Income Taxes

The components of Income (loss) from continuing operations before income taxes and equity loss from NEC TOKIN are as follows (amounts in thousands):



	Fiscal Years Ended March 31,
	2016			2015			2014
Domestic (U.S.)	$	(38,581	)	$	(26,238	)	$	(89,529	)
Foreign (Outside U.S.)	7,364			14,112			33,232
Total	$	(31,217	)	$	(12,126	)	$	(56,297	)

The provision (benefit) for Income tax expense is as follows (amounts in thousands):



	Fiscal Years Ended March 31,
	2016			2015			2014
Current:
Federal	$	—		$	—		$	—
State and local	95			(92		)	35
Foreign	5,416			7,403			7,816
Total current income tax expense from continuing operations	5,511			7,311			7,851
Deferred:
Federal	(647		)	270			(1,694		)
State and local	172			39			406
Foreign	970			(2,393		)	(5,081		)
Deferred tax expense (benefit) from continuing operations	495			(2,084		)	(6,369		)
Provision for income taxes	$	6,006		$	5,227		$	1,482

The Company realized a deferred tax expense (benefit) for fiscal years ended 2016, 2015 and 2014 of $1.4 million, $(2.1) million and $(2.7) million, respectively, in certain foreign jurisdictions based on changes in judgment about the realizability of deferred tax assets in future years.

Differences between the provision for income taxes on earnings from continuing operations and the amount computed using the U.S. Federal statutory income tax rate are as follows (amounts in thousands):



	Fiscal Years Ended March 31,
	2016		2015		2014
Amount computed using the statutory rate of 35%	(10,926	)	(4,245	)	(19,704	)
Change in U.S. valuation allowance	4,099		(19,691	)	21,788
Unremitted earnings of foreign subsidiaries	(231	)	18,502		—
Effect of prior year adjustments (1)	(286	)	5,766		(786	)
Effect of business combination	(648	)	—		—
Taxable foreign source income	2,415		4,660		3,392
Call option expiration	7,381		—		—
Other non-deductible expenses	126		217		149
State income taxes, net of federal taxes	267		(53	)	441
Change in foreign operations tax exposure reserves	998		1,119		773
Change in foreign tax law	981		—		—
Change in foreign operations valuation allowance (2)	(200	)	1,378		(2,733	)
Other effect of foreign operations	2,030		(2,426	)	(1,838	)
Provision for income taxes	6,006		5,227		1,482


(1)	The effect of prior year adjustments is offset by a full valuation allowance resulting in no impact on the provision for income taxes.


(2)	The change in foreign operations valuation allowance excludes other comprehensive income and currency translation adjustments of $0.6 million, $(3.4) million, and $1.0 million for fiscal years ended 2016, 2015 and 2014, respectively which has no impact on the provision for income taxes.

The foreign jurisdictions having the greatest effect on the provision for income taxes are China and Mexico. The statutory tax rates for China and Mexico are 25% and 30%, respectively. The provision for income taxes for China and Mexico for fiscal years ended 2016, 2015 and 2014 is $3.2 million, $6.4 million, and $2.2 million, respectively.

The components of deferred tax assets and liabilities are as follows (amounts in thousands):



	March 31,
	2016			2015
Deferred tax assets:
Net operating loss carry forwards	$	173,041		$	162,691
Sales allowances and inventory reserves	16,918			21,696
Medical and employee benefits	11,234			15,982
Tax credits	9,840			10,025
Stock-based compensation	2,576			3,578
Other	2,988			3,411
Total deferred tax assets before valuation allowance	216,597			217,383
Less valuation allowance	(170,917		)	(167,594		)
Total deferred tax assets	45,680			49,789
Deferred tax liabilities:
Unremitted earnings of subsidiaries	(18,271		)	(18,502		)
Depreciation and differences in basis	(11,718		)	(12,166		)
Amortization of intangibles and debt discounts	(7,107		)	(7,261		)
NEC TOKIN put/call option	—			(1,860		)
Non-amortized intangibles	(2,556		)	(2,556		)
Other	(451		)	(54		)
Total deferred tax liabilities	(40,103		)	(42,399		)
Net deferred tax assets	$	5,577		$	7,390

The following table presents the annual activities included in the deferred tax valuation allowance:



	Valuation Allowance for Deferred Tax Assets
Balance at March 31, 2013	$	169,270
Charge to costs and expenses	21,515
Deductions	(1,509		)
Balance at March 31, 2014	189,276
Charge to costs and expenses	(19,900		)
Deductions	(1,782		)
Balance at March 31, 2015	167,594
Charge to costs and expenses	4,072
Deductions	(749		)
Balance at March 31, 2016	$	170,917

In fiscal year 2016, the valuation allowance increased $3.3 million primarily primarily due to the reversal of the deferred tax liability related to the NT Options offset by the increase in federal net operating loss carryforwards. In fiscal year 2015, the valuation allowance decreased $21.7 million primarily from the recognition of a deferred tax liability for unremitted earnings of the Company’s foreign subsidiaries and other adjustments relating to prior years, and from currency translation adjustments. In fiscal year 2014, the valuation allowance increased $20.0 million primarily as a result of the increase in federal net operating loss carryforwards offset by a decrease in net operating loss carryforwards in certain foreign jurisdictions. Deductions in fiscal years 2016, 2015 and 2014 resulted primarily from expiring net operating loss carryforwards and expiring tax credits in certain U.S. state and foreign jurisdictions.

The change in net deferred income tax asset (liability) for the current year is presented below (amounts in thousands):



Balance at March 31, 2015	$	7,390
Deferred income taxes related to continuing operations	(495		)
Deferred income taxes resulting from business combination	(648		)
Deferred income taxes related to other comprehensive income	915
Foreign currency translation	(1,585		)
Balance at March 31, 2016	$	5,577

As of March 31, 2016 and 2015, the Company's gross deferred tax assets are reduced by a valuation allowance of $170.9 million and $167.6 million, respectively. A valuation allowance on U.S. deferred tax assets was determined to be necessary based on the existence of significant negative evidence such as a cumulative three-year loss of the U.S. consolidated group. The amount of future income required for the Company to realize its deferred tax assets is $29.0 million. The realization of $1.3 million of deferred tax assets in Italy is dependent on the sale of land and buildings in Italy.

In assessing the realizability of deferred tax assets in foreign jurisdictions, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of March 31, 2016. However, the amount of deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

As of March 31, 2016, the Company had U.S. federal net operating loss carryforwards of $417.9 million. These U.S. federal net operating losses were incurred from 2004 through 2016 and are available to offset future federal taxable income, if any, through 2036. The Company had state net operating losses of $497.7 million, of which $3.0 million will expire in one year if unused. These state net operating losses are available to offset future state taxable income, if any, through 2036. Foreign subsidiaries, primarily in Finland, Italy, Portugal and Sweden had net operating loss carryforwards totaling $59.6 million. The net operating losses in Portugal and Finland are available to offset future taxable income through 2027 and 2019, respectively. The net operating losses in Italy and Sweden are available indefinitely to offset future taxable income. For the U.S. federal and state jurisdictions there is a greater likelihood of not realizing the future tax benefits of these deferred tax assets, and accordingly, the Company has recorded valuation allowances related to the net deferred tax assets in these jurisdictions. For the foreign jurisdictions with net operating loss carryforwards, a valuation allowance has been recorded where the Company does not expect to fully realize the deferred tax assets in the future.

Utilization of the Company's net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the "Code") and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization. The issuance of the Platinum Warrant may have given rise to an "ownership change" for purposes of Section 382 of the Code. If such an ownership change were deemed to have occurred, the amount of our taxable income that could be offset by the Company's net operating loss carryovers in taxable years after the ownership change would be severely limited. While the Company believes that the issuance of the Platinum Warrant did not result in an ownership change for purposes of Section 382 of the Code, there is no assurance that the Company's view will be unchallenged. Moreover, a future exercise of part or all of the Platinum Warrant may give rise to an ownership change in the future. Blue Powder was acquired which has substantial federal net operating losses that will now be limited due to the ownership change which occurred.

At March 31, 2016, the U.S. consolidated group of companies had the following tax credit carryforwards available (amounts in thousands):



	Tax Credits ($)	Fiscal Year of Expiration
U.S. foreign tax credits	5,173	2017
U.S. research credits	1,425	2023
Texas franchise tax credits	3,242	2026

The Company conducts business in Macedonia through a subsidiary that qualifies for a tax holiday. The tax holiday will terminate on January 1, 2023. For calendar years 2014, 2015, and 2016, the statutory rate of 10% was reduced to zero. For the fiscal year ended March 31, 2016 the Company realized no income tax benefit from the tax holiday.

At March 31, 2016, the Company makes no assertion that unremitted earnings from subsidiaries outside the United States are indefinitely reinvested. This assertion changed during fiscal year 2015 based on an analysis of cash needs in the U.S. related to a planned acquisition and current debt funding. Due to the valuation allowance in the U.S., this assertion did not result in a cash tax impact. The Company has recognized a deferred tax liability relating to its investments in subsidiaries outside the United States.

At March 31, 2016, the Company had $7.1 million of unrecognized tax benefits. A reconciliation of gross unrecognized tax benefits (excluding interest and penalties) is as follows (amounts in thousands):



	Fiscal Years Ended March 31,
	2016			2015			2014
Beginning of fiscal year	$	6,377		$	5,691		$	5,395
Additions for tax positions of the current year	763			1,115			639
Additions for tax positions of prior years	—			—			19
Reductions for tax positions of prior years	—			(56		)	(28		)
Lapse in statute of limitations	(10		)	(203		)	—
Settlements	(27		)	(170		)	(334		)
End of fiscal year	$	7,103		$	6,377		$	5,691

At March 31, 2016, $2.5 million of the $7.1 million of unrecognized income tax benefits would affect the Company's effective income tax rate, if recognized. It is reasonably possible that the total unrecognized tax benefit could decrease by $1.8 million in fiscal year 2017 if the advanced pricing arrangement for one of the Company’s foreign subsidiaries is agreed to by the foreign tax authority.

The Company files income tax returns in the U.S. and multiple foreign jurisdictions, including various state and local jurisdictions. The U.S. Internal Revenue Service concluded its examinations of the Company's U.S. federal tax returns for all tax years through 2003. Because of net operating losses, the Company's U.S. federal returns for 2003 and later years will remain subject to examination until the losses are utilized. The Company is subject to income tax examinations for the years 2008 and forward in Mexico and Portugal; and 2010 and forward in China and Italy. The Company records potential interest and penalty expenses related to unrecognized income tax benefits within its global operations in income tax expense. The Company had $0.4 million and $0.3 million of accrued interest and penalties respectively at March 31, 2016 and 2015, which is included as a component of income tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.