8. Income Taxes
Total income before income taxes summarized by region for the years ended December 31 is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
78,343 |
|
|
$ |
77,538 |
|
|
$ |
128,489 |
|
|
Foreign |
|
|
(4,118 |
) |
|
|
(12,830 |
) |
|
|
(16,470 |
) |
|
Total income before income taxes |
|
$ |
74,225 |
|
|
$ |
64,708 |
|
|
$ |
112,019 |
|
The income tax (benefit) provision for the years ended December 31 consists of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
5,972 |
|
|
$ |
(14,837 |
) |
|
$ |
1,480 |
|
|
State |
|
|
776 |
|
|
|
1,283 |
|
|
|
178 |
|
|
Foreign |
|
|
2,793 |
|
|
|
2,350 |
|
|
|
2,090 |
|
|
Total current provision |
|
|
9,541 |
|
|
|
(11,204 |
) |
|
|
3,748 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(913 |
) |
|
|
40,338 |
|
|
|
42,719 |
|
|
State |
|
|
(4,217 |
) |
|
|
1,453 |
|
|
|
4,433 |
|
|
Foreign |
|
|
(2,223 |
) |
|
|
(2,583 |
) |
|
|
(698 |
) |
|
Total deferred provision |
|
|
(7,353 |
) |
|
|
39,208 |
|
|
|
46,454 |
|
|
Changes in tax rate |
|
|
(14,929 |
) |
|
|
(216 |
) |
|
|
266 |
|
|
Changes in valuation allowance |
|
|
5,703 |
|
|
|
1,494 |
|
|
|
(3,739 |
) |
|
Total (benefit) provision |
|
$ |
(7,038 |
) |
|
$ |
29,282 |
|
|
$ |
46,729 |
|
The differences between the income tax provision at the United States federal statutory tax rate and the Company’s effective tax rate for the years ended December 31 are the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax provision at federal statutory rate |
|
$ |
25,979 |
|
|
$ |
22,648 |
|
|
$ |
39,207 |
|
|
Recovery of tax basis in United States subsidiary |
|
|
(19,540 |
) |
|
— |
|
|
— |
|
||
|
Change in tax rates |
|
|
(14,929 |
) |
|
|
(216 |
) |
|
|
266 |
|
|
Valuation allowance |
|
|
5,703 |
|
|
|
1,494 |
|
|
|
(3,739 |
) |
|
Compensation expense |
|
|
(5,619 |
) |
|
|
(8,013 |
) |
|
|
(2,115 |
) |
|
Income tax credits and incentives |
|
|
(3,462 |
) |
|
|
(3,426 |
) |
|
|
(1,754 |
) |
|
State income tax |
|
|
3,240 |
|
|
|
3,243 |
|
|
|
4,264 |
|
|
Return to provision adjustments |
|
|
(1,939 |
) |
|
|
(1,079 |
) |
|
|
(1,062 |
) |
|
Income tax reserves |
|
|
1,184 |
|
|
|
759 |
|
|
|
2,301 |
|
|
Acquisition related charges |
|
|
(489 |
) |
|
|
5,167 |
|
|
|
— |
|
|
Globalization initiative |
|
|
306 |
|
|
|
6,290 |
|
|
|
9,039 |
|
|
Other |
|
|
2,528 |
|
|
|
2,415 |
|
|
|
322 |
|
|
Total (benefit) provision |
|
$ |
(7,038 |
) |
|
$ |
29,282 |
|
|
$ |
46,729 |
|
Significant components of the Company’s deferred tax assets and liabilities at December 31 are composed of the following:
|
|
|
December 31, |
|
|||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
General business and other credit carryforwards |
|
$ |
18,928 |
|
|
$ |
21,215 |
|
|
Net operating loss carryforwards |
|
|
14,991 |
|
|
|
9,976 |
|
|
Stock-based compensation |
|
|
13,502 |
|
|
|
18,227 |
|
|
Inventory |
|
|
10,075 |
|
|
|
16,324 |
|
|
Amortization of intangibles |
|
|
6,742 |
|
|
|
10,871 |
|
|
Original issue discount |
|
|
4,606 |
|
|
|
8,817 |
|
|
Deferred rent |
|
|
2,532 |
|
|
|
4,347 |
|
|
Other |
|
|
14,943 |
|
|
|
9,718 |
|
|
Gross deferred tax assets |
|
|
86,319 |
|
|
|
99,495 |
|
|
Less valuation allowance |
|
|
(16,247 |
) |
|
|
(10,544 |
) |
|
Net deferred tax assets |
|
|
70,072 |
|
|
|
88,951 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Acquired intangibles |
|
|
(53,076 |
) |
|
|
(69,428 |
) |
|
Depreciation |
|
|
(23,132 |
) |
|
|
(29,888 |
) |
|
Other |
|
|
(1,752 |
) |
|
|
(1,687 |
) |
|
Total deferred tax liabilities |
|
|
(77,960 |
) |
|
|
(101,003 |
) |
|
Consolidated net deferred tax liabilities |
|
$ |
(7,888 |
) |
|
$ |
(12,052 |
) |
|
Add deferred tax liability, net, attributable to non-controlling interests |
|
|
199 |
|
|
|
528 |
|
|
Net deferred tax liabilities |
|
$ |
(7,689 |
) |
|
$ |
(11,524 |
) |
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
Year Ended December 31, |
|
|||||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Gross unrecognized tax benefits at January 1 |
|
$ |
23,322 |
|
|
$ |
12,448 |
|
|
$ |
12,372 |
|
|
Increases in tax positions for prior years |
|
|
1,692 |
|
|
|
1,716 |
|
|
|
2,614 |
|
|
Decreases in tax positions for prior years |
|
|
(24 |
) |
|
|
(270 |
) |
|
|
(3,156 |
) |
|
Increases in tax positions for current year relating to ongoing operations |
|
|
968 |
|
|
|
6,205 |
|
|
|
618 |
|
|
Decreases in tax positions as a result of a lapse of statute of limitations |
|
|
(402 |
) |
|
|
— |
|
|
|
— |
|
|
Increases in tax positions for current year relating to acquisitions |
|
|
— |
|
|
|
3,223 |
|
|
|
— |
|
|
Decreases in tax positions due to settlements with taxing authorities |
|
|
(200 |
) |
|
|
— |
|
|
|
— |
|
|
Gross unrecognized tax benefits at December 31 |
|
$ |
25,356 |
|
|
$ |
23,322 |
|
|
$ |
12,448 |
|
At December 31, 2017, 2016, and 2015, $24.1 million, $12.5 million, and $7.2 million, respectively, of the Company’s total unrecognized tax benefits, if recognized, would affect the effective income tax rate.
In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes, the Company has classified uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2017, 2016, and 2015, the Company recognized approximately $(0.1) million, $0.3 million, and $0.1 million, respectively, in interest and penalties as income tax expense (benefit) in the Consolidated Statements of Operations. The Company had approximately $0.4 million and $0.5 million for the payment of interest and penalties accrued at December 31, 2017 and December 31, 2016, respectively, in the Consolidated Balance Sheets.
The Company believes it is reasonably possible that approximately $6.5 million of its remaining unrecognized tax positions may be recognized by the end of 2018 as certain statute of limitations expire, the amount of which is primarily attributable to tax positions involving the valuation of intercompany transactions.
The Company is subject to routine compliance reviews on various tax matters around the world in the ordinary course of business. Currently, income tax audits are being conducted in the state of New York, the state of Louisiana and Germany. U.S. and most foreign jurisdictions remain subject to examination in all years due to prior year net operating losses and R&D credits.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”) which among many other things reduces the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Based on information available at December 31, 2017, the Company recorded a provisional tax benefit in the amount of approximately $14.9 million associated with the revaluation of its deferred taxes offset by an increase in valuation allowance of $2.7 million for a net benefit of $12.2 million for the corporate tax rate reduction. The final accounting is subject to change as further guidance on the U.S. GAAP treatment of this and other provisions of the Act become available and further analysis is complete.
The Company’s foreign subsidiaries had a cumulative net deficit in earnings and profits in aggregate as of December 31, 2017. Therefore, based on the Company’s provisional assessment, the mandatory one-time repatriation provision under the Act had an immaterial impact to the net deficit in earnings and profits of the Company’s foreign subsidiaries and no impact on the Company’s tax expense. In the event the Company is required to repatriate funds from outside of the United States, such repatriation would not generate additional United States tax liabilities, but could be subject to local laws and customs generating immaterial tax consequences in the subsidiaries’ jurisdictions.
At December 31, 2017, the Company had $34.5 million, $93.3 million and $8.7 million of federal, state and foreign net operating loss carryforwards, respectively, which will begin to expire in 2018. Valuation allowance reserves of $53.4 million are recorded against California net operating losses of $53.4 million due to uncertainty surrounding their realization.
There were also federal and California income tax credit carryforwards of $21.4 million and $20.7 million, respectively. The federal credits will begin to expire in 2020. The California credits can be carried forward indefinitely. Valuation allowance reserves of $20.7 million are recorded against the California credits due to uncertainty surrounding their realization.
Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of the Company’s net operating loss and credit carryforwards may be subject to an annual limitation against taxable income in future periods. As a result of any future ownership changes, the annual limitation of loss and credit carryforwards may cause them to expire before ultimately becoming available to reduce future income tax liabilities.