Income Taxes

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



	Fiscal Years Ended March 31,
	2017		2016			2015
Domestic (U.S.)	$	653	$	(38,581	)	$	(26,238	)
Foreign (Outside U.S.)	9,983		7,364			14,112
Total	$	10,636	$	(31,217	)	$	(12,126	)

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



	Fiscal Years Ended March 31,
	2017			2016			2015
Current:
Federal	$	—		$	—		$	—
State and local	62			95			(92		)
Foreign	4,247			5,416			7,403
Total current income tax expense from continuing operations	4,309			5,511			7,311
Deferred:
Federal	(6		)	(647		)	270
State and local	(97		)	172			39
Foreign	84			970			(2,393		)
Deferred tax expense (benefit) from continuing operations	(19		)	495			(2,084		)
Provision for income taxes	$	4,290		$	6,006		$	5,227

The Company realized a deferred tax expense (benefit) for fiscal years ended 2017, 2016 and 2015 of $1.2 million, $1.4 million and $(2.1) 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,
	2017			2016			2015
Amount computed using the statutory rate of 35%	$	3,722		$	(10,926	)	$	(4,245	)
Change in U.S. valuation allowance	(7,080		)	4,099			(19,691		)
Unremitted earnings of foreign subsidiaries	2,127			(231		)	18,502
Effect of prior year adjustments (1)	1,789			(286		)	5,766
Expired foreign tax credits	4,766			—			—
Effect of business combination	—			(648		)	—
Taxable foreign source income	1,835			2,415			4,660
(Put)/call option valuation impact	(3,745		)	7,381			—
Other non-deductible expenses	(937		)	126			217
State income taxes, net of federal taxes	(35		)	267			(53		)
Change in foreign operations tax exposure reserves	108			998			1,119
Change in foreign tax law	144			981			—
Change in foreign operations valuation allowance (2)	983			(200		)	1,378
Other effect of foreign operations	613			2,030			(2,426		)
Provision for income taxes	$	4,290		$	6,006		$	5,227


(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 $0.9 million, $0.6 million, and $(3.4) million for fiscal years ended 2017, 2016 and 2015, 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 combined provision for income taxes for China and Mexico for fiscal years ended 2017, 2016 and 2015 is $3.1 million, $3.2 million, and $6.4 million, respectively.

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



	March 31,
	2017			2016
Deferred tax assets:
Net operating loss carry forwards	$	165,161		$	173,041
Sales allowances and inventory reserves	14,910			16,918
Medical and employee benefits	16,336			11,234
Tax credits	4,954			9,840
Stock-based compensation	2,501			2,576
Other	2,357			2,988
Total deferred tax assets before valuation allowance	206,219			216,597
Less valuation allowance	(163,898		)	(170,917		)
Total deferred tax assets	42,321			45,680
Deferred tax liabilities:
Unremitted earnings of subsidiaries	(20,265		)	(18,271		)
Depreciation and differences in basis	(7,576		)	(11,718		)
Amortization of intangibles and debt discounts	(6,207		)	(7,107		)
Non-amortized intangibles	(2,549		)	(2,556		)
Other	(501		)	(451		)
Total deferred tax liabilities	(37,098		)	(40,103		)
Net deferred tax assets	$	5,223		$	5,577

The following table presents the annual activities included in the deferred tax valuation allowance (amounts in thousands):



	Valuation Allowance for Deferred Tax Assets
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
Charge to costs and expenses	(2,094		)
Deductions	(4,925		)
Balance at March 31, 2017	$	163,898

In fiscal year 2017, the valuation allowance decreased $7.0 million, of which $4.8 million relates to the expiration of foreign tax credit carryovers that were held by the U.S. Group and a $1.2 million decrease related to the investment in TOKIN. In fiscal year 2016, the valuation allowance increased $3.3 million 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. Deductions in fiscal years 2017, 2016 and 2015 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, 2016	$	5,577
Deferred income taxes related to continuing operations	19
Deferred income taxes related to other comprehensive income	181
Foreign currency translation	(554		)
Balance at March 31, 2017	$	5,223

As of March 31, 2017 and 2016, the Company’s gross deferred tax assets are reduced by a valuation allowance of $163.9 million and $170.9 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 $29.8 million.

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, 2017. 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, 2017, the Company had U.S. federal net operating loss carryforwards of $399.9 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 $515.8 million, of which $5.2 million will expire in one year if unused. These state net operating losses are available to offset future state taxable income, if any, through 2037. Foreign subsidiaries, primarily in Finland, Italy, Portugal and Sweden had net operating loss carryforwards totaling $48.6 million, of which $4.8 million will expire within one year if unused. 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. 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, 2017, the U.S. consolidated group of companies had the following tax credit carryforwards available (amounts in thousands):

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 2015, 2016, and 2017, the statutory rate of 10% was reduced to zero. For the fiscal year ended March 31, 2017 the Company realized no income tax benefit from the tax holiday.

At March 31, 2017, 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, 2017, the Company had $7.4 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,
	2017			2016			2015
Beginning of fiscal year	$	7,103		$	6,377		$	5,691
Additions for tax positions of the current year	762			763			1,115
Reductions for tax positions of prior years	(64		)	—			(56		)
Lapse in statute of limitations	(411		)	(10		)	(203		)
Settlements	—			(27		)	(170		)
End of fiscal year	$	7,390		$	7,103		$	6,377

At March 31, 2017, $2.7 million of the $7.4 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 $2.3 million in fiscal year 2018 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 $0.2 million and $0.4 million of accrued interest and penalties respectively at March 31, 2017 and 2016, 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.

Tax
Credits ($)

Fiscal Year
of Expiration

U.S. foreign tax credits

U.S. research credits

Texas franchise tax credits