NOTE 11 – INCOME TAXES

Tax Cuts and Jobs Act

The Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, provides an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and creates new taxes on certain foreign sourced earnings. As of the completion of these financial statements and related disclosures, we have not completed our accounting for the tax effects of the Tax Act; however, as described below, we have made a reasonable estimate of such effects and recorded a provisional tax expense of $45.9 million, which is included as a component of income tax expense from continuing operations in the fourth quarter of 2017. This provisional tax expense incorporates assumptions made based upon the Company’s current interpretation of the Tax Act, and may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects will be reported as a component of income tax expense from continuing operations in the reporting period in which any such adjustments are determined.

The table below reflects the significant components of the provisional amount of tax expense recorded in the fourth quarter of 2017 and included as a component of income tax expense from continuing operations:

Component	Provisional Amount
Remeasurement of U.S. deferred tax assets and liabilities	$	2,913
Transition tax on foreign earnings		104,327
Foreign tax credits used to offset transition tax		(58,975	)
Other adjustments		(2,357	)
Total net tax expense related to the Tax Act	$	45,908

The Company expects to use net operating loss carryforwards and tax credits to completely offset any cash tax obligations resulting from the transition tax. The other components shown above represent noncash adjustments to tax expense.

Remeasurement of U.S. deferred tax assets and liabilities

We remeasured certain U.S. deferred tax assets and liabilities using the lower corporate income tax rate of 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these deferred tax balances.

Transition tax on foreign earnings

The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes, and is net of indirect effects of unrecognized tax benefits. We have not yet completed our calculation of the total post-1986 E&P for the majority of our foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.

No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities. Our undistributed foreign earnings, including those subject to the transition tax, continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable. We continue to evaluate the potential effects the Tax Act may have on our long term plans for capital investment across the geographies in which we operate.

Foreign tax credits used to offset transition tax

The Company is able to claim foreign tax credits against the incremental U.S. tax due on its previously deferred foreign earnings. However, we have not yet completed our calculation of the total amount of foreign taxes previously paid or accrued by the majority of our foreign subsidiaries that may be creditable against the transition tax. We expect these tax credits to generally be available to offset any cash tax liability resulting from the transition tax.

Other adjustments

We have not yet completed our analysis of the direct and indirect implications of the Tax Act on the Company’s tax attributes, such as tax credit carryforwards. Included in the provisional tax expense is the estimated effect of our change in judgment regarding realizability of foreign tax credits and R&D credits.

Income (loss) before income taxes	2017			2016			2015
U.S.	$	(72,668	)	$	(40,861	)	$	(21,091	)
Foreign		135,259			65,896			61,686
Total	$	62,591		$	25,035		$	40,595

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

	2017			2016			2015
Current tax provision (benefit)
Federal	$	-		$	-		$	12
Foreign		31,820			28,993			17,983
State		7			13			29
		31,827			29,006			18,024
Deferred tax provision (benefit)
Federal		30,186			(10,517	)		(2,739	)
Foreign		(2,352	)		(13,847	)		(1,063	)
State		(8	)		101			(228	)
		27,826			(24,263	)		(4,030	)
Liability for unrecognized tax benefits		2,672			1,815			88
Total income tax provision	$	62,325		$	6,558		$	14,082

Effective Tax Rate Reconciliation

Reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 2017, 2016, and 2015 is as follows:

	2017						2016						2015
				Percent						Percent						Percent
				of pretax						of pretax						of pretax
	Amount			earnings			Amount			earnings			Amount			earnings
Federal tax	$	21,907			35.0		$	8,762			35.0		$	14,214			35.0
State income taxes, net of federal tax provision		(15	)		-			(65	)		(0.3	)		(152	)		(0.4	)
Foreign income taxed at lower tax rates		(23,515	)		(37.6	)		(6,955	)		(27.8	)		(10,126	)		(24.9	)
U.S. tax impact of foreign operations		6,726			10.7			324			1.3			2,046			5.0
Foreign withholding taxes		4,343			6.9			4,834			19.3			2,268			5.6
Research and development		(2,643	)		(4.2	)		(2,241	)		(9.0	)		(2,068	)		(5.1	)
Liability for unrecognized tax benefits		2,672			4.3			1,815			7.3			88			0.2
Valuation allowance		2,077			3.3			(2,600	)		(10.4	)		3,580			8.8
Provision-to-return adjustments		131			0.2			(61	)		(0.2	)		994			2.4
Employee stock-based compensation		1,537			2.5			-			-			-			-
U.S. Tax Cuts and Jobs Act		45,908			73.4			-			-			-			-
Other		3,197			5.1			2,745			11.0			3,238			8.1
Income tax provision	$	62,325			99.6		$	6,558			26.2		$	14,082			34.7

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:

	2017			2016			2015
Balance at January 1,	$	28,849		$	26,503		$	19,488
Additions based on tax positions related to the current year		3,492			6,746			3,450
Additions for prior year tax positions		863			960			6,963
Reductions for prior year tax positions		(2,623	)		(5,360	)		(3,398	)
Balance at December 31,	$	30,581		$	28,849		$	26,503

If the $30.6 million of unrecognized tax benefits as of December 31, 2017 is recognized, approximately $27.2 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 2007. 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 2012. 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, 2017, 2016 and 2015.

Deferred Taxes

The table below sets forth our deferred tax assets and liabilities as of December 31, 2017 and 2016:

	2017			2016
Deferred tax assets
Inventory cost	$	8,000		$	6,923
Accrued expenses and accounts receivable		690			2,112
Foreign tax credits		10,626			19,610
Research and development tax credits		15,828			13,633
Net operating loss carryforwards		5,392			37,379
Accrued pension		5,428			5,494
Share based compensation and others		12,443			16,992
		58,407			102,143
Valuation allowances		(22,560	)		(32,082	)
Total deferred tax assets, non-current		35,847			70,061
Deferred tax liabilities
Plant, equipment and intangible assets		(17,278	)		(28,639	)
Total deferred tax liabilities, non-current		(17,278	)		(28,639	)
Net deferred tax assets	$	18,569		$	41,422

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 $15.4 million net deferred tax assets presented in the balance sheet as of December 31, 2017, is net of $3.2 million of unrecognized tax benefits. 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.

We adopted ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”) effective in the first quarter of 2017. The effect of the adoption related to the income tax components of ASU 2016-09 was an increase of $4.8 million to retained earnings and to deferred income tax assets, to record the tax benefit of the net operating loss carryforward resulting from excess tax deductions related to stock based compensation. ASU 2016-09 requires that the tax effects of differences between cumulative compensation expense recorded for financial statement purposes and available income tax deductions be recorded to income tax expense. We recorded a $1.5 million increase to income tax expense as a result of the application of ASU 2016-09 to stock based compensation vesting and exercise events that occurred during 2017.

At December 31, 2017, we had federal tax credit and research credit carryforwards of approximately $20 million and $7 million, respectively, which are available to offset future income tax liabilities. The federal tax credit carryforwards begin to expire in 2021 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 and state research credit carryforwards will expire before they are utilized. The valuation allowances recorded against the related deferred tax assets totaled $13 million and $22.4 million as of December 31, 2017 and 2016, respectively.

At December 31, 2017, we had state net operating loss (“NOL”) carryforwards of approximately $3 million, and foreign NOL carryforwards of $2 million which are available to offset future taxable income. The U.S. state NOL carryforwards will begin to expire in 2018. 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 million and $5.9 million as of December 31, 2017 and 2016, respectively.

Supplemental Information

Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European subsidiaries. As of December 31, 2017, we had undistributed earnings from non-U.S. operations of approximately $770 million (including approximately $51 million of restricted earnings, which are not available for dividends). Undistributed earnings of our China subsidiaries comprise $429 million of this total. Additional Chinese withholding taxes of approximately $42 million would be required should the $429 million of such earnings be distributed out of China as dividends.

The impact of tax holidays decreased our tax expense by approximately $3.7 million, $7.3 million and $2.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. The benefit of the tax holidays on basic and diluted earnings per share was $0.08, $0.15 and $0.06 for the twelve months ended December 31, 2017, 2016 and 2015, respectively.