Note 15 - Income Taxes

12 Months Ended

Dec. 31, 2015

Note 1

– Income Taxes

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the years ended December 31, 2015, 2014 and 2013, the Company recorded an income tax provision of $21.3 million, $18.9 million and $16.3 million, respectively. The effective income tax rate for the years ended December 31, 2015, 2014 and 2013 was 31.5 percent, 31.2 percent and 31.6 percent, respectively.

The provision for income taxes is based on income before income taxes reported for financial statement purposes. The components of income before income taxes are as follows:

	Year Ended December 31,
(in thousands)	2015		2014		2013

Domestic	$	59,421	$	51,052	$	45,659
Foreign		8,440		9,479		5,919
Total	$	67,861	$	60,531	$	51,578

Significant components of the provision for income taxes for the following periods are as follows:

	Year Ended December 31,
(in thousands)	2015			2014			2013

Current:
Federal	$	15,845		$	17,413		$	13,934
State		1,074			1,185			379
Foreign		1,591			2,149			1,762
Deferred
Federal		2,798			(1,821	)		168
State		(38	)		(17	)		(39	)
Foreign		294			130			(335	)
Valuation Allowance		(217	)		(143	)		432
Total	$	21,347		$	18,896		$	16,301

A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows:

	Year Ended December 31,
	2015			2014			2013

Federal tax statutory rate		35.0	%		35.0	%		35.0	%
State tax (net of federal benefit)		0.5			0.5			0.6
Qualified subsidiary election		0.6			0.2			(0.8	)
Valuation allowance against deferred tax assets		(0.3	)		(0.2	)		0.8
Research and development credit		(2.9	)		(0.8	)		(1.8	)
Foreign rate differential		(1.8	)		(2.1	)		(1.6	)
Tax reserves		1.5			0.4			0.6
Domestic manufacturing deduction		(1.4	)		(2.1	)		(1.1	)
Miscellaneous		0.3			0.3			(0.1	)
Total		31.5	%		31.2	%		31.6	%

On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Act) was signed into law. Included in the Act was the extension of the research and development credit for years 2012 and 2013. As the Act was enacted during 2013,

the federal portion of the 2012 research and development credit was recognized in the first quarter of 2013. The Company recorded a tax benefit of $0.5 million for the 2012 federal research credit, which translated to an effective income tax rate reduction of 0.9 percent for the year ended December 31, 2013.

Significant components of deferred tax assets and liabilities are as follows:

	December 31,
(in thousands)	2015			2014

Deferred tax assets:
Accrued expenses	$	628		$	378
Warrants and stock options		2,828			2,152
Intangibles		499			319
Inventories		177			172
Other assets		856			527
Net operating loss		2,409			2,842
Less valuation allowance		(2,625	)		(3,048	)
Total deferred tax assets		4,772			3,342
Deferred tax liabilities:
Depreciation		(7,945	)		(4,246	)
Goodwill		(1,067	)		(430	)
Total deferred tax liabilities		(9,012	)		(4,676	)
Net deferred tax liability	$	(4,240	)	$	(1,334	)

The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2015. Such amounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings. As of December 31, 2015, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of $25.8 million.

As of December 31, 2015, the Company had estimated net operating loss carry forwards of $2.4 million for tax purposes. The net operating losses primarily relate to Japan operations and can be carried forward for ten years but are limited to 65 percent of taxable income. The net operating losses begin to expire at various dates between 2018 and 2023. The Company’s Japan operations are taxed both by local authorities and in the U.S. Accordingly, a portion of Japan’s net operating losses has been recognized as a benefit in the U.S.

The Company establishes valuation allowances for deferred tax assets when, after consideration of all positive and negative evidence, it is considered more-likely-than-not that a portion of the deferred tax assets will not be realized. The Company's valuation allowances of $2.6 million and $3.0 million at December 31, 2015 and December 31, 2014, respectively, reduce the carrying value of deferred tax assets associated with certain net operating loss carry forwards and other assets with insufficient positive evidence for recognition. The decrease in the valuation allowance is primarily attributable to fluctuations in foreign currency and the recognition of net operating losses against Japan’s 2015 taxable income.

The Company files a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state, or foreign income tax examinations by tax authorities for years before 2011.

The Company has liabilities related to unrecognized tax benefits totaling $2.8 million and $1.3 million at December 31, 2015 and 2014, respectively, that if recognized would result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilities in the accompanying consolidated balance sheets. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. The Company recognizes interest and penalties related to income tax matters in income tax expense and reports the liability in current or long-term income taxes payable as appropriate. Interest and penalties were immaterial for each of the years ended December 31, 2015, 2014 and 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	December 31,
	2015		2014

Balance at beginning of period	$	1,295	$	695
Additions for tax positions of current year		919		632
Additions for tax positions of prior years		555		344
Decrease related to expiration of statutes of limitations		-		(376	)
Balance at period end	$	2,769	$	1,295