(8)

INCOME TAXES

The provisions for income tax expense (benefit) were as follows (in thousands):

 

		2013				2012				2011
Federal:
Current		$	632			$	(67	)		$	(53,696	)
Deferred			11,537				(6,381	)			(1,896	)
Total federal			12,169				(6,448	)			(55,592	)
State:
Current			519				1,796				(241	)
Deferred			119				(307	)			(10,522	)
Total state			638				1,489				(10,763	)
Foreign:
Current			8,228				5,325				(1,027	)
Deferred			312				(405	)			3,915
Total foreign			8,540				4,920				2,888
Total income taxes (benefit)		$	21,347			$	(39	)		$	(63,467	)

The Company’s provision for income tax expense (benefit) and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the non-U.S. jurisdictions in which the Company has operations, the applicable statutory rates are generally significantly lower than in the U.S., ranging from 0% to 41%. The Company’s provision for income tax expense (benefit) was calculated using the applicable statutory rate for each jurisdiction applied to the Company’s pre-tax earnings (loss) in each jurisdiction, while the Company’s effective tax rate is calculated by dividing income tax expense (benefit) by earnings (loss) before income taxes.

 

The Company’s earnings (loss) before income taxes and income tax expense (benefit) for 2013, 2012 and 2011 are as follows (in thousands):

 

		Years Ended December 31,
		2013								2012								2011
Income tax jurisdiction		Earnings (loss) before income taxes				Income tax expense				Earnings (loss) before income taxes				Income tax expense (benefit)				Earnings (loss) before income taxes				Income tax expense (benefit)
United States		$	38,705			$	12,807			$	(27,379	)		$	(5,867	)		$	(161,976	)		$	(66,355	)
Canada			4,091				1,187				2,564				545				945				309
Chile			9,622				1,920				5,971				1,043				9,321				2,030
China			6,148				1,646				1,278				319				1,416				354
Jersey (1)			25,348				0				25,162				0				25,109				0
Non-benefited loss operations (2)			(15,841	)			0				(13,492	)			0				(16,844	)			0
Other jurisdictions (3)			14,142				3,787				16,369				3,921				10,982				195
Earnings (loss) before income taxes		$	82,215			$	21,347			$	10,473			$	(39	)		$	(131,047	)		$	(63,467	)
Effective tax rate (4)							26.0	%							(0.4	%)							48.4	%

 

(1)	Jersey does not assess income tax on corporate net earnings.

(2)	Consists of entities in the following tax jurisdictions where no tax benefit is recognized in the period being reported because of the provision of offsetting valuation allowances: Japan, Brazil, China, Hong Kong and India.

(3)	Consists of entities in the following tax jurisdictions, each of which comprises not more than 5%, of 2013 consolidated income (loss) before taxes: UK, Germany, France, Spain, Belgium, Italy, Netherlands, Switzerland, Malaysia, Thailand, Singapore, China, Hong Kong, Portugal and Austria.

(4)	The effective tax rate is calculated by dividing income tax expense (benefit) by earnings (loss) before income taxes.

For 2013, the effective tax rate was lower than the U.S. federal and state combined statutory rate of approximately 40% primarily because of earnings from foreign operations in jurisdictions imposing either lower tax rates on corporate earnings or no corporate income tax. As reflected in the table above, earnings (loss) before income taxes in the U.S. was earnings of $38.7 million, with income tax expense of $12.8 million, an average rate of 33.1%, while earnings (loss) before income taxes in non-U.S. jurisdictions was earnings of $43.5 million, with aggregate income tax expense of $8.5 million, an average rate of 19.6%. Combined, this results in consolidated net earnings for the period of $82.2 million, and a consolidated tax expense for the period of $21.3, resulting in an effective tax rate of 26.0%.

For 2013, of the Company’s $43.5 million in earnings before income tax earned outside the U.S., $25.3 million was earned in Jersey, which does not impose a tax on corporate earnings. In addition, there were foreign losses of $15.8 million for which no tax benefit was recognized during the year ended December 31, 2013 because of the provision of offsetting valuation allowances. Individually, none of the other foreign jurisdictions included in “Other jurisdictions” in the table above had more than 5% of 2013 consolidated earnings (loss) before taxes.

Unremitted earnings of non-U.S. subsidiaries are expected to be reinvested outside of the U.S. indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.

As of December 31, 2013, the Company had approximately $372.0 million in cash and cash equivalents, of which $166.5 million, or 44.8%, was held outside the U.S. Of the $166.5 million held by the Company’s non-U.S. subsidiaries, approximately $51.2 million is available for repatriation to the U.S. without incurring U.S. income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in the Company’s financial statements as of December 31, 2013. The Company’s cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet the Company’s liquidity needs in the U.S. for the next twelve months and the Company does not expect to repatriate any of the funds presently designated as indefinitely reinvested outside the U.S. Under current applicable tax laws, if the Company chooses to repatriate some or all of the funds designated as indefinitely reinvested outside the U.S., the amount repatriated would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes. As of December 31, 2013 and 2012, U.S. income taxes have not been provided on cumulative total earnings of $226.0 million and $171.2 million, respectively.

 

Income taxes differ from the statutory tax rates as applied to earnings (loss) before income taxes as follows (in thousands):

 

		2013				2012				2011
Expected income tax expense (benefit)		$	28,775			$	3,666			$	(45,866	)
State income tax, net of federal benefit			255				1,406				(7,320	)
Rate differential on foreign income			(11,897	)			(8,752	)			(11,808	)
Change in unrecognized tax benefits			740				(149	)			2,906
Non-deductible expenses			(150	)			194				168
Prior year R&D credit claims			(493	)			0				(6,253	)
Other			(1,187	)			79				304
Change in valuation allowance			5,304				3,517				4,402
Total provision (benefit) for income taxes		$	21,347			$	(39	)		$	(63,467	)
Effective tax rate			26.0	%			(0.4	%)			48.4	%

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented below (in thousands):

 

DEFERRED TAX ASSETS:		2013				2012
Deferred tax assets – current:
Inventory adjustments		$	5,075			$	8,184
Accrued expenses			17,084				16,082
Allowances for bad debts and chargebacks			6,179				6,751
Total current assets			28,338				31,017
Deferred tax assets – long term:
Loss carryforwards			43,711				50,399
Business credit carryforward			9,763				5,034
Share-based compensation			279				191
Valuation allowance			(19,903	)			(14,599	)
Total long term assets			33,850				41,025
Total deferred tax assets			62,188				72,042
Deferred tax liabilities – current:
Prepaid expenses			6,223				4,486
Deferred tax liabilities – long term:
Depreciation on property, plant and equipment			24,703				24,711
Total deferred tax liabilities			30,926				29,197
Net deferred tax assets		$	31,262			$	42,845

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The U.S. net operating loss for the year ended December 31, 2011 was carried back to offset federal taxable income for 2009 and 2010, generating tax refunds of approximately $52.0 million in the first quarter of 2012. The U.S. net operating loss for the year ended December 31, 2012, along with the remaining unused net operating loss carryback from December 31, 2011, can be carried forward to reduce future taxable income. These net operating losses can be carried forward for 20 years and do not begin to expire until 2032. As of December 31, 2013 and 2012, no valuation allowance against the related deferred tax asset has been set up for these loss carry-forwards as it is believed the loss carry-forwards will be fully utilized in reducing future taxable income.

As of December 31, 2013 and 2012, the Company had combined foreign operating loss and related deferred tax assets carry-forwards available to reduce future taxable income of approximately $66.3 million and $52.1 million, respectively. Some of these net operating losses expire beginning in 2014; however others can be carried forward indefinitely. As of December 31, 2013 and 2012, a valuation allowance against deferred tax assets of $19.9 million and $14.6 million, respectively, had been set up for those loss carry-forwards that are not more likely than not to be fully utilized in reducing future taxable income.

 

The balance of unrecognized tax benefits included in net prepaid expenses in the consolidated balance sheets increased by $0.6 million during the year. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

		2013				2012
Beginning balance		$	10,221			$	10,948
Additions for current year tax positions			696				464
Additions for prior year tax positions			164				24
Reductions for prior year tax positions			(5	)			(6	)
Settlement of uncertain tax positions			0				(301	)
Reductions related to lapse of statute of limitations			(260	)			(908	)
Ending balance		$	10,816			$	10,221

If recognized, $9.6 million of unrecognized tax benefits would be recorded as a reduction in income tax expense.

Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense and totaled $0.1 million for the year ended December 31, 2013, $0.2 million for the year ended December 31, 2012, and $0.6 million for the year ended December 31, 2011. Accrued interest and penalties were $1.8 million and $1.6 million as of December 31, 2013 and 2012, respectively.

The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate.

As of December 31, 2013, the Company’s tax filings are generally subject to examination in the U.S. and several Asian and European tax jurisdictions for years ending on or after December 31, 2007. During the year, the Company reduced the balance of 2013 and prior year unrecognized tax benefits by $0.3 million as a result of expiring statutes. It is reasonably possible that the statute of limitations will lapse for certain tax jurisdictions during 2014, which would reduce the balance of 2013 and prior year unrecognized tax benefits by $1.4 million.

The Company is currently under examination by the IRS for tax years 2007 through 2011. The Company is also under examination by a number of states. During the year ended December 31, 2013, there was no reduction in the balance of 2013 and prior year unrecognized tax benefits due to any settlement of an examination. It is reasonably possible that certain federal and state examinations could be settled during the next twelve months which would reduce the balance of 2013 and prior year unrecognized tax benefits by $3.6 million.