Note 13.  Income Taxes

 

The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. At December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Tax Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The provisional amount recorded related to the remeasurement was not material. The Company has analyzed the earnings and profits, or E&P, of its foreign subsidiaries since the Company’s inception and concluded that no provisional amount is required for the one-time transition tax liability. The Company’s provisional calculations of the one-time transition tax and deferred tax remeasurement are subject to developing interpretations of the legislation, changes to certain estimates and amounts related to the E&P of certain subsidiaries, and the filing of its tax returns. The final analysis will be completed over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.

  

The Company’s income (loss) before income taxes generated from its United States and foreign operations were:

 

 

The Company’s provision (benefit) for income taxes consisted of the following:

 

 

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

 

 

Deferred Tax Assets and Liabilities

 

Deferred income taxes reflect the 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, tax credit carryforwards, and the tax effects of net operating loss carryforwards. The significant components of the Company’s deferred tax assets and liabilities are as follows:

 

Effective January 1, 2017, the Company adopted ASU No. 2016-09, under which, differences between the tax deduction for share-based awards and the related compensation expenses recognized under ASC 718 are prospectively accounted for as a component of the provision for income taxes. In addition, ASU No. 2016-09 eliminated the requirement that excess tax benefits from share-based compensation reduce taxes payable prior to being recognized in the financial statements. As a result of the adoption of ASU No. 2016-09, the cumulative excess benefits of stock compensation of $0.9 million that was not previously recognized was established on the balance sheet resulting in an increase in deferred tax assets and retained earnings.

 

Net Operating Loss Carryforwards and Tax Credits

 

At December 31, 2017, the Company had no material U.S. federal net operating loss, or NOL, carryforwards and California and other state NOL carryforwards of approximately $17.2 million and $0.8 million, respectively, which begin to expire in 2030 and 2034, respectively. The Company had foreign NOL carryforwards of approximately $20.6 million which can be used annually with certain limitations and have an indefinite carryforward period.

At December 31, 2017, the Company had federal and California research and development tax credit carryforwards of approximately $10.6 million and $16.2 million, respectively. The federal research and development tax credit begins to expire in 2032. The California research and development tax credit has an indefinite carryforward period. The Company also had a U.S. federal alternative minimum tax, or AMT, credit carryforward of $0.5 million which can be used to offset future regular tax to the extent of the current AMT; the credit has an indefinite carryforward period.

 

The utilization of NOL and credit carryforwards and other tax attributes could be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986 (the “Code”), whereby they could be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period as defined in the Code.

 

Valuation Allowance

 

In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Ultimately, the realization of deferred tax assets depends on the existence of future taxable income. Management considers sources of taxable income such as income in prior carryback periods, future reversal of existing deferred taxable temporary differences, tax-planning strategies, and projected future taxable income.

 

As of December 31, 2015, the Company assessed the realizability of the deferred tax assets of AFP and determined that it was not more likely than not that the net deferred tax assets of AFP would be realized. Therefore, the Company established a full valuation allowance of $0.9 million as of December 31, 2015. The Company has discontinued recognizing AFP income tax benefits until it is determined that it is more likely than not that AFP will generate sufficient taxable income to realize its deferred income tax assets. As of December 31, 2017 and 2016, the Company had a full valuation allowance against the net deferred tax assets of AFP, which totaled $4.9 million and $3.0 million, respectively.

 

Undistributed Losses from Foreign Operations

 

As of December 31, 2017 and 2016, deferred income taxes have not been provided on the accumulated undistributed losses of the Company’s foreign subsidiaries of approximately $15.9 million and $14.9 million, respectively. It is the Company’s plan not to repatriate future foreign earnings to the U.S.

 

Uncertain Income Tax Positions

 

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

 

 

Included in the balance of unrecognized tax benefits as of December 31, 2017, was $6.4 million that represents the portion that would impact the effective income tax rate if recognized. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefit as of December 31, 2017, will decline by $1.9 million in the next 12 months as a result of the expected resolution of a current U.S. state audit.

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax provision. For the years ended December 31, 2017 and 2016, the Company recognized accrued interest of approximately $0.1 million and $0.3 million, respectively, related to its uncertain tax positions.

The Company and/or one or more of its subsidiaries filed income tax returns in the U.S. federal jurisdiction and various U.S. states and foreign jurisdictions. As of December 31, 2017, the Company is not subject to U.S. federal, state, and foreign income tax examinations for years before 2007. In June 2017, the Internal Revenue Service, or IRS, commenced an audit of the Company’s 2015 income tax return. Subsequent to December 31, 2017, the IRS completed the examination resulting in no changes to reported tax. In August 2011, the California Franchise Tax Board commenced an audit of the Company’s 2007,  2008, and 2009 tax returns; this audit is currently ongoing. The Company is subject to income tax audit by tax authorities for tax years 2014,  2015,  and 2016 for federal and 2007 to 2016 for states.