5. Income taxes
The components of the Company’s income before provision for income taxes are as follows:
|
|
|
Years ended December 31, |
|
|||||||||
|
(amounts in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
29,121 |
|
|
$ |
22,725 |
|
|
$ |
14,727 |
|
|
Foreign |
|
|
535 |
|
|
|
— |
|
|
|
— |
|
|
Income before provision for income taxes |
|
$ |
29,656 |
|
|
$ |
22,725 |
|
|
$ |
14,727 |
|
The provision for income taxes consists of the following:
|
|
|
Years ended December 31, |
|
|||||||||
|
(amounts in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
245 |
|
|
$ |
451 |
|
|
$ |
(140 |
) |
|
State |
|
|
240 |
|
|
|
776 |
|
|
|
102 |
|
|
Foreign |
|
|
206 |
|
|
|
— |
|
|
|
— |
|
|
Total current tax expense (benefit) |
|
|
691 |
|
|
|
1,227 |
|
|
|
(38 |
) |
|
Deferred tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
8,709 |
|
|
|
1,357 |
|
|
|
3,639 |
|
|
State |
|
|
92 |
|
|
|
590 |
|
|
|
705 |
|
|
Foreign |
|
|
(71 |
) |
|
|
— |
|
|
|
— |
|
|
Total deferred tax expense |
|
|
8,730 |
|
|
|
1,947 |
|
|
|
4,344 |
|
|
Tax benefit for change in valuation allowance |
|
|
(767 |
) |
|
|
(968 |
) |
|
|
(1,164 |
) |
|
Total deferred tax expense, net |
|
|
7,963 |
|
|
|
979 |
|
|
|
3,180 |
|
|
Income tax expense |
|
$ |
8,654 |
|
|
$ |
2,206 |
|
|
$ |
3,142 |
|
The components of deferred tax assets and liabilities consist of the following:
|
|
|
As of |
|
|||||
|
|
|
December 31, |
|
|||||
|
(amounts in thousands) |
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets (liabilities) |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
5,669 |
|
|
$ |
6,199 |
|
|
Net operating loss and credit carryforward |
|
|
10,378 |
|
|
|
16,505 |
|
|
Allowance, reserves and other |
|
|
3,301 |
|
|
|
8,690 |
|
|
Stock-based compensation |
|
|
2,598 |
|
|
|
2,378 |
|
|
Deferred tax assets |
|
|
21,946 |
|
|
|
33,772 |
|
|
Valuation allowance |
|
|
— |
|
|
|
(767 |
) |
|
Net deferred tax assets |
|
|
21,946 |
|
|
|
33,005 |
|
|
Property, plant, and equipment |
|
|
(3,658 |
) |
|
|
(6,351 |
) |
|
Total |
|
$ |
18,288 |
|
|
$ |
26,654 |
|
Reconciliation of the federal statutory income tax rate to the effective income tax rate for the last three years is as follows:
|
|
|
Years ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. Statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
State income taxes, net of federal benefit |
|
|
0.37 |
|
|
|
0.88 |
|
|
|
2.00 |
|
|
Stock-based compensation |
|
|
(30.40 |
) |
|
|
(23.74 |
) |
|
|
0.65 |
|
|
Change in valuation allowance |
|
|
(2.59 |
) |
|
|
(4.26 |
) |
|
|
(7.91 |
) |
|
R&D credit, net of reserve |
|
|
(1.43 |
) |
|
|
(1.75 |
) |
|
|
(2.97 |
) |
|
Expiration of net operating losses |
|
|
2.76 |
|
|
|
4.51 |
|
|
|
1.17 |
|
|
Reassessment of prior year APIC benefit |
|
|
— |
|
|
|
— |
|
|
|
(3.11 |
) |
|
Effect of U.S tax law change |
|
|
25.55 |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
0.92 |
|
|
|
0.07 |
|
|
|
(2.50 |
) |
|
Effective income tax rate |
|
|
29.18 |
% |
|
|
9.71 |
% |
|
|
21.33 |
% |
On December 22, 2017, TCJA was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect the Company’s business. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017, expensing of capital expenditures, the transition of U.S. international taxation from a worldwide tax system to a territorial system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, and limitations on the deductibility of certain executive compensation and other deductions. The Company is required to recognize the effect of the tax law changes in the period of enactment, including the transition tax, re-measuring the Company’s U.S. deferred tax assets and liabilities, as well as reassessing the net realizability of the Company’s deferred tax assets and liabilities. During the fourth quarter of 2017, the Company recorded a provisional net charge of $7,578 related to the TCJA due to the remeasurement of the deferred taxes. The one-time transition tax on the mandatory deemed repatriation of foreign earnings was determined to be immaterial.
Given the significant complexity of the TCJA, the Company will continue to evaluate and analyze the impact of this legislation. New guidance from regulators, interpretation of the law, and refinement of the Company’s estimates from ongoing analysis of data and tax positions may change the provisional amounts.
The Company operates in several taxing jurisdictions, including U.S. federal, multiple U.S. states and the Netherlands. The statute of limitations has expired for all tax years prior to 2014 for federal and 2013 to 2014 for various state tax purposes. However, the net operating loss generated on the Company’s federal and state tax returns in prior years may be subject to adjustments by the federal and state tax authorities.
As of December 31, 2017, the Company had $29,941 and $5,717 of federal and state net operating loss carryforwards, respectively, that begin to expire in 2023 and 2028 for federal and state purposes, respectively, if not utilized. As of December 31, 2017, the Company had federal and California research and development credit carryforward of $2,181 and $2,197, respectively. The federal credit will begin to expire in 2022; the California credit has indefinite carryforward.
The Company’s existing net operating losses (NOLs) and credit carryforwards are subject to limitations arising from ownership changes subject to the provisions of Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and if the Company undergoes one or more future ownership changes, the Company’s ability to utilize these carryforwards could be further limited.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. During the year ended December 31, 2017, the Company released $767 of the valuation allowance that had been established against California net operating losses that expired during the year.
As of December 31, 2017 and 2016, the Company was able to determine that, based upon future projections of income, it is more likely than not that all of its federal NOLs will be utilized before they expire. However, the Company determined that it is more likely than not that some of its California NOLs will expire unused and therefore the Company had a valuation allowance of $767 relating to these NOLs as of December 31, 2016. In the current period, the Company released (or reversed) $767 of the California NOLs valuation allowance due to expiration of California NOLs.
The Company recognizes interest accrued and penalties related to unrecognized tax benefits as income tax expense. No significant interest or penalties were recognized during the periods presented.
Included in the balance of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, are $1,062, $934 and $773, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
|
|
|
December 31, |
|
|||||||||
|
(amounts in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Reconciliation of liability for unrecognized tax benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
934 |
|
|
$ |
773 |
|
|
$ |
577 |
|
|
Additions based on tax positions related to current year |
|
|
128 |
|
|
|
161 |
|
|
|
176 |
|
|
Additions for tax positions of prior years |
|
|
— |
|
|
|
— |
|
|
|
20 |
|
|
Balance at end of period |
|
$ |
1,062 |
|
|
$ |
934 |
|
|
$ |
773 |
|