INCOME TAXES
Income before provision for income tax is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. | $ | (18,059 | ) | | $ | 68 |
| | $ | 20,507 |
|
Foreign | 23,209 |
| | 54,835 |
| | 31,902 |
|
Income before provision for income tax | $ | 5,150 |
| | $ | 54,903 |
| | $ | 52,409 |
|
The components of income tax expense for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
U.S. Federal | $ | 10,110 |
| | $ | (1,388 | ) | | $ | 13,497 |
|
U.S. State and local | 1,079 |
| | 692 |
| | 1,984 |
|
Non-U.S. | 12,764 |
| | 15,069 |
| | 2,239 |
|
Total current tax expense | 23,953 |
| | 14,373 |
| | 17,720 |
|
Deferred | | | | | |
U.S. Federal | 6,345 |
| | (1,534 | ) | | (3,410 | ) |
U.S. State and local | (1,333 | ) | | (378 | ) | | (385 | ) |
Non-U.S. | (3,522 | ) | | (152 | ) | | 560 |
|
Total deferred tax benefit | 1,490 |
| | (2,064 | ) | | (3,235 | ) |
Total income tax expense | $ | 25,443 |
| | $ | 12,309 |
| | $ | 14,485 |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 3,958 |
| | $ | 6,557 |
|
Credit carryforwards | 4,466 |
| | 2,512 |
|
Accruals deductible in different periods | 11,969 |
| | 16,157 |
|
Employee benefits | 1,085 |
| | 2,389 |
|
Total deferred tax assets | 21,478 |
| | 27,615 |
|
Valuation allowance | (5,862 | ) | | (3,706 | ) |
Total net deferred tax assets | $ | 15,616 |
| | $ | 23,909 |
|
Deferred tax liabilities: | |
Basis difference in fixed and intangible assets | (23,934 | ) | | (12,678 | ) |
Foreign earnings to be repatriated | (380 | ) | | — |
|
Total deferred tax liabilities | (24,314 | ) | | (12,678 | ) |
Total net deferred tax assets | $ | (8,698 | ) | | $ | 11,231 |
|
The income tax expense in the accompanying statements of income differs from the provision calculated by applying the U.S. federal statutory income tax rate of 35% in 2017, 2016, and 2015 to income before taxes due to the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory tax expense | $ | 1,802 |
| | $ | 19,216 |
| | $ | 18,343 |
|
State tax expense | (318 | ) | | 188 |
| | 1,249 |
|
Foreign taxes at rates less than U.S. rates | (3,101 | ) | | (6,838 | ) | | (1,760 | ) |
Deferred charges on sales of U.S. intellectual property | 980 |
| | 980 |
| | (5,878 | ) |
Equity compensation | 606 |
| | (530 | ) | | 204 |
|
Tax credits | (1,498 | ) | | (911 | ) | | (935 | ) |
Uncertain tax position | 2,048 |
| | 485 |
| | 3,897 |
|
Lapse of statute | (1,521 | ) | | (495 | ) | | (784 | ) |
Change of valuation allowance on foreign tax credit | 314 |
| | — |
| | — |
|
Earnout adjustment | (190 | ) | | (1,184 | ) | | — |
|
Repatriation tax net of foreign tax credits | 16,564 |
| | — |
| | — |
|
Net deferred tax asset re-measurement
| 3,883 |
| | — |
| | — |
|
Tax audits | 726 |
| | 543 |
| | — |
|
Withholding taxes | 2,880 |
| | — |
| | — |
|
Return to provision | 711 |
| | — |
| | — |
|
AMT on acquisition | 621 |
| | — |
| | — |
|
Other | 936 |
| | 855 |
| | 149 |
|
Total expense | $ | 25,443 |
| | $ | 12,309 |
| | $ | 14,485 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing. As a result, the Company has recorded $20.5 million as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $3.9 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings, net of foreign tax credits was $16.6 million based on cumulative foreign earnings of $181.0 million.
In accordance with SAB 118, the Company has determined that the $16.6 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
As of December 31, 2017, the Company has not assessed the impact of the changes arising from the Act that are effective in tax year 2018 and onward and will be included in the 2018 as interpreted guidance is further released. The Company has also not yet made a policy election with respect to its treatment of potential global intangible low-taxed income (“GILTI”). Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. The Company is still in the process of analyzing the provisions of the Act associated with GILTI and the expected impact of GILTI on the Company in the future.
At December 31, 2017, the Company had deferred tax assets attributable to U.S. state net operating loss carryforwards of $1.2 million, which will begin to expire in 2018. At December 31, 2017, the Company had U.S. state R&D credit carryforwards of $0.4 million, which will begin to expire in 2021. At December 31, 2017, the Company had $4.2 million of U.S. foreign tax credit carryforwards that can be used to offset future U.S. tax liabilities related to foreign source taxable income. The foreign tax credits will start to expire in 2022.
At December 31, 2017, certain foreign subsidiaries had deferred tax assets attributable to net operating loss carryforwards as follows: $0.03 million in Germany, $1.4 million in France, $0.5 million in Canada, and $0.5 million in Denmark. These foreign net operating loss carryforwards, if not utilized to offset taxable income in future periods, will expire in various amounts beginning in 2028.
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, valuation allowances of $5.9 million and $3.7 million were recorded at December 31, 2017 and 2016, respectively. The increase of $2.2 million in valuation allowance was primarily due to a valuation allowance recorded against the Company's current year generation of the Foreign Tax Credit in U.S.
The realizability of the deferred tax assets is primarily dependent on the Company's ability to generate sufficient taxable income in future periods. The Company's management weighed the aggregate effect of all positive evidence and negative evidence in determining the likelihood of realization of the deferred tax assets. The factors used by management to collect evidence included historical earnings of the applicable taxing jurisdiction, the cash refund opportunity to utilize the tax losses, and the future forecast of profitability in the jurisdiction. Weighing all the positive and negative evidence, the Company has recorded a valuation allowance related primarily to net operating losses in certain foreign jurisdictions and U.S. foreign tax credits where it is more likely than not that the tax benefit of the net operating losses and tax credits will not be realized.
There are no changes to the position on the Company's permanent reinvestment of its earnings from foreign operations, with the exception of Excel-Tech and Natus Ireland. As of December 31, 2017, the Company intends to distribute all of the earnings from Excel-Tech and Natus Ireland in excess of their operational needs. The Company has recorded a deferred tax liability of $0.4 million accordingly for 5% Canadian withholding tax on the expected Excel-Tech distribution to Natus Ireland. Natus Ireland has 0% withholding tax under domestic exemption and therefore, no liability has been recorded. The Company intends on permanently reinvesting the earnings of its remaining foreign subsidiaries. The other remaining foreign subsidiaries have both the intent and ability to indefinitely reinvest its undistributed earnings.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):
|
| | | |
Balance at January 1, 2015 | $ | 3,395 |
|
Increases for tax positions related to prior years | 281 |
|
Increases for tax positions related to the current year | 3,302 |
|
Lapse of statutes of limitations | (664 | ) |
Balance at January 1, 2016 | $ | 6,314 |
|
Increases for tax positions related to prior years | 174 |
|
Increases for tax positions related to the current year | 70 |
|
Lapse of statutes of limitations | (475 | ) |
Foreign exchange difference | (185 | ) |
Balance at January 1, 2017 | $ | 5,898 |
|
Increases for tax positions related to prior years | 747 |
|
Increases for tax positions related to the current year | 1,712 |
|
Lapse of statutes of limitations | (1,393 | ) |
Foreign exchange difference | 53 |
|
Balance at December 31, 2017 | $ | 7,017 |
|
For the year ended December 31, 2017, unrecognized tax benefits increased by $1.1 million and $0.6 million of tax expense in the income tax provision were recorded. The increase was primarily attributable to the increase in uncertain tax positions related to the current year in certain jurisdictions.
The unrecognized tax benefits for the tax years ended December 31, 2017, 2016 and 2015 were $7.0 million, $5.9 million and $6.3 million, respectively which include $4.0 million, $2.5 million and $2.4 million, respectively that would impact the effective tax rate if recognized.
The Company expects a range from zero to $0.9 million of unrecognized tax benefit that will impact the effective tax rate in the next 12 months due to the lapse of statute of limitations provided that no taxing authority conducts a new examination.
At December 31, 2017, 2016 and 2015, the Company had cumulatively accrued $0.6 million, $0.6 million, and $0.4 million for estimated interest and penalties related to uncertain tax positions. The Company records interest and penalties related to recognized tax positions as a component of income tax expense (benefit), which totaled approximately $(0.01) million, $0.2 million, and $0.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company is currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate over the next 12 months.
The Company's tax returns remain open to examination as follows: U.S. federal, 2014 through 2017; U.S. states, generally 2013 through 2017; and significant foreign jurisdictions, generally 2013 through 2017.