INCOME TAXES
For financial reporting purposes, income before income taxes included the following components (in thousands): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.S. income | $ | 49,715 |
| | $ | 43,281 |
| | $ | 15,410 |
|
Non-U.S. income (loss) | 2,512 |
| | (5,967 | ) | | 365 |
|
Income before income taxes | $ | 52,227 |
| | $ | 37,314 |
| | $ | 15,775 |
|
The components of income tax expense are as follows (in thousands): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current expense: | | | | | |
U.S. federal and state | $ | 1,429 |
| | $ | 444 |
| | $ | 4,329 |
|
Foreign | 3,122 |
| | 1,992 |
| | 1,488 |
|
Current expense | 4,551 |
| | 2,436 |
| | 5,817 |
|
Deferred expense (benefit): | | | | | |
U.S. federal and state | 6,866 |
| | 6,154 |
| | (3,403 | ) |
Foreign | (334 | ) | | (259 | ) | | 194 |
|
Valuation allowance | (3,236 | ) | | — |
| | — |
|
Deferred expense (benefit) | 3,296 |
| | 5,895 |
| | (3,209 | ) |
Total income tax expense | $ | 7,847 |
| | $ | 8,331 |
| | $ | 2,608 |
|
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows: |
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Tax computed at U.S. federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) in income taxes resulting from: | | | | | |
State tax expense, net of federal benefit | 2.8 | % | | 3.0 | % | | 1.1 | % |
U.S. credits and incentives | (12.4 | %) | | (24.0 | %) | | (30.7 | %) |
Foreign earnings | 4.1 | % | | 10.2 | % | | 3.7 | % |
Stock-based compensation | (9.9 | %) | | (4.8 | %) | | 5.7 | % |
U.S. Tax Cuts and Jobs Act | 7.7 | % | | — | % | | — | % |
Intra-entity asset transfer | (17.2 | %) | | — | % | | — | % |
Other | 4.9 | % | | 2.9 | % | | 1.7 | % |
Effective tax rate | 15.0 | % | | 22.3 | % | | 16.5 | % |
The U.S. Tax Cuts and Jobs Act, (the "Tax Act") was enacted on December 22, 2017, and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made a reasonable estimate of the effects and recorded provisional amounts in its financial statements for taxes on deemed repatriation of foreign earnings as of December 31, 2017. As the Company continues to interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, the Company may make adjustments to the provisional amounts, which may materially impact its provision for income taxes and effective tax rate in the period in which adjustments are made. The accounting for the effects of the Tax Act will be completed in 2018.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018:
One-time transition tax— The Tax Act requires the Company to pay U.S. income taxes on deemed repatriation of foreign earnings as of December 31, 2017. The Company has recorded a provisional amount for its one-time transitional tax liability and income tax expense of $1.8 million based on initial estimates; further analysis is required to conclude on the final liability due under the provision.
Valuation allowance— The Company has determined that it is more likely than not that its deferred tax asset related to foreign income tax credits will not be realized, resulting in the establishment of a valuation allowance and a corresponding increase in income tax expense of $3.2 million for the year ended December 31, 2017. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the applicable tax law. The Company's judgment regarding future recoverability may change due to many factors, including future guidance and subsequent evaluation of the impact of the Tax Act. Should there be a change in the ability to recover deferred tax assets, the Company's income tax provision would increase or decrease in the period in which the assessment is changed.
Deferred income taxes— Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded a provisional $1.1 million benefit for its U.S. deferred income taxes as of December 31, 2017 to reflect the reduction in the U.S. statutory tax rate from 35% to 21% resulting from the Tax Act.
As of December 31, 2017 and 2016, the components of deferred tax assets (liabilities) are as follows (in thousands): |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Assets: | | | |
Net operating loss carryforwards | $ | 4,066 |
| | $ | 11,956 |
|
Alternative minimum tax credit | 770 |
| | 686 |
|
Stock-based compensation | 11,629 |
| | 15,180 |
|
Federal and state research and development tax credits | 27,120 |
| | 21,986 |
|
Foreign tax credit | 3,809 |
| | 2,753 |
|
Deferred rent | 4,138 |
| | 6,779 |
|
Wire transaction loss/recovery | 57 |
| | 1,916 |
|
Capitalized research and development | 8,604 |
| | — |
|
Other | 3,191 |
| | 3,979 |
|
Gross deferred tax assets | 63,384 |
| | 65,235 |
|
Liabilities: | | | |
Depreciable and amortizable assets | (12,658 | ) | | (9,815 | ) |
Convertible notes | (2,155 | ) | | (8,448 | ) |
Accrued bonus | (4,128 | ) | | — |
|
Other | (459 | ) | | (343 | ) |
Gross deferred tax liabilities | (19,400 | ) | | (18,606 | ) |
Less: valuation allowance | (3,236 | ) | | — |
|
Net deferred tax assets | $ | 40,748 |
| | $ | 46,629 |
|
Net current deferred tax assets | $ | — |
| | $ | 6,536 |
|
Net long-term deferred tax assets | 40,847 |
| | 40,415 |
|
Net long-term deferred tax liabilities | (99 | ) | | (322 | ) |
Net deferred tax assets | $ | 40,748 |
| | $ | 46,629 |
|
As of December 31, 2017 and 2016, the Company had approximately $14.3 million and $31.4 million of federal net operating loss carryforwards ("NOLs") available to offset future taxable income expiring from 2024 through 2037. The total amount of state and local NOLs in aggregate was $17.1 million and $16.2 million as of December 31, 2017 and 2016, respectively, which will begin to expire in 2024. Certain NOLs are subject to limitations under Section 382 of the Internal Revenue Code.
The Company has recorded unrecognized tax benefits in other long-term liabilities on its consolidated balance sheets. The aggregate changes in the balance of the Company's gross unrecognized tax benefits for the three years ended December 31, 2017 are as follows (in thousands): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits as of beginning of period | $ | 2,935 |
| | $ | 8,069 |
| | $ | 4,992 |
|
Increases based on tax positions related to the current year | 1,247 |
| | 922 |
| | 1,678 |
|
Increases related to tax positions from prior fiscal years | — |
| | 65 |
| | 1,444 |
|
Reductions related to tax positions from prior fiscal years | (40 | ) | | (1,906 | ) | | — |
|
Settlements with tax authority | — |
| | (4,215 | ) | | (45 | ) |
Total gross unrecognized tax benefits as of end of period | $ | 4,142 |
| | $ | 2,935 |
| | $ | 8,069 |
|
If recognized, unrecognized tax benefits would have a net impact of approximately $4.0 million on the effective tax rate. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Recognized interest and penalties were immaterial in 2017 and $0.1 million and $0.3 million for 2016, and 2015, respectively. The Company has determined its unrecognized tax benefits, including similar items in open tax years, based on historical experience with taxing authorities and other associated information and analysis.
The Company regularly reevaluates its tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state, and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, and judicial precedents), that would reduce the technical merits of the positions to below more likely than not. The Company believes that its accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The Company applies a variety of methodologies in making these estimates and assumptions.
The Company is open to audit in various jurisdictions for tax returns related to years after 2010. The Company has recorded changes in the liability for unrecognized tax benefits for current and prior year tax positions related to both ongoing and concluded income tax audits in various jurisdictions.
For 2017 and 2016, the Company has not provided for deferred taxes on investments in its foreign subsidiaries as there is no excess of financial reporting basis over tax basis with regard to these subsidiaries. If financial reporting basis exceeds tax basis in the future and the Company does not intend to permanently reinvest the earnings of its foreign subsidiaries, deferred taxes will be provided.