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Note 9 - Income Taxes

6 Months Ended

Jun. 28, 2015

Note 9 - Income Taxes

9.

INCOME TAXES

We use the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

For the three-month periods ended June 28, 2015 and June 29, 2014, we recorded $71 and $57, respectively, in income tax expense. For the six-month periods ended June 28, 2015 and June 29, 2014, we recorded $182 and $117, respectively, in income tax expense. These are detailed as follows:

		Three-month periods ended								Six-month periods ended
		June 28,				June 29,				June 28,				June 29,
		2015				2014				2015				2014
Current income tax provision:
Foreign		$	(8	)		$	—			$	43			$	—
Federal			22				—				22				—
State			2				2				7				7
Deferred income tax provision			55				55				110				110
Total		$	71			$	57			$	182			$	117

Deferred income tax provision is primarily due to the recognition of deferred tax liabilities generated from goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. The remaining expense in 2014 was due to state income taxes, and in 2015 was primarily due to the income reported for our China operations during the period.

Our overall effective tax rate is the result of the combination of income and losses in each of our tax jurisdictions, which is particularly influenced by the fact that we have recorded a full reserve against our deferred tax assets pertaining to cumulative historical losses for our U.S. operations and our U.K. subsidiary, as management does not believe, at this time, that it is more likely than not that we will realize the benefit of these losses. Our tax rate for the six-month period ended June 28, 2015 was 12.3%, which was different from the federal statutory rate due to the effect of the utilization of fully reserved net operating loss carryforwards (“NOL”) as well as the effect of differing foreign income tax rates, principally in China. Our tax rate for the six-month period ended June 29, 2014 was (4.7%), which was different from the federal statutory rate due to the loss incurred and our full reserve against our NOLs, and the effect of differing foreign income tax rates, principally in China.

We have substantial NOLs available to offset taxable income in the United States. However, we remain subject to the alternative minimum tax in the United States. The alternative minimum tax limits the amount of NOL available to offset taxable income to 90% of the current year income. We recorded a provision of $22 for U.S. alternative minimum tax for both the three and six months ended June 30, 2015, and no alternative minimum tax in either the three or six months ended June 29, 2014. The payment of the alternative minimum tax normally results in the establishment of a deferred tax asset; however, we have established a full valuation allowance for this related deferred tax asset.

As of June 28, 2015, we have foreign and domestic NOL and credit carryforwards totaling approximately $86,200 and $1,400 available to reduce future taxable income. Included in our NOL carryforwards are foreign loss carryforwards of approximately $12,400 that can be carried forward indefinitely. The domestic NOL carryforward of $73,800 expires from 2019 through 2035. The domestic NOL carryforward includes approximately $2,900 for which a benefit will be recorded in capital in excess of par value when realized.

Our unrecognized tax benefits related to uncertain tax positions at June 28, 2015 pertain to foreign tax jurisdictions. The following table summarizes the activity related to our unrecognized tax benefits:

		Six month periods ended
		June 28,				June 29,
		2015				2014

Balance – beginning of period		$	7,296			$	7,296
Increases related to current year tax positions			—				—
Increases related to prior year tax positions			—				—
Decreases related to prior year tax positions			—				—
Expiration of statute of limitations for assessment of taxes			—				—
Settlements of examinations			(6,778	)			—
Balance – end of period		$	518			$	7,296

The release of uncertain tax positions in 2015 relates to the successful conclusion of a federal tax examination, resulting in a $19.9 million increase in the amount of our reported domestic NOL carryforward.

We file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. Our U.S. tax matters for the years 2000 through 2014 remain subject to examination by the Internal Revenue Service (“IRS”) and by various state and local tax jurisdictions due to our NOL carryforwards. Our tax matters for the years 2007 through 2014 remain subject to examination by the respective foreign tax jurisdiction authorities. The IRS has now completed its examination of our 2011, 2012 and 2013 U.S. federal income tax returns, with no resulting material effect to our financial position or results of operations.