.1 million, which includes interest and penalties, related to these uncertain tax positions. The Company has also recorded a corresponding receivable, net of payments received, from Vishay Intertechnology.

The following table summarizes changes in the Company's gross liabilities, excluding interest and penalties, associated with unrecognized tax benefits (in thousands):



	December 31,
	2015			2014			2013
Balance at beginning of year	$	1,704		$	1,373		$	1,203
Addition based on tax positions related to current year	109			238			132
Addition based on tax positions related to prior years	13			249			78
Currency translation adjustments	(29		)	(100		)	38
Reduction for payments made	(241		)	—			—
Reduction for lapses of statute of limitations	(50		)	(56		)	(78		)
Balance before indemnification receivable	1,506			1,704			1,373
Receivable from Vishay Intertechnology for indemnification	(107		)	(281		)	(350		)
Balance at end of year	$	1,399		$	1,423		$	1,023

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued total penalties and interest of $0.3 million as of December 31, 2015, none of which was included in the indemnification receivable. As of December 31, 2014 and December 31, 2013, the Company accrued total penalties and interest of $0.5 million, of which $0.3 million and $0.4 million, respectively, were recorded within the indemnification receivable from Vishay Intertechnology.

Included in the balance of unrecognized tax benefits as of December 31, 2015, 2014, and 2013 is $1.5 million, $1.7 million, and $1.4 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The Company believes that it is reasonably possible that an increase in unrecognized tax benefits related to foreign exposures of between $0.1 million and $0.2 million may be necessary in 2016. As of December 31, 2015, the Company anticipates that it is reasonably possible that it will reverse approximately $0.3 million to $0.5 million of its current unrecognized tax benefits within the calendar year due to the expiration of the statute of limitations in certain jurisdictions. In addition, the Company believes it is reasonably possible that it may recognize approximately $0.1 million to $0.3 million of current unrecognized tax benefits within the calendar year as the result of cash payments made to the taxing authorities. Approximately $0.1 million of unrecognized tax benefits the Company expects to reverse due to statute lapses are covered by the Tax Matters Agreement. Upon reversal, the Company will recognize a pretax expense and a corresponding income tax benefit.

The Company and its subsidiaries file U.S. federal income tax returns, as well as income tax returns in various state, local, and foreign jurisdictions. The Company files federal, state, and local income tax returns on a combined, unitary, or stand-alone basis. The statute of limitations in those jurisdictions generally ranges from 3 to 4 years. Additionally, the Company's foreign subsidiaries file income tax returns in the countries in which they have operations and the statutes of limitations in those jurisdictions generally range from 3 to 10 years.

Currently, the Company has an ongoing income tax audit in India for the years 2010 through 2013, and has been notified that an audit will be conducted in Israel for the years 2012 through 2014. As a consequence of an on-going Vishay Intertechnology audit, the Company’s Israeli subsidiary may also be subject to audit for the years 2008 through 2010.