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Income Taxes

The Company accounts for income taxes under the liability method. Accordingly, deferred income taxes have been provided for temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.

The components of income (loss) before taxes are as follows (in thousands):

	Year ended December 31,
	2015			2014
Domestic	$	(18,625	)	$	(11,924	)
Foreign		(6,599	)		15,309
	$	(25,224	)	$	3,385

The components of income tax expense are as follows (in thousands):

	Year ended December 31,
	2015			2014
Current:
Federal	$	0		$	0
State		31			102
Foreign		(269	)		3,417
Total current income tax expense		(238	)		3,519

Deferred:
Federal		0			0
State		0			0
Foreign		2,230			1,050
Total deferred income tax expense		2,230			1,050
	$	1,992		$	4,569

The Company files a consolidated federal income tax return which includes all domestic subsidiaries. State income taxes paid in the U.S. during 2015 and 2014 totaled $120,000 and $33,000, respectively. State income tax refunds received in the U.S. during 2015 totaled $30,000. Foreign income taxes paid during 2015 and 2014 totaled $2,195,000 and $1,063,000, respectively. There were no foreign refunds received in 2015 and 2014. There were no federal taxes paid in 2015 and 2014, and there were no federal refunds received in 2015 and 2014. At December 31, 2015, the Company had $132,040,000 of federal net operating loss carryforwards available to offset future federal taxable income, which will expire in various amounts from 2024 to 2035.

At December 31, 2015, the Company had $137,645,000 of state net operating loss carryforwards available to offset future state taxable income, the majority of which relates to Florida and Kentucky. These carryforwards expire in various amounts from 2018 to 2035.

The following is a reconciliation of income tax (benefit) expense to that computed by applying the federal statutory rate to (loss) income before income taxes (in thousands):

	Year ended December 31,
	2015			2014
Federal tax expense at the statutory rate	$	(8,829	)	$	1,185
Current year permanent differences		254			61
State income taxes, net of federal tax impact		(613	)		(772	)
Foreign repatriation, net of foreign tax credits		(3,394	)		4,077
Effect of tax rates of foreign subsidiaries		323			(733	)
Currency translation effect on temporary differences		(217	)		(71	)
Change in valuation allowance		11,453			297
Prior year adjustment		3,015			531
Other		0			(6	)
	$	1,992		$	4,569

ASC 740,

Income Taxes

requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The net cumulative domestic loss for the current and prior two years represents negative evidence under the provisions of ASC 740 requiring the Company to establish a valuation allowance against domestic deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. and certain non-U.S. tax benefits.

The gross deferred tax asset for the Company’s Mexican subsidiaries was $4,033,000 and $2,556,000 as of December 31, 2015 and 2014, respectively. The net deferred tax asset balance of $2,556,000 at December 31, 2014 is attributable to the Mexican subsidiaries.

As a result of the increased uncertainty surrounding the Company’s forecast of taxable income in Mexico, it was determined that the Company no longer met the “more likely than not” threshold required under ASC 740-10 in order to maintain the Mexico deferred tax asset. Accordingly, the Company recorded a valuation allowance on its net deferred tax asset related to certain non-U.S. tax benefits, resulting in deferred tax expense of $2,230,000 during year ended December 31, 2015. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. and non-U.S. tax benefits.

Deferred income tax assets and liabilities are as follows (in thousands):

	December 31,
	2015			2014
Deferred tax assets:
Compensation and benefit accruals	$	1,987		$	1,665
Inventory valuation		2,840			3,124
Federal and state net operating loss carryforwards		51,460			46,835
Deferred revenue		533			2,573
Accounts receivable allowance		42			113
Defined benefit pension plan		1,766			2,304
Foreign deferred revenue and other provisions		4,033			2,556
AMT credits		185			185
Other		1,526			974
		64,372			60,329
Domestic valuation allowance		(58,682	)		(51,914	)
Foreign valuation allowance		(4,033	)		0
Total deferred tax assets		1,657			8,415

Deferred tax liabilities:
Foreign subsidiaries – unrepatriated earnings		(379	)		(3,773	)
Depreciation		(1,278	)		(2,086	)
Total deferred tax liabilities		(1,657	)		(5,859	)

Net deferred tax asset	$	0		$	2,556

The ASC Income Tax topic includes guidance for the accounting for uncertainty in income taxes recognized in an enterprise’s financials. Specifically, the guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The total amount of gross unrecognized tax benefits as of December 31, 2015 and 2014 was $200,000. There were no changes to the unrecognized tax benefit balance during the years ended December 31, 2015 and 2014.

If the Company’s positions are sustained by the taxing authority in favor of the Company, the entire balance at December 31, 2015 would reduce the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015 and 2014, the Company does not have an accrual for the payment of tax-related interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Internal Revenue Service (IRS) is not currently examining the Company’s U.S. income tax returns for 2011 through 2014, for which the statute has yet to expire. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.

As of December 31, 2015, the Company has no undistributed earnings of foreign subsidiaries that are classified as permanently reinvested. The Company did not repatriate any funds to the U.S during 2015 and expects the repatriation of any available non-U.S. cash holdings during 2016 will be limited to the amount of undistributed earnings as of December 31, 2015. The loss recognized by the Company’s Mexican operations during 2015 reduced the undistributed earnings of that entity and the Company has therefore recognized a deferred income tax benefit equal to the reduction in the U.S deferred tax liability and a corresponding increase in the deferred tax asset valuation allowance.