Entity information:
(12.)     INCOME TAXES
On December 22, 2017, the Tax Reform Act was signed into law. This legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 29, 2017 and recognized a $56.5 million tax benefit in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 29, 2017.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 29, 2017. The Company had an estimated $147.5 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $14.7 million of income tax expense in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 29, 2017. The Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with this repatriation tax.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it also includes two new U.S. tax base erosion provisions - the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018. Because of the complexity of the new GILTI tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company's current structure and estimated future results of global operations, but also its intent and ability to modify its structure. The Company is currently in the process of analyzing its structure and has not made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI.
The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect to be materially impacted by the BEAT provisions, however, it is still in the process of analyzing the effect of this provision of the Tax Reform Act. The Company has not included any tax impact of BEAT in its consolidated financial statements for the year ended December 29, 2017.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address the application of 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 Tax Reform Act. The Company has recognized the tax impact of the revaluation of deferred tax assets and liabilities and the provisional tax impacts related to deemed repatriated earnings and included these amounts in its consolidated financial statements for the year ended December 29, 2017. The ultimate impact may differ from the provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.



(12.)     INCOME TAXES (Continued)
The U.S. and international components of income (loss) before benefit for income taxes for fiscal years 2017, 2016 and 2015 were as follows (in thousands):
 
2017
 
2016
 
2015
U.S.
$
(46,459
)
 
$
(52,446
)
 
$
(42,166
)
International
68,286

 
53,631

 
26,466

Total income (loss) before benefit for income taxes
$
21,827

 
$
1,185

 
$
(15,700
)

The benefit for income taxes for fiscal years 2017, 2016 and 2015 was comprised of the following (in thousands):
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
(1,558
)
 
$
(8,327
)
 
$
(3,753
)
State
(29
)
 
149

 
(367
)
International
15,947

 
10,752

 
6,312

 
14,360

 
2,574

 
2,192

Deferred:
 
 
 
 
 
Federal
(58,924
)
 
(4,952
)
 
(8,144
)
State
(788
)
 
(638
)
 
(880
)
International
500

 
(1,760
)
 
(1,274
)
 
(59,212
)
 
(7,350
)
 
(10,298
)
Total benefit for income taxes
$
(44,852
)
 
$
(4,776
)
 
$
(8,106
)

The benefit for income taxes differs from the U.S. statutory rate for fiscal years 2017, 2016 and 2015 due to the following:
 
2017
 
2016
 
2015
Statutory rate
$
7,639

35.0
 %
 
$
415

35.0
 %
 
$
(5,495
)
35.0
 %
Federal tax credits
(1,896
)
(8.7
)
 
(1,792
)
(151.2
)
 
(1,850
)
11.8

Foreign rate differential
(11,125
)
(50.9
)
 
(7,086
)
(598.0
)
 
(3,180
)
20.2

Uncertain tax positions
3,517

16.1

 
1,724

145.5

 
(531
)
3.4

State taxes, net of federal benefit
(864
)
(4.0
)
 
(1,068
)
(90.1
)
 
(1,490
)
9.5

Non-deductible transaction costs
—

—

 
1,012

85.4

 
4,867

(31.0
)
Valuation allowance
1,030

4.7

 
1,340

113.1

 
626

(4.0
)
Change in tax rates
(56,453
)
(258.6
)
 
(270
)
(22.8
)
 
(91
)
0.6

U.S. Tax Reform - Toll charge on unremitted earnings
14,719

67.4

 
—

—

 
—

—

Change in unremitted earnings assertion

2,340

10.7

 
—

—

 
—

—

Change in tax law (Internal Revenue Code §987)
—

—

 
2,630

221.9

 
—

—

Other
(3,759
)
(17.2
)
 
(1,681
)
(141.8
)
 
(962
)
6.1

Effective tax rate
$
(44,852
)
(205.5
)%
 
$
(4,776
)
(403.0
)%
 
$
(8,106
)
51.6
 %

The difference between the Company’s effective tax rate and the U.S. federal statutory income tax rate in the current year is primarily attributable to the components of Tax Reform Act as well as the Company’s overall lower effective tax rate in the foreign jurisdictions in which it operates and where its foreign earnings are derived, including Switzerland, Mexico, Germany, Uruguay, and Ireland. In addition, the Company currently has a tax holiday in Malaysia through April 2018, with a potential extension through April 2023 if certain conditions are met.
(12.)     INCOME TAXES (Continued)
Difference Attributable to Foreign Investments. As a result of the deemed mandatory repatriation of earnings of foreign subsidiaries provisions in the Tax Reform Act, the Company included an estimated $147.5 million of undistributed earnings of foreign subsidiaries in income subject to U.S. tax at reduced tax rates. In addition to the provisional $14.7 million of income tax expense recorded on the deemed mandatory repatriation, the Company recorded an additional $2.3 million in deferred taxes associated with foreign withholding taxes in accordance with the change in its permanent reinvestment assertion related to the undistributed earnings subject to the deemed mandatory repatriation provisions.
Prospectively, the Company intends to limit its distributions to previously taxed income. If distributions are made utilizing current period earnings, the Company will record foreign withholding taxes in the period of the distribution.
Deferred tax assets (liabilities) consist of the following (in thousands):
 
December 29,
2017
 
December 30,
2016
Net operating loss carryforwards
$
107,005

 
$
154,706

Tax credit carryforwards
28,215

 
24,646

Inventories
4,956

 
7,524

Accrued expenses
3,815

 
5,724

Stock-based compensation
5,531

 
10,614

Other
—

 
936

Gross deferred tax assets
149,522

 
204,150

Less valuation allowance
(36,480
)
 
(35,391
)
Net deferred tax assets
113,042

 
168,759

Property, plant and equipment
(27,547
)
 
(33,069
)
Intangible assets
(219,576
)
 
(337,722
)
Convertible subordinated notes
(806
)
 
(2,577
)
Other
(6,325
)
 
—

Gross deferred tax liabilities
(254,254
)
 
(373,368
)
Net deferred tax liability
$
(141,212
)
 
$
(204,609
)
Presented as follows:
 
 
 
Noncurrent deferred tax asset
$
4,152

 
$
3,970

Noncurrent deferred tax liability
(145,364
)
 
(208,579
)
Net deferred tax liability
$
(141,212
)
 
$
(204,609
)

As of December 29, 2017, the Company has the following carryforwards available:
Jurisdiction
 
Tax
Attribute
 
Amount
(in millions)
 
Begin to
Expire
U.S. Federal
 
Net operating loss
 
$
415.9

 
2019
U.S. State
 
Net operating loss
 
227.3

 
2018
International
 
Net operating loss
 
37.4

 
2018
U.S. Federal
 
Foreign tax credit
 
17.0

 
2019
U.S. Federal and State
 
R&D tax credit
 
7.2

 
2018
U.S. State
 
Investment tax credit
 
6.3

 
2018

Net operating losses are presented as pre-tax amounts.



(12.)     INCOME TAXES (Continued)
Certain U.S. tax attributes are subject to limitations of Internal Revenue Code §382, which in general provides that utilization is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain shareholders or public groups in stock of a corporation by more than 50 percentage points over a three-year period. Such an ownership change occurred upon the consummation of the acquisition of LRM. The Company does not anticipate that these limitations will affect utilization of these carryforwards prior to their expiration.
The Company’s federal net operating loss carryforward and certain other federal tax credits reported on its income tax returns included uncertain tax positions taken in prior years. Due to the application of the accounting for uncertain tax positions, the actual tax attributes are larger than the tax amounts for which a deferred tax asset is recognized for financial statement purposes.
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management has determined that a portion of the deferred tax assets as of December 29, 2017 and December 30, 2016 related to certain foreign tax credits, state investment tax credits, and foreign and state net operating losses will not be realized.
The Company files annual income tax returns in the U.S., various state and local jurisdictions, and in various foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is examined and finally settled. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most probable outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. The resolution of an uncertain tax position, if recognized, would be recorded as an adjustment to the Provision (Benefit) for Income Taxes and the effective tax rate in the period of resolution.
Below is a summary of changes to the unrecognized tax benefit for fiscal years 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Balance, beginning of year
$
10,561

 
$
9,271

 
$
2,411

Additions based upon tax positions related to the current year
3,833

 
1,450

 
274

Reductions as a result of a lapse of applicable statute of limitations
(510
)
 
—

 
(470
)
Revaluation due to change in tax rate (Tax Reform Act)
(1,782
)
 
—

 
—

Additions (reductions) related to prior period tax returns
(14
)
 
240

 
163

Reductions (additions) relating to business combinations
—

 
(400
)
 
7,443

Reductions relating to settlements with tax authorities
—

 
—

 
(550
)
Balance, end of year
$
12,088

 
$
10,561

 
$
9,271


Integer and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years that remain open and subject to tax audits varies depending on the tax jurisdiction. The Internal Revenue Service finalized an audit of the 2012 and 2013 U.S. Federal income tax returns of the Company in the first quarter of 2015. The impact to the income tax expense was not material. The U.S. subsidiaries of the Company are still subject to a U.S. federal examination for the taxable years 2014 - 2017. The U.S. subsidiaries of the former LRM are still subject to U.S. federal, state, and local examinations for the taxable years 2006 to 2014.
It is reasonably possible that a reduction of approximately $1.1 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of December 29, 2017, approximately $11.8 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of Provision (Benefit) for Income Taxes on the Consolidated Statements of Operations and Comprehensive Income (Loss). During 2017, 2016 and 2015, the recorded amounts for interest and penalties, respectively, were not significant.