Note 16. Income Taxes
Geographic sources of income before income taxes are as follows for the years ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
United States |
|
$ |
2,894 |
|
|
$ |
5,406 |
|
|
$ |
(3,165 |
) |
|
China |
|
|
41,075 |
|
|
|
22,826 |
|
|
|
18,420 |
|
|
Turkey |
|
|
9,160 |
|
|
|
(8,564 |
) |
|
|
(4,552 |
) |
|
Mexico |
|
|
3,641 |
|
|
|
1,169 |
|
|
|
956 |
|
|
Total income before income taxes |
|
$ |
56,770 |
|
|
$ |
20,837 |
|
|
$ |
11,659 |
|
As of December 31, 2017, the Company has not completed its accounting for all of the tax effects associated with the enactment of Tax Reform. However, the Company has, in certain cases made a provisional estimate of the effects on its existing deferred tax balances and the one-time transition tax. Consequently, the Company has adjusted its US gross deferred tax assets for the reduction in the income tax rate and provisionally estimated the impact of the one-time transition tax on earnings. The provisional transition tax required the Company to recognize $74.3 million of previously untaxed foreign earnings in its 2017 U.S. income tax calculation and to include additional indirect foreign tax credits of $7.4 million. The Company will finalize the provisional amounts within one year from the date of enactment.
As a result of Tax Reform, the Company provisionally recognized a total benefit of approximately $0.1 million (net of valuation allowance) from the reduced income tax rate from 35% to 21% that was applied to certain of the Company’s net deferred tax liabilities and the realization of a benefit from its alternative minimum tax credit carryover. All other material income tax benefits and expenses associated with the enactment of Tax Reform are not reflected in the income tax provision as the Company continues to record a valuation allowance against its U.S. federal and state deferred tax assets.
Because the Company previously asserted permanent reinvestment, it did not record a deferred tax liability related to unremitted foreign earnings. The Company intends to continue to permanently reinvest such earnings. In addition, the Company’s ability to repatriate funds from China to the United States is subject to a number of restrictions imposed by the Chinese government. As the Company obtains and analyzes information related to the deemed repatriation of foreign earnings under Tax Reform, the Company will finalize the provision within one year of the enactment date. Additionally, there is uncertainty as to what portion, if any, of Tax Reform will be adopted by the U.S. state and local taxing authorities.
The income tax provision includes U.S. federal, state, and local taxes, Turkey, China and Mexico taxes currently payable and those deferred because of temporary differences between the financial statement and the tax bases of assets and liabilities. The components of the income tax provision for the years ended December 31 are as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
(49 |
) |
|
$ |
— |
|
|
$ |
(51 |
) |
|
U.S. state and local taxes |
|
|
(3 |
) |
|
|
(196 |
) |
|
|
55 |
|
|
Foreign |
|
|
14,200 |
|
|
|
9,973 |
|
|
|
4,738 |
|
|
Total current |
|
|
14,148 |
|
|
|
9,777 |
|
|
|
4,742 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
(20 |
) |
|
|
51 |
|
|
|
— |
|
|
U.S. state and local taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
(1,048 |
) |
|
|
(2,833 |
) |
|
|
(765 |
) |
|
Total deferred |
|
|
(1,068 |
) |
|
|
(2,782 |
) |
|
|
(765 |
) |
|
Total income tax provision |
|
$ |
13,080 |
|
|
$ |
6,995 |
|
|
$ |
3,977 |
|
The following is a reconciliation from the U.S. statutory income tax rate to the Company’s effective income tax rate for the years ended December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States statutory income tax rate |
|
|
35.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Foreign rate differential |
|
|
(11.1 |
) |
|
|
5.3 |
|
|
|
(23.9 |
) |
|
Foreign permanent differences |
|
|
1.2 |
|
|
|
2.4 |
|
|
|
4.1 |
|
|
China rate change |
|
|
— |
|
|
|
(4.8 |
) |
|
|
— |
|
|
U.S. rate change |
|
|
19.9 |
|
|
|
— |
|
|
|
— |
|
|
Withholding taxes |
|
|
5.0 |
|
|
|
6.8 |
|
|
|
3.4 |
|
|
Foreign tax credits |
|
|
(5.0 |
) |
|
|
(7.9 |
) |
|
|
0.0 |
|
|
IRC Section 965 dividend |
|
|
20.3 |
|
|
|
— |
|
|
|
— |
|
|
Foreign tax credits - 965 dividend |
|
|
(13.1 |
) |
|
|
— |
|
|
|
— |
|
|
Nondeductible interest expense |
|
|
— |
|
|
|
11.5 |
|
|
|
— |
|
|
Valuation allowance |
|
|
(28.0 |
) |
|
|
(14.3 |
) |
|
|
17.3 |
|
|
State taxes |
|
|
— |
|
|
|
(0.6 |
) |
|
|
0.5 |
|
|
Deferred tax adjustments |
|
|
3.7 |
|
|
|
(0.1 |
) |
|
|
2.3 |
|
|
Research and development |
|
|
(1.2 |
) |
|
|
(3.0 |
) |
|
|
(3.0 |
) |
|
U.S. foreign income inclusions |
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
|
Turkey incentive credits |
|
|
(5.3 |
) |
|
|
(2.2 |
) |
|
|
(0.4 |
) |
|
Other |
|
|
1.6 |
|
|
|
4.5 |
|
|
|
(0.2 |
) |
|
Effective income tax rate |
|
|
23.0 |
% |
|
|
33.6 |
% |
|
|
34.1 |
% |
The following is a summary of the components of deferred tax assets and liabilities at December 31:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss and credit carry forwards |
|
$ |
18,913 |
|
|
$ |
25,354 |
|
|
$ |
32,294 |
|
|
Deferred revenue |
|
|
2,616 |
|
|
|
5,373 |
|
|
|
6,563 |
|
|
Non-deductible accruals |
|
|
9,557 |
|
|
|
8,316 |
|
|
|
4,825 |
|
|
Equity compensation |
|
|
3,489 |
|
|
|
3,503 |
|
|
|
— |
|
|
Equity investment |
|
|
390 |
|
|
|
633 |
|
|
|
653 |
|
|
Amortization of intangible assets |
|
|
320 |
|
|
|
472 |
|
|
|
720 |
|
|
Tax credits |
|
|
4,582 |
|
|
|
2,914 |
|
|
|
384 |
|
|
Other |
|
|
3,424 |
|
|
|
1,248 |
|
|
|
1,671 |
|
|
Total deferred tax assets |
|
|
43,291 |
|
|
|
47,813 |
|
|
|
47,110 |
|
|
Valuation allowance |
|
|
(29,141 |
) |
|
|
(40,596 |
) |
|
|
(41,216 |
) |
|
Net deferred tax assets |
|
|
14,150 |
|
|
|
7,217 |
|
|
|
5,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
(1,497 |
) |
|
|
— |
|
|
|
(615 |
) |
|
Depreciation |
|
|
(3,489 |
) |
|
|
(1,714 |
) |
|
|
(1,831 |
) |
|
Other |
|
|
(1,972 |
) |
|
|
(423 |
) |
|
|
(1,787 |
) |
|
Total deferred tax liabilities |
|
|
(6,958 |
) |
|
|
(2,137 |
) |
|
|
(4,233 |
) |
|
Net deferred tax assets |
|
$ |
7,192 |
|
|
$ |
5,080 |
|
|
$ |
1,661 |
|
The deferred tax valuation allowance at December 31 consisted of the following:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Allowance at beginning of year |
|
$ |
(40,596 |
) |
|
$ |
(41,216 |
) |
|
$ |
(39,347 |
) |
|
Benefits obtained (expenses incurred) |
|
|
11,455 |
|
|
|
620 |
|
|
|
(1,869 |
) |
|
Allowance at end of year |
|
$ |
(29,141 |
) |
|
$ |
(40,596 |
) |
|
$ |
(41,216 |
) |
The valuation allowance relates to deferred taxes that the Company believes do not meet the more-likely-than-not criteria for recording the related benefits.
During the period ended September 30, 2017, the Company released the valuation allowance recorded against deferred tax assets reported in Turkey. The release of this valuation allowance resulted in the recognition of a non-cash tax benefit of $2.6 million for the year. The Company also recognized $2.7 million of benefit during the year from the receipt of a new tax incentive from the Turkish government that will be used to reduce future cash taxes.
The Company has U.S. federal net operating losses (NOLs) of approximately $51.2 million, state NOLs of approximately $92.6 million and foreign tax credits of approximately $1.7 million available to offset future U.S. taxable income. The federal and state net operating loss carryforwards expire in varying amounts through 2037 and the foreign tax credits which expire in 2026. The Company also has Turkey investment tax incentives of approximately $2.8 million that do not expire.
Sections 382 and 383 of the Internal Revenue Code of 1986, contain rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carry forwards and certain built-in losses recognized in years after the ownership change. An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation. If an ownership change occurs, Section 382 generally imposes an annual limitation on the use of pre-ownership change NOLs to offset taxable income earned after the ownership change. The annual limitation is equal to the product of the applicable long-term tax exempt rate and the value of the company’s stock immediately before the ownership change. This annual limitation may be adjusted to reflect any unused annual limitation for prior years and certain recognized built-in gains and losses for the year. In addition, Section 383 generally limits the amount of tax liability in any post-ownership change year that can be reduced by pre-ownership change tax credit carryforwards. In 2008, the Company had an “ownership change” and the pre-ownership change NOLs existing at the date of change of $25.6 million were subject to an annual limitation of $4.3 million. As of December 31, 2016, the pre-ownership change NOLs are no longer limited. Certain of these NOLs may be at risk of limitation in the event of a future ownership change.
The Company recognizes the impact of a tax position in its financial statements if that position is more-likely-than-not to be sustained on audit, based on the technical merits of the position. The Company discloses all unrecognized tax benefits, which includes the reserves recorded for uncertain tax positions on filed tax returns and the unrecognized portion of affirmative claims. The Company’s policy regarding uncertain tax positions is to recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2017, the Company has not identified any unrecognized tax benefits.
The Company operates in and files income tax returns in various jurisdictions in China, Mexico, Turkey and the U.S., which are subject to examination by tax authorities.
During the year, the Company settled tax audits conducted by the China tax authorities for the years 2014 through 2016, and by the Turkish tax authorities for the years 2012 through 2014. The amount of the settlement of these audits was immaterial to the current year income tax provision.