Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
12 Months Ended
Mar. 31, 2013
Income Taxes  
Income Taxes

Note 12: Income Taxes

        The components of Income (loss) before income taxes and equity loss from NEC TOKIN consists of (amounts in thousands):

 
  Fiscal Years Ended March 31,  
 
  2013   2012   2011  

Domestic (U.S.)

  $ (90,028 ) $ (6,568 ) $ 27,473  

Foreign (Outside U.S.)

    12,418     15,012     38,275  
               

 

  $ (77,610 ) $ 8,444   $ 65,748  
               

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

 
  Fiscal Years Ended March 31,  
 
  2013   2012   2011  

Current:

                   

Federal

  $   $ (938 ) $  

State and local

    37     49     58  

Foreign

    3,598     7,195     6,049  
               

 

    3,635     6,306     6,107  
               

Deferred:

                   

Federal

    (65 )   11     21  

State and local

    700     (394 )   99  

Foreign

    (952 )   (4,171 )   (3,523 )
               

 

    (317 )   (4,554 )   (3,403 )
               

Income tax expense

  $ 3,318   $ 1,752   $ 2,704  
               

        A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:

 
  Fiscal Years Ended March 31,  
 
  2013
(%)
  2012
(%)
  2011
(%)
 

Statutory U.S. federal income tax rate

    35.0     35.0     35.0  

Change in U.S. valuation allowance

    (35.5 )   13.2     (22.9 )

Taxable foreign source income

    (4.6 )   4.6     6.8  

State income taxes, net of federal taxes

    (1.0 )   4.9     0.2  

Other non-deductible expenses

    (0.4 )   3.5     1.5  

Income tax settlements

        (14.1 )    

Change in foreign operations valuation allowance

    5.9     (112.2 )   (20.8 )

Other effect of foreign operations

    (3.7 )   85.8     4.3  
               

Effective income tax rate

    (4.3 )   20.7     4.1  
               

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

 
  March 31,  
 
  2013   2012  

Deferred tax assets:

             

Net operating loss carry forwards

  $ 154,841   $ 135,458  

Sales allowances and inventory reserves

    14,683     12,937  

Tax credits

    11,664     11,763  

Medical and employee benefits

    7,868     8,960  

Stock options

    3,416     3,574  

Other

    4,615     8,259  
           

Total deferred tax assets before valuation allowance

    197,087     180,951  

Less valuation allowance

    (169,270 )   (149,306 )
           

Total deferred tax assets

    27,817     31,645  
           

Deferred tax liabilities:

             

Depreciation and differences in basis

    (14,629 )   (14,598 )

Amortization of intangibles and debt discounts

    (6,978 )   (9,394 )

Non-amortized intangibles

    (2,542 )   (2,591 )

Other

    (72 )   (949 )
           

Total deferred tax liabilities

    (24,221 )   (27,532 )
           

Net deferred tax asset

  $ 3,596   $ 4,113  
           

        The following table presents the annual activities included in the deferred tax valuation allowance:

 
  Valuation
Allowance for
Deferred Tax
Assets
 

Balance at March 31, 2010

  $ 162,217  

Benefit to costs and expenses

   
(11,623

)

Deductions

    (7,378 )
       

Balance at March 31, 2011

    143,216  

Benefit to costs and expenses

   
10,206
 

Deductions

    (4,116 )
       

Balance at March 31, 2012

    149,306  

Benefit to costs and expenses

   
23,977
 

Deductions

    (4,013 )
       

Balance at March 31, 2013

  $ 169,270  
       

        In fiscal year 2013, the valuation allowance increased $20.0 million primarily as a result of the increase in federal net operating loss carryforwards offset by a decrease in net operating loss carryforwards in certain foreign jurisdictions. In fiscal year 2012, the valuation allowance increased $6.1 million primarily as a result of the increase in federal net operating loss carryforwards offset by a decrease in net operating loss carryforwards in certain foreign jurisdictions. In fiscal year 2011, the valuation allowance decreased $19.0 million primarily as a result of the decrease in net operating loss carryforwards in the U.S. and in certain foreign jurisdictions. Deductions in fiscal years 2012 and 2011 resulted from expiring net operating loss carryforwards and expiring tax credits in certain 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, 2012

  $ 4,113  

Deferred income taxes related to operations

    317  

Deferred income taxes related to purchased subsidiary

     

Deferred income taxes related to other comprehensive income

    (396 )

Foreign currency translation

    (438 )
       

Balance at March 31, 2013

  $ 3,596  
       

        As of March 31, 2013 and 2012, the Company's gross deferred tax assets are reduced by a valuation allowance of $169.3 million and $149.3 million, respectively. A full 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.

        In assessing the realizability of deferred tax assets, 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, 2013. 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, 2013, the Company had U.S. federal net operating loss carryforwards of $352.7 million. These U.S. federal net operating losses were incurred from 2004 through 2013 and are available to offset future federal taxable income through 2033. The Company had state net operating losses of $429.5 million, of which $6.5 million will expire in one year if unused. These state net operating losses are available to offset future state taxable income, if any, through 2033. Foreign subsidiaries, primarily in Finland, Italy, Portugal and Sweden had net operating loss carryforwards totaling $81.3 million of which $5.9 million will expire in one year if unused. The net operating losses in Portugal and Finland are available to offset future taxable income through 2018 and 2019, respectively. The net operating losses in Italy and Sweden are available indefinitely to offset future taxable income. For the U.S. 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. Moreover, a future exercise of part or all of the Platinum Warrant may give rise to an ownership change in the future. 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, 2013, the U.S. consolidated group of companies had the following tax credit carryforwards available (amounts in thousands):

 
  Tax
Credits ($)
  Fiscal Year
of Expiration
 

U.S. foreign tax credits

    8,012     2017  

U.S. research credits

    172     2018  

Texas franchise tax credits

    3,480     2026  

        The Company conducts business in China through a subsidiary that qualified for a tax holiday. The tax holiday terminated on January 1, 2013. For calendar years 2012 and 2011 the statutory tax rate of 25% was reduced to 12.5%. For the fiscal year ended March 31, 2013, the Company realized an income tax benefit of $0.3 million from the tax holiday.

        At March 31, 2013, unremitted earnings of the subsidiaries outside the United States were deemed to be permanently invested. The Company has $60.3 million of unremitted foreign earnings. There are no current plans to repatriate foreign earnings and no deferred tax liability was recognized with regard to such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.

        At March 31, 2013, the Company had $5.4 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,  
 
  2013   2012   2011  

Beginning of fiscal year

  $ 6,321   $ 5,156   $ 5,010  

Additions for tax positions of the current year

    35     433     247  

Additions for tax positions of prior years

    37     820     29  

Reductions for tax positions of prior years

    (640 )   (39 )    

Lapse in statute of limitations

    (358 )       (130 )

Settlements

        (49 )    
               

End of fiscal year

  $ 5,395   $ 6,321   $ 5,156  
               

        At March 31, 2013, $0.5 million of the $5.4 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 $0.4 million in fiscal year 2014 related to uncertain tax positions in certain U.S. state and foreign jurisdictions which may settle or close.

        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. For our more significant foreign locations, we are subject to income tax examinations for the years 2007 and forward in Mexico 2009 and forward in China, Italy and Portugal. The Company recognizes potential accrued interest and penalties related to unrecognized income tax benefits within its global operations in income tax expense. The Company had $0.3 million and $0.4 million of accrued interest and penalties respectively at March 31, 2013 and March 31, 2012, 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.