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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of income (loss) before income taxes were as follows (in thousands):
Year ended December 31,
20232022
U.S.$(43,450)$(43,587)
Non-U.S.35,636 53,936 
Income (loss) before income taxes$(7,814)$10,349 
The components of income tax expense (benefit) were as follows (in thousands):
Year ended December 31,
20232022
Current
U.S. federal and state$101 $196 
Non-U.S.11,165 6,571 
Total current11,266 6,767 
Deferred
U.S. federal and state85 26 
Non-U.S.(289)(156)
Total deferred(204)(130)
Income tax expense$11,062 $6,637 
The reconciliation between the actual provision for income taxes and that computed by applying the U.S. statutory rate to loss before income taxes are outlined below (in thousands):
Year ended December 31,
20232022
Income tax benefit at the statutory rate$(1,641)21.0 %$2,173 21.0 %
State taxes, net of federal tax benefit(114)1.5 %879 8.5 %
Non-U.S. operations(274)3.5 %(7,242)(70.0)%
Domestic incentives448 (5.7)%166 1.6 %
Prior year federal, non-U.S. and state tax3,536 (45.3)%(591)(5.7)%
Nondeductible expenses806 (10.3)%3,157 30.5 %
Valuation allowance8,313 (106.4)%8,077 78.0 %
Other(12)0.1 %18 0.2 %
Income tax expense$11,062 (141.6)%$6,637 64.1 %
Our effective tax rate was 141.6% and 64.1% for the years ended December 31, 2023 and 2022, respectively.
The tax expense for the years ended December 31, 2023 and 2022 includes an increase in our valuation allowance of $8.3 million and $8.1 million, respectively, consisting of a full valuation allowance against our deferred tax assets in the U.S., U.K., Germany, Singapore, China and Saudi Arabia as further described below under the primary components of deferred taxes.
The Organization for Economic Co-operation and Development (“OECD”) introduced Base Erosion and Profit Shifting (“BEPS”) Pillar 2 rules that impose a global minimum tax rate of 15%. Numerous countries, including European Union member states, have enacted or are expected to enact legislation to be effective as early as January 1, 2024, with general implementation of a global minimum tax by January 1, 2025. We are currently evaluating the potential impact on our consolidated financial statements and related disclosures. This may have an impact on our future effective tax rate.
The primary components of deferred taxes include (in thousands):
December 31,
20232022
Deferred tax assets
Reserves and accruals$3,821 $3,940 
Operating lease liabilities17,384 17,596 
Inventories10,170 12,964 
Stock awards1,829 1,862 
Net operating loss and other tax carryforwards160,127 124,024 
Goodwill and intangible assets20,091 26,607 
Fair value discount on 2025 Notes19,751 26,301 
Property and equipment6,619 4,570 
Other5,896 3,991 
Gross deferred tax assets245,688 221,855 
Valuation allowance(231,907)(208,139)
Total deferred tax assets$13,781 $13,716 
Deferred tax liabilities
Operating lease assets$(13,903)$(13,989)
Prepaid expenses and other(450)(445)
Total deferred tax liabilities(14,353)(14,434)
Net deferred tax liabilities$(572)$(718)
Goodwill from certain acquisitions is tax deductible due to the acquisition structure as an asset purchase or due to tax elections made by the Company and the respective sellers at the time of acquisition.
We have deferred tax assets related to net operating loss and other tax carryforwards in the U.S., and in certain states and foreign jurisdictions. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.
At December 31, 2023, we had $316.4 million of U.S. net operating loss carryforwards and $10.0 million of state net operating losses. Of these losses, $33.5 million will expire no later than 2037 if they are not utilized prior to that date. The remaining $292.9 million will not expire. We also had $227.6 million of non-U.S. net operating loss carryforwards with indefinite expiration dates. In addition to our net operating loss carryforwards, we also had U.S. interest limitation carryforwards of $36.0 million with indefinite expiration dates. The ultimate realization of income tax benefits for these net operating loss and interest limitation carryforwards depends on our ability to generate sufficient taxable income in the respective taxing jurisdictions. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic net operating losses may be limited in future periods depending upon future changes in ownership. Where we have unrecognized tax benefits in jurisdictions with existing net operating losses, we utilize the unrecognized tax benefits as a source of income to offset such losses. We do not anticipate being able to fully utilize all of the losses prior to their expiration in the following jurisdictions: the U.S, the U.K, Germany, Singapore, China and Saudi Arabia.
During 2023, we recognized $8.3 million of tax expense related to the increase in our valuation allowance provided against our deferred tax assets to write down our deferred tax assets in these jurisdictions to what is more likely than not realizable. We increased our valuation allowance related to our U.S. and foreign deferred tax assets by $6.5 million and $1.8 million, respectively. In making such a determination for each of these jurisdictions, we considered all available positive and negative evidence, including our recent history of pretax losses over the prior three year period, the goodwill and intangible asset impairments for various reporting units, the future reversals of existing taxable temporary differences, the projected future taxable income or loss and tax-planning. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive
evidence may become available to allow us to reach a conclusion that a portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
Deferred tax liabilities arising from the difference between the financial reporting and income tax bases inherent in our foreign subsidiaries, referred to as outside basis differences, have not been provided for U.S. income tax purposes because we do not intend to sell, liquidate or otherwise trigger the recognition of U.S. taxable income with regard to our investment in these foreign subsidiaries. Determining the amount of U.S. deferred tax liabilities associated with outside basis differences is not practicable at this time.
We file income tax returns in the U.S. as well as in various states and non-U.S. jurisdictions. With few exceptions, we are no longer subject to income tax examination by tax authorities in these jurisdictions prior to 2016.
We account for uncertain tax positions in accordance with guidance in ASC Topic 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in thousands):
2023 ActivityAmount
Balance at January 1, 2023$10,512 
Additional based on tax positions related to prior years501 
Additional based on tax positions related to current year1,477 
Lapse of statute of limitations(1,587)
Balance at December 31, 2023$10,903 
The total amount of unrecognized tax benefits at December 31, 2023 was $10.9 million, of which it is reasonably possible that $4.4 million could be settled during the next twelve-month period as a result of the conclusion of various tax audits or due to the expiration of the applicable statute of limitations. We estimate that $8.0 million of the unrecognized tax benefits at December 31, 2023, excluding consideration of valuation allowance, would impact our future effective income tax rate, if recognized.
We recognize interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statements of comprehensive income (loss). As of December 31, 2023 and 2022, we had accrued approximately $0.3 million and $0.4 million in interest and penalties, respectively. During the years ended December 31, 2023 and 2022, we recognized no material change in the interest and penalties related to uncertain tax positions.