Note 5 — Income Taxes

The deferred tax assets and deferred tax liabilities and related valuation allowance were comprised of the following:

	December 31,
	2016			2015
Deferred tax assets:
Derivative financial instruments	$	—		$	267
Net operating losses		13,643			5,525
Research and development credits		23,012			21,494
Depreciation		5,457			3,886
Valuation reserves and accrued liabilities		9,667			5,553
Foreign tax credit		6,926			1,654
Stock compensation		4,508			3,129
Inventory		1,571			1,622
Patents		218			156
Defined benefit obligation		2,306			2,011
Other credits		639			639
Other		116			10
		68,063			45,946
Valuation allowance		(19,304	)		(13,418	)
Deferred tax liabilities:
Intangible assets		(8,442	)		(10,161	)
Unrealized foreign currency exchange gains		(285	)		(3,797	)
Undistributed profits of subsidiary		(12,002	)		(3,254	)
Property and equipment		(470	)		(696	)
Other		(319	)		(342	)
		(21,518	)		(18,250	)
Net deferred tax asset	$	27,241		$	14,278

Reconciliations between the statutory Federal income tax rate of 34% and the effective rate of income tax expense for each of the three years in the period ended December 31, 2016 are as follows:

	Year Ended December 31,
	2016			2015			2014
Statutory Federal income tax rate		34.0	%		34.0	%		34.0	%
Increase (Decrease) resulting from:
U.S. Taxes on foreign income, net of taxes paid credit		1.3	%		1.0	%		0.3	%
Change in valuation allowance		5.3	%		(1.9	%)		(0.8	%)
Foreign, state and local tax, net of Federal benefit		1.1	%		1.6	%		1.9	%
Nondeductible expenses		2.4	%		1.8	%		1.8	%
Stock option compensation		—			(0.1	%)		(0.1	%)
Research and development credits		(0.7	%)		(0.9	%)		(0.5	%)
Effect of different tax rates of foreign jurisdictions		(15.0	%)		(12.1	%)		(10.0	%)
Undistributed profits of subsidiaries		7.9	%		2.4	%		—
Other tax exempt income		—			(0.1	%)		(0.9	%)
Tax effects of intercompany transfers		(5.3	%)		—			—
Other		(0.3	%)		0.3	%		(0.1	%)
Effective rate		30.7	%		26.0	%		25.6	%

Note 5 — Income Taxes (Continued)

The Company has Net Operating Loss (“NOL”) carryforwards as follows:

Jurisdiction	Amount as of December 31, 2016		Years of Expiration
U.S. Federal and state income tax	$	25,364		2018- 2035
Foreign	$	9,879		2018-2037
Foreign	$	47,707		Indefinite

On April 1, 2014, we acquired all of the stock of GPT in an all cash transaction. The deferred tax assets in 2016 and 2015 related to research and development credits and the offsetting valuation allowance are primarily a result of the GPT acquisition.

A portion of the U.S. Federal NOLs was incurred prior to the June 8, 1999 Preferred Financing, which qualified as a change in ownership under Section 382 of the Internal Revenue Code (“IRC”). Due to this change in ownership, the NOL accumulated prior to the change in control can only be utilized against current earnings up to a maximum annual limitation of approximately $591. As a result of the annual limitation, approximately $6,025 remaining of these carryforwards are expected to expire before ultimately becoming available to reduce future tax liabilities in addition to $13,324 in NOLs generated prior to the change in control which have already expired without being utilized.

In 2014 through 2016, we incurred NOLs in Vietnam associated with the startup activities of new production facilities. In 2015 and 2016, we incurred a loss in Ukraine associated with foreign currency losses. These NOLs are expected to be utilized in 2017 through 2019 as the locations become profitable. We also incur NOLs in Luxembourg associated with our global holding company structure. Management has concluded that it is more likely than not these NOLs will not be utilized, and thus has not recognized the benefit of these NOLs.

We recognize the tax benefit of stock option exercises in excess of compensation expense recorded for financial reporting purposes directly to paid-in capital only when this excess tax benefit provides a reduction to current taxes payable. In certain previous tax years, our U.S. Federal NOLs completely offset our current Federal tax liability and, therefore, we did not recognize the benefit of tax deductions allowed for stock option exercises in excess of compensation expense recognized for financial reporting purposes. As such, in those years, our deferred tax asset related to NOLs was less than the actual NOL available. In 2016, we utilized the entire U.S. Federal NOL carryforward available which included the benefit of tax deductions in excess of compensation expense for financial reporting purposes. We recorded this benefit, which totaled $7,509 and $6,681 for 2016 and 2015, respectively, directly to paid-in capital. The U.S. Federal NOL carryforwards include $0 and $22,343 for 2016 and 2015, respectively, relating to deductions taken with respect to stock option exercises in excess of amounts recognized for financial reporting purposes. The U.S. State NOL carryforwards include $17,564 and $17,213 for 2016 and 2015, respectively, relating to deductions taken with respect to stock option exercises in excess of amounts recognized for financial reporting purposes. This portion of the NOL carryforwards is not included as a component of the Company’s deferred tax asset.

The earnings before income taxes and our tax provision are comprised of the following:

	Year Ended December 31,
	2016		2015		2014
Income before income taxes:
Domestic	$	12,981	$	25,508	$	11,170
Foreign		97,582		103,430		83,051
Total income before income taxes	$	110,563	$	128,938	$	94,221

Note 5 — Income Taxes (Continued)

	Year Ended December 31,
	2016			2015			2014
Current income tax expense:
Federal	$	9,215		$	8,428		$	4,005
State and local		749			606			(15	)
Foreign		32,844			24,622			24,737
Total current income tax expense	$	42,808		$	33,656		$	28,727
Deferred income tax expense (benefit):
Federal	$	(10,597	)	$	(3,051	)	$	(576	)
State and local		(742	)		(183	)		9
Foreign		2,496			3,123			(4,058	)
Total deferred income tax expense	$	(8,843	)	$	(111	)	$	(4,625	)
Total tax expense	$	33,965		$	33,545		$	24,102

The Company has recognized deferred taxes related to earnings from foreign subsidiaries, except for certain foreign subsidiaries for which the earnings are permanently reinvested. Quantification of the deferred tax liability, if any, associated with permanently reinvested basis differences is not practicable.

The Company is subject to taxation in the United States and various state and foreign jurisdictions. As of December 31, 2016, the Company’s tax years from 2008 through 2016 are subject to examination by the various tax authorities. With limited exceptions, as of December 31, 2016, the Company is no longer subject to U.S. Federal, state, local, or foreign examinations by tax authorities for years before 2008. Tax audits are currently ongoing in Germany for tax years 2008 through 2011.

During 2015, to entice the Company to construct a new facility in Macedonia, the government of Macedonia granted the Company a tax holiday that released the Company from the obligation to pay corporate income taxes for a ten year period, subject to certain limitations. The amount of corporate income tax savings realized by the Company as a result of this tax holiday during 2016 and 2015, respectively, was zero as a result of operating losses generated during each period. The aggregate dollar effect and per share effect of the corporate income tax holiday during 2016 and 2015 was immaterial.

At December 31, 2016, 2015 and 2014, the Company had total unrecognized tax benefits of $4,486, $4,443 and $4,651, respectively, all of which, if recognized, would affect the effective income tax rates. The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	Year Ended December 31,
	2016			2015			2014
Balance at beginning of year	$	4,443		$	4,651		$	2,241
Additions based on tax position related to current year		80			—			43
Additions based on tax positions related to prior year		366			262			2,991
Reductions from settlements and statute of limitation expiration		(299	)		(19	)		(432	)
Effect of foreign currency translation		(104	)		(451	)		(192	)
Balance at end of year	$	4,486		$	4,443		$	4,651

The Company classifies income tax-related penalties and net interest as income tax expense. In the years ended December 31, 2016, 2015 and 2014 income tax related interest and penalties were insignificant. The Company believes that it is reasonably possible that there may be a decrease to its unrecognized tax benefits in the next 12 months due to audit settlements and statute expirations, but the amount expected to reverse is insignificant in relation to the consolidated financial statements.