NOTE 11 — INCOME TAXES
The components of income before income taxes for the years ended December 31 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 18,436 |
| | $ | 2,281 |
| | $ | 7,472 |
|
Foreign | 18,713 |
| | 17,334 |
| | 25,572 |
|
Total | $ | 37,149 |
| | $ | 19,615 |
| | $ | 33,044 |
|
The components of the (benefit) provision for income taxes attributable to continuing operations for the years ended December 31 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 3,149 |
| | $ | 1,545 |
| | $ | 490 |
|
Foreign | 295 |
| | 204 |
| | 174 |
|
State | 883 |
| | 449 |
| | 58 |
|
Total current | $ | 4,327 |
| | $ | 2,198 |
| | $ | 722 |
|
Deferred: | |
| | |
| | |
|
Federal | 14,970 |
| | (215 | ) | | (13 | ) |
Foreign | (9,267 | ) | | 3,813 |
| | (4,422 | ) |
State | (2,304 | ) | | 5 |
| | (104 | ) |
Total deferred | 3,399 |
| | 3,603 |
| | (4,539 | ) |
Total (benefit) provision for income taxes | $ | 7,726 |
| | $ | 5,801 |
| | $ | (3,817 | ) |
The Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017 making significant reforms to the Internal Revenue Code. The reforms include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, transition of U.S. international taxation from a worldwide tax system to a territorial system, and a mandatory one-time transition tax on the 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 implication 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 and provides a one-year measurement period to complete the accounting required under ASC 740.
In accordance with SAB 118, the Company has calculated its best estimate of the impact of the Tax Act in its year end income tax provision based on its understanding of the Tax Act and guidance available and as a result has recorded $12.6 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 remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $2.7 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $6.7 million. The provisional amount related to withholding taxes on the undistributed earnings of our Canadian subsidiary, as these amounts are no longer permanently reinvested, was $3.2 million. Additional work is necessary to conduct 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. The Company recorded an additional amount of tax liability related to the one-time transition tax of $2.7 million, after utilization of certain tax attributes, payable over eight years.
The provision for income taxes differs from the amount computed by applying the statutory federal rate to pretax income as follows (in percentages):
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal benefit | (1.4 | )% | | 1.5 | % | | (0.2 | )% |
Permanent items | 0.5 | % | | 9.5 | % | | 0.6 | % |
Effect of foreign operations | (5.7 | )% | | (9.0 | )% | | (8.0 | )% |
Research and incentive tax credit generated | (4.6 | )% | | (14.3 | )% | | (3.0 | )% |
Valuation allowance | (37.6 | )% | | 5.5 | % | | (32.1 | )% |
Income tax reserves | 0.5 | % | | 1.3 | % | | (0.5 | )% |
Stock compensation deferred | 0.0 | % | | 0.0 | % | | (3.5 | )% |
Remeasurement U.S. deferreds | 7.3 | % | | 0.0 | % | | 0.0 | % |
Transition tax | 18.1 | % | | 0.0 | % | | 0.0 | % |
Foreign earnings withholding tax | 8.6 | % | | 0.0 | % | | 0.0 | % |
Other | 0.1 | % | | 0.1 | % | | 0.1 | % |
| 20.8 | % | | 29.6 | % | | (11.6 | )% |
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740 "Income Taxes" (ASC 740). Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting bases of assets and liabilities at the end of each reporting period. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Accrued liabilities and other | $ | 6,444 |
| | $ | 7,582 |
|
Net operating loss and credit carryforwards | 67,299 |
| | 81,404 |
|
Deferred revenue | 1,541 |
| | 2,628 |
|
Depreciation and amortization | 4,071 |
| | 4,980 |
|
Stock compensation and other | 5,429 |
| | 7,673 |
|
Gross deferred tax assets | 84,784 |
| | 104,267 |
|
Valuation allowance | (21,943 | ) | | (27,879 | ) |
Total deferred tax assets | $ | 62,841 |
| | $ | 76,388 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Accrued liabilities and other | $ | (4,207 | ) | | $ | (1,333 | ) |
Depreciation and amortization | (20,155 | ) | | (31,631 | ) |
Stock compensation | — |
| | — |
|
Acquired intangibles | (927 | ) | | (927 | ) |
Total deferred tax liabilities | (25,289 | ) | | (33,891 | ) |
| | | |
Net deferred tax assets | $ | 37,552 |
| | $ | 42,497 |
|
The Company has established a valuation allowance against a portion of its remaining deferred tax assets because it is more likely than not that certain deferred tax assets will not be realized. In determining whether deferred tax assets are realizable, the Company considered numerous factors including historical profitability, the amount of future taxable income and the existence of taxable temporary differences that can be used to realize deferred tax assets. The valuation allowance decreased approximately $5.9 million in 2017 from 2016 primarily due to releasing valuation allowance of $13.5 million against net deferred tax assets of our Canadian and Dutch subsidiaries, releasing valuation allowance of $1.0 million against net deferred tax assets of certain state net operating loss carryforwards, and recording increased valuation allowance on the net deferred tax assets of our state net operating loss carryforwards of $8.6 million as a result of remeasurement using the new U.S. federal corporate tax rate of 21%. The Company extended its commitments with its largest customer, LabCorp, and determined that it was more likely than not that Canadian deferred tax assets would be realized based on increased positive income projections. We expect to utilize portions of net operating loss carryforwards before statutory expiration dates based on our income projections in the Netherlands, and thus we determined that it was more likely than not that a portion of the Dutch deferred tax assets would be realized.
At December 31, 2017, the Company had gross federal, state and foreign net operating loss carryforwards of approximately $69.8 million, $389.9 million, and $9.5 million, respectively. These losses expire beginning in 2018. Federal and state net operating losses of approximately $69.8 million and $389.9 million, respectively, were acquired as part of the acquisitions of U.S. companies. These acquired net operating losses are subject to annual limitations due to the "change of ownership" provisions of Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has federal, state and foreign credit carryforwards of approximately $7.6 million, $3.7 million, and $15.4 million, respectively. These credits begin to expire in 2018, except for approximately $3.4 million which have an indefinite carryforward period. Certain of these credits are subject to annual limitations under the change in ownership provisions. Alternative minimum tax credits of $2.3 million which are potentially subject to refund under the Act have been reflected as deferred tax assets. In addition, the Company has a gross scientific research and experimental developmental pool in Canada of approximately $15.4 million which has an indefinite carryforward period.
The excess of financial reporting basis over tax basis of the Company's foreign subsidiaries is considered permanently reinvested with the exception of certain earnings of the Canadian subsidiary. The cumulative amount of excess financial reporting basis of the Company's non-U.S. subsidiaries was approximately $7.4 million at December 31, 2017, $26.6 million at December 31, 2016 and $17.2 million at December 31, 2015. Since the Company does not intend to permanently reinvest its previously taxed Canadian earnings, it had recorded a deferred tax liability of $3.2 million related to withholding and state income taxes associated with the ultimate repatriation from Canada to the U.S. of these previously taxed earnings. Beginning January 1, 2018, the Tax Act implemented a territorial tax system in the U.S. such that the income earned by the Company’s non-U.S. subsidiaries will be subject to a 100% dividend received deduction. As such, only potential withholding and state income taxes on the non-permanently reinvested earnings have a liability recorded. We have not recognized a deferred tax liability related to withholding taxes on the excess financial reporting basis of our other foreign subsidiaries because the Company currently intends to reinvest earnings of these subsidiaries in operations outside the U.S. and determination of such liability, if any, is dependent on circumstances existing if and when remittance occurs.
As of December 31, 2017 and December 31, 2016, the Company had recorded gross unrecognized tax benefits of approximately $2.7 million and $2.6 million, respectively. All of the unrecognized tax benefits as of December 31, 2017, if recognized, would impact the effective tax rate. The Company recognizes interest expense and penalties associated with uncertain tax positions as a component of income tax expense. During the years ended December 31, 2017 and 2016, the Company recognized approximately $35,400 and $3,000 in tax related interest and penalties, respectively. Reserves for interest and penalties as of December 31, 2017 and 2016 are not significant as the Company has net operating loss carryovers.
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Balance at beginning of year | $ | 2,677 |
| | $ | 2,184 |
|
Additions based on tax positions related to the current year | 355 |
| | 481 |
|
Additions for tax positions of prior years | — |
| | 12 |
|
Reductions for tax positions of prior years | (103 | ) | | — |
|
Lapse of statute of limitations | (152 | ) | | — |
|
Balance at end of year | $ | 2,777 |
| | $ | 2,677 |
|
As of December 31, 2017, there were no unrecognized tax benefits that the Company expects would change significantly over the next 12 months.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. In the United States and Canada, the statute of limitations with respect to the federal income tax returns for tax years after 2011 are open to audit; however, since the Company has net operating losses, the taxing authority has the ability to review tax returns prior to the 2012 tax year and make adjustments to these net operating loss carryforwards. We are currently under audit in Canada for the Company’s scientific research and experimental development pool claims for the 2012 through 2013 tax years. We do not expect a material adjustment as a result of the audit. We are not under audit in any other major taxing jurisdictions at this time.