|
11. |
Income Taxes: |
The components of income tax expense are as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
6,020 |
|
|
$ |
6,084 |
|
|
$ |
1,012 |
|
|
State |
|
|
507 |
|
|
|
983 |
|
|
|
439 |
|
|
Foreign |
|
|
3,159 |
|
|
|
838 |
|
|
|
3,425 |
|
|
|
|
|
9,686 |
|
|
|
7,905 |
|
|
|
4,876 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
17,034 |
|
|
|
4,765 |
|
|
|
3,881 |
|
|
State |
|
|
643 |
|
|
|
184 |
|
|
|
71 |
|
|
Foreign |
|
|
(470 |
) |
|
|
62 |
|
|
|
28 |
|
|
|
|
|
17,207 |
|
|
|
5,011 |
|
|
|
3,980 |
|
|
Total income tax expense |
|
$ |
26,893 |
|
|
$ |
12,916 |
|
|
$ |
8,856 |
|
The income before tax is comprised of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic operations |
|
$ |
57,079 |
|
|
$ |
47,599 |
|
|
$ |
10,596 |
|
|
Foreign operations |
|
$ |
2,723 |
|
|
$ |
2,269 |
|
|
$ |
16,216 |
|
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 35% for the years ended December 31, 2017, 2016 and 2015 to income before provision for income taxes as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income tax provision at statutory rate |
|
$ |
20,931 |
|
|
$ |
17,454 |
|
|
$ |
9,384 |
|
|
State taxes, net of federal effect |
|
|
573 |
|
|
|
822 |
|
|
|
370 |
|
|
Foreign taxes net of federal effect |
|
|
(238 |
) |
|
|
(1,613 |
) |
|
|
754 |
|
|
Domestic manufacturing benefit |
|
|
(1,569 |
) |
|
|
(1,244 |
) |
|
|
(553 |
) |
|
Change in valuation allowance for deferred tax assets, including $1.5 million related to the Tax Act |
|
|
(523 |
) |
|
|
— |
|
|
|
(653 |
) |
|
Research tax credit |
|
|
(1,559 |
) |
|
|
(692 |
) |
|
|
(694 |
) |
|
Deferred tax true-up |
|
|
41 |
|
|
|
(1,644 |
) |
|
|
(23 |
) |
|
Remeasurement of deferred tax balances related to the Tax Act |
|
|
8,020 |
|
|
|
— |
|
|
|
— |
|
|
Transition tax on foreign earnings related to the Tax Act |
|
|
(106 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
1,323 |
|
|
|
(167 |
) |
|
|
271 |
|
|
Provision for income taxes |
|
$ |
26,893 |
|
|
$ |
12,916 |
|
|
$ |
8,856 |
|
|
Effective tax rate |
|
|
45 |
% |
|
|
26 |
% |
|
|
33 |
% |
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years and (2) bonus depreciation that will allow for full expensing of qualified property. The Tax Act also establishes new tax laws that will affect 2018, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate; (2) the creation of the Base Erosion and Anti-Abuse (“BEAT”), a new minimum tax; (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax Global Intangible Low-Taxed Income (“GILTI”), which allows for the possibility of using FTCs and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) the repeal of the domestic production activity deduction; (6) limitations on the deductibility of certain executive compensation; and (7) limitations on the use of FTCs to reduce the U.S. income tax liability. Given the complexity of the 2018 Tax Act provisions identified above, we are still evaluating the effects and have not yet determined what, if any, accounting policies will need to change, nor have we calculated the impact of the above provisions.
At December 31, 2017 the Company has not completed its accounting for the tax effects of enactment of the Tax Act, however, the Company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
|
• |
Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. For certain of its deferred tax assets and deferred tax liabilities, the Company has recorded a provisional decrease of $8.0 million, respectively, with a corresponding net adjustment to deferred income tax expense of $8.0 million for the year ended December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, its calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. |
|
• |
Transition tax: The transition tax is a tax on previously deferred earnings and profits (“E&P”) of certain of its foreign subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the transition tax and recorded a provisional transition tax obligation of $1.5 million with a corresponding adjustment to current income tax expense. The company also computed a Section 78 foreign tax credit from the post-1986 E&P of the relevant subsidiaries that resulted in a current income tax benefit of $1.5 million. However, the Company is continuing to gather additional information to more precisely compute the amount of the transition tax and foreign tax credit. |
|
• |
Valuation allowances: The Company must assess whether its valuation allowance analyses are affected by various aspects of the Tax Act. Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company concluded that with all the facts that are available at this point in time that that a full valuation allowance on all carry forward foreign tax credits were needed. The Company recorded the valuation allowance as of December 31, 2017 in the amount of $1.5 million with a corresponding adjustment to current income tax expense. |
Deferred tax assets and liabilities are comprised of the following:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Research and development credit carryforward |
|
$ |
216 |
|
|
$ |
3,784 |
|
|
Reserves and accruals not currently deductible |
|
|
1,883 |
|
|
|
2,932 |
|
|
Deferred revenue |
|
|
1,075 |
|
|
|
2,286 |
|
|
Domestic net operating loss carryforwards |
|
|
892 |
|
|
|
1,049 |
|
|
Foreign net operating loss and credit carryforwards |
|
|
2,551 |
|
|
|
4,362 |
|
|
Intangibles |
|
|
5,388 |
|
|
|
11,002 |
|
|
Share-based compensation |
|
|
1,500 |
|
|
|
2,249 |
|
|
Inventory obsolescence reserve |
|
|
3,260 |
|
|
|
4,454 |
|
|
Depreciation |
|
|
— |
|
|
|
206 |
|
|
Other |
|
|
1,135 |
|
|
|
832 |
|
|
Gross deferred tax assets |
|
|
17,900 |
|
|
|
33,156 |
|
|
Valuation allowance for deferred tax assets |
|
|
(2,447 |
) |
|
|
(1,924 |
) |
|
Deferred tax assets after valuation allowance |
|
|
15,453 |
|
|
|
31,232 |
|
|
Gross deferred tax liabilities |
|
|
(574 |
) |
|
|
(382 |
) |
|
Net deferred tax assets |
|
$ |
14,879 |
|
|
$ |
30,850 |
|
At December 31, 2017 and 2016, the Company had valuation allowances of $2,447 and $1,924, respectively, on certain of the Company’s deferred tax assets to reflect the deferred tax assets at the net amount that is more likely than not to be realized. The Company recorded a full valuation allowance on all foreign tax credits as of December 31, 2017 in the amount of $1,542, offset by reversal of valuation allowance against expired state research and developments credits in the amount of $741 and the reversal of a prior valuation allowance based on current year utilization in the amount of $278.
In assessing the realizability of deferred tax assets, the Company uses a more likely than not standard. If it is determined that it is more-likely-than-not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of the assets is dependent on the generation of future taxable income during the periods in which the associated temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies when making this assessment. In making the determination that it is more likely than not that the Company’s deferred tax assets will be realized as of December 31, 2017, the Company relied primarily on projected future taxable income.
At December 31, 2017, the Company had federal, state and foreign net operating loss carryforwards of $591, $171 and $1,134, respectively. The federal, state and foreign net operating loss carryforwards expire on various dates through December 31, 2032, December 31, 2032 and December 31, 2026, respectively. At December 31, 2017, the Company had federal and state research & development credits and foreign tax credit carryforwards of $118, $318 and $1,542, respectively. The federal research & development credits are set to expire at December 31, 2037. The state research & development credits are set to expire at various dates through December 21, 2024. The foreign tax credit is set to expire at various dates through December 31, 2027
A provision has not been made at December 31, 2017 for U.S. or additional foreign withholding taxes on approximately $7,663 of undistributed earnings not subject to the transition tax of the Company’s foreign subsidiaries in Europe and Japan nor on any additional outside basis differences inherent in these entitites because it is the present intention of management to permanently reinvest these undistributed earnings. It is not practical to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated.
The total amount of unrecognized tax benefits are as follows:
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Unrecognized tax benefits, opening balance |
|
$ |
4,827 |
|
|
$ |
5,236 |
|
|
$ |
5,292 |
|
|
Gross increases—tax positions in prior period |
|
|
171 |
|
|
|
118 |
|
|
|
136 |
|
|
Gross decreases—tax positions in prior period |
|
|
(362 |
) |
|
|
(735 |
) |
|
|
(755 |
) |
|
Gross increases—current-period tax positions |
|
|
244 |
|
|
|
208 |
|
|
|
563 |
|
|
Lapse of statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Unrecognized tax benefits, ending balance |
|
$ |
4,880 |
|
|
$ |
4,827 |
|
|
$ |
5,236 |
|
Included in the ending balance at December 31, 2017 and 2016 are unrecognized tax benefits of $4,403 and $4,275, respectively, which would be reflected as an adjustment to income tax expense if recognized. The year over year increase from 2016 to 2017 is primarily due to additional unrecognized tax benefits related to federal tax exposures. It is reasonably possible that certain amounts of unrecognized tax benefits may reverse in the next 12 months; however, the Company does not expect such reversals to have a significant impact on its results of operations or financial position.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately $246, $76 and $71, respectively, in interest and penalties expense associated with uncertain tax positions. As of December 31, 2017 and 2016, the Company had accrued interest and penalties expense related to unrecognized tax benefits of $1,190 and $1,019, respectively.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal tax purposes, the Company is generally no longer subject to tax examinations for years prior to 2013. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for years prior to 2012. For foreign tax purposes, the Company is generally no longer subject to examination for tax periods 2012 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from any future examinations of these years.
In the normal course of business, the Company is subject to tax audits in various jurisdictions, and such jurisdictions may assess additional income taxes or other taxes against it. Although the Company believes its tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from the Company’ s historical income tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on the Company’ s results of operations or cash flows in the period or periods for which that determination is made.