NOTE 11 – INCOME TAXES

Income (loss) before income taxes	2016			2015			2014
U.S.	$	(40,861	)	$	(21,091	)	$	392
Foreign		65,896			61,686			85,600
Total	$	25,035		$	40,595		$	85,992

The components of the income tax provision (benefit) are as follows for the years ended December 31:

	2016			2015			2014
Current tax provision (benefit)
Federal	$	-		$	12		$	285
Foreign		28,993			17,983			21,783
State		13			29			44
		29,006			18,024			22,112
Deferred tax provision (benefit)
Federal		(10,517	)		(2,739	)		2,996
Foreign		(13,847	)		(1,063	)		(4,244	)
State		101			(228	)		51
		(24,263	)		(4,030	)		(1,197	)
Liability for unrecognized tax benefits		1,815			88			(556	)
Total income tax provision	$	6,558		$	14,082		$	20,359

Effective Tax Rate Reconciliation

Reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 2016, 2015, and 2014 is as follows:

	2016						2015						2014
				Percent						Percent						Percent
				of pretax						of pretax						of pretax
	Amount			earnings			Amount			earnings			Amount			earnings
Federal tax	$	8,762			35.0		$	14,214			35.0		$	30,097			35.0
State income taxes, net of federal tax provision		(65	)		(0.3	)		(152	)		(0.4	)		18			-
Foreign income taxed at lower tax rates		(6,955	)		(27.8	)		(10,126	)		(24.9	)		(9,421	)		(11.0	)
U.S. tax impact of foreign operations		324			1.3			2,046			5.0			365			0.4
Foreign withholding taxes		4,834			19.3			2,268			5.6			3,694			4.3
Research and development		(2,241	)		(9.0	)		(2,068	)		(5.1	)		(2,666	)		(3.1	)
Liability for unrecognized tax benefits		1,815			7.3			88			0.2			(556	)		(0.6	)
Valuation allowance		(2,600	)		(10.4	)		3,580			8.8			876			1.0
Provision-to-return adjustments		(61	)		(0.2	)		994			2.4			(1,925	)		(2.2	)
Other		2,745			11.0			3,238			8.1			(123	)		(0.1	)
Income tax provision	$	6,558			26.2		$	14,082			34.7		$	20,359			23.7

Uncertain Tax Positions

In accordance with the provisions related to accounting for uncertainty in income taxes, we recognize the benefit of a tax position if the position is “more likely than not” to prevail upon examination by the relevant tax authority. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2016			2015			2014
Balance at January 1,	$	26,503		$	19,488		$	20,710
Additions based on tax positions related to the current year		6,746			3,450			2,729
Additions for prior year tax positions		960			6,963			424
Reductions for prior year tax positions		(5,360	)		(3,398	)		(4,375	)
Balance at December 31,	$	28,849		$	26,503		$	19,488

If the $28.8 million of unrecognized tax benefits as of December 31, 2016 is recognized, approximately $28.3 million would affect the effective tax rate. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlements of ongoing audits or competent authority proceedings. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2008, or for the 2010 and 2011 tax years. We are no longer subject to China income tax examinations by tax authorities for tax years before 2006. With respect to state and local jurisdictions and countries outside of the U.S., with limited exceptions, we are no longer subject to income tax audits for years before 2011. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties, if any, have been provided for in our reserve for any adjustments that may result from future tax audits. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits in interest expense. We had an immaterial amount of accrued interest and penalties at December 31, 2016, 2015 and 2014.

Deferred Taxes

At December 31, 2016 and 2015, our deferred tax assets and liabilities are comprised of the following items:

	2016			2015
Deferred tax assets
Inventory cost	$	6,923		$	7,944
Accrued expenses and accounts receivable		2,112			2,206
Foreign tax credits		19,610			20,133
Research and development tax credits		13,633			12,306
Net operating loss carryforwards		37,379			25,878
Accrued pension		5,494			7,169
Share based compensation and others		16,992			18,238
		102,143			93,874
Valuation allowances		(32,082	)		(35,738	)
Total deferred tax assets, non-current		70,061			58,136
Deferred tax liabilities
Plant, equipment and intangible assets		(28,639	)		(39,722	)
Total deferred tax liabilities, non-current		(28,639	)		(39,722	)
Net deferred tax assets	$	41,422		$	18,414

We prospectively adopted ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, (“ASU 2013-11”) effective in the first quarter of 2014. ASU No. 2013-11 provides that an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The $27.8 million net deferred tax asset presented on the balance sheet as of December 31, 2016, is net of $13.6 million of unrecognized tax benefits. The $41.4 million net deferred tax asset presented above is prior to the net balance sheet presentation required by ASU 2013-11. The $12.8 million net deferred tax assets presented as of December 31, 2015, is net of $5.6 million of unrecognized tax benefits. The $18.4 million net deferred tax asset presented above is the net balance sheet presentation required by ASU 2013-11.

At December 31, 2016, we had federal and state tax credit carryforwards of approximately $26.8 million and $6.6 million, respectively, which are available to offset future income tax liabilities. The federal tax credit carryforwards begin to expire in 2017 and the state tax credit carryforwards will begin to expire in 2020. We determined that it is more likely than not that a portion of our federal foreign tax credit and federal and state research credit carryforwards will expire before they are utilized. The valuation allowances recorded against the related deferred tax assets totaled $22.4 million as of December 31, 2016.

At December 31, 2016, we had federal and state net operating loss (“NOL”) carryforwards of approximately $81.6 million and $3.7 million, respectively, and foreign NOL carryforwards of $26.3 million which are available to offset future taxable income. The federal NOL carryforwards will begin to expire in 2032. We determined that it is more likely than not that the U.S. federal NOL carryforwards will be utilized; thus, no valuation allowance has been recorded. The U.S. state NOL carryforwards will begin to expire in 2017. We determined that it is more likely than not that the U.S. state NOL carryforwards will expire before they are fully utilized and recorded a full valuation allowance on the related deferred tax assets. The foreign NOL carryforwards will begin to expire in 2020. We determined that it is more likely than not that a portion of the foreign NOL carryforwards will expire before they are fully utilized. The valuation allowances recorded against the related deferred tax assets totaled $5.9 million as of December 31, 2016.

Supplemental Information

Funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state income taxes. We intend to permanently reinvest overseas all of our earnings from our foreign subsidiaries, except to the extent such undistributed earnings have previously been subject to U.S. tax; accordingly, U.S. taxes are not being recorded on undistributed foreign earnings. As of December 31, 2016, we had undistributed earnings from our non-U.S. operations of approximately $507.6 million (including approximately $38.9 million of restricted earnings which are not available for dividends). Undistributed earnings of our China subsidiaries comprise $357.8 million of this total. Additional federal and state income taxes of approximately $151.3 million would be required should such earnings be repatriated to the U.S. as dividends.

The impact of tax holidays decreased our tax expense by approximately $7.3 million, $2.9 million and $2.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. The benefit of the tax holidays on both basic and diluted earnings per share for the years ended December 31, 2016 was approximately $0.15. The benefit of the tax holidays on both basic and diluted earnings per share for the years ended December 31, 2015 and 2014 was approximately $0.6 and $0.05, respectively.