Note 7 – Income Taxes
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for a one‑time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation, and limitations on the deductibility of interest.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin (“SAB”) No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. SAB No. 118 allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. The Company’s financial results reflect the income tax effects of the 2017 Tax Act for which provisional amounts have been made based on a reasonable estimate.
The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which we believe have the most significant impact on the Company’s federal income taxes are as follows:
Reduction of the U.S. Corporate Income Tax Rate
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were re‑measured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a $5.9 million increase in income tax benefit for 2017 and a corresponding $5.9 million decrease in net deferred tax liabilities at December 29, 2017.
Transition Tax on Foreign Earnings
The Company recognized a provisional income tax expense of $0.7 million for 2017 related to the one-time transition tax on certain foreign earnings. This resulted in a corresponding decrease in deferred tax assets due to the utilization of net operating loss carryforwards. The determination of the transition tax requires further analysis regarding the amount and composition of the Company’s historical foreign earnings, which is expected to be completed in 2018.
Income from continuing operations before tax was as follows:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 29, 2017 |
|
|
December 30, 2016 |
|
|
December 25, 2015 |
|
|||
|
United States |
|
$ |
370 |
|
|
$ |
(12,553 |
) |
|
$ |
(15,319 |
) |
|
Foreign |
|
|
42,659 |
|
|
|
32,683 |
|
|
|
24,135 |
|
|
Income from continuing operations before tax |
|
$ |
43,029 |
|
|
$ |
20,130 |
|
|
$ |
8,816 |
|
Significant components of income tax benefit from continuing operations consist of the following:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 29, 2017 |
|
|
December 30, 2016 |
|
|
December 25, 2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
809 |
|
|
$ |
— |
|
|
$ |
(1,001 |
) |
|
State |
|
|
249 |
|
|
|
(73 |
) |
|
|
65 |
|
|
Foreign |
|
|
397 |
|
|
|
1,858 |
|
|
|
1,816 |
|
|
Total current tax expense |
|
|
1,455 |
|
|
|
1,785 |
|
|
|
880 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(13,251 |
) |
|
|
(2,213 |
) |
|
|
(4,296 |
) |
|
State |
|
|
(1,553 |
) |
|
|
— |
|
|
|
(203 |
) |
|
Foreign |
|
|
(537 |
) |
|
|
(221 |
) |
|
|
(372 |
) |
|
Total deferred tax benefit |
|
|
(15,341 |
) |
|
|
(2,434 |
) |
|
|
(4,871 |
) |
|
Income tax benefit from continuing operations |
|
$ |
(13,886 |
) |
|
$ |
(649 |
) |
|
$ |
(3,991 |
) |
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax benefit from continuing operations consist of the following:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 29, 2017 |
|
|
December 30, 2016 |
|
|
December 25, 2015 |
|
|||
|
Effective rate reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal tax expense |
|
$ |
15,060 |
|
|
$ |
7,046 |
|
|
$ |
3,084 |
|
|
State income taxes, net |
|
|
(373 |
) |
|
|
(324 |
) |
|
|
(383 |
) |
|
Permanent items |
|
|
2,141 |
|
|
|
303 |
|
|
|
92 |
|
|
Foreign rate differential |
|
|
(7,498 |
) |
|
|
(5,907 |
) |
|
|
(4,259 |
) |
|
Tax holiday |
|
|
(7,437 |
) |
|
|
(5,714 |
) |
|
|
(3,872 |
) |
|
Credits |
|
|
(1,818 |
) |
|
|
(794 |
) |
|
|
(691 |
) |
|
Tax contingencies |
|
|
335 |
|
|
|
86 |
|
|
|
(835 |
) |
|
Share-based compensation |
|
|
(5,438 |
) |
|
|
185 |
|
|
|
22 |
|
|
Withholding tax |
|
|
840 |
|
|
|
1,435 |
|
|
|
925 |
|
|
Impact of re-characterizing intercompany debt to equity |
|
|
1,409 |
|
|
|
— |
|
|
|
— |
|
|
Impact of Tax Cuts and Jobs Act |
|
|
(6,188 |
) |
|
|
— |
|
|
|
— |
|
|
Other, net |
|
|
(248 |
) |
|
|
168 |
|
|
|
(71 |
) |
|
Valuation allowance |
|
|
(4,671 |
) |
|
|
2,867 |
|
|
|
1,997 |
|
|
Income tax benefit from continuing operations |
|
$ |
(13,886 |
) |
|
$ |
(649 |
) |
|
$ |
(3,991 |
) |
Deferred income tax assets and liabilities from continuing operations consist of the following as of:
|
|
|
December 29, 2017 |
|
|
December 30, 2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
2,825 |
|
|
$ |
2,159 |
|
|
Share-based compensation |
|
|
866 |
|
|
|
1,521 |
|
|
Accrued payroll |
|
|
1,202 |
|
|
|
903 |
|
|
Net operating loss carryforwards |
|
|
4,020 |
|
|
|
5,274 |
|
|
Transaction costs |
|
|
63 |
|
|
|
191 |
|
|
Tax credits |
|
|
5,851 |
|
|
|
3,600 |
|
|
Other assets |
|
|
1,956 |
|
|
|
2,337 |
|
|
Deferred tax assets |
|
|
16,783 |
|
|
|
15,985 |
|
|
Valuation allowance |
|
|
(4,252 |
) |
|
|
(4,888 |
) |
|
Total deferred tax assets |
|
|
12,531 |
|
|
|
11,097 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(18,283 |
) |
|
|
(10,830 |
) |
|
Property, plant and equipment |
|
|
(3,069 |
) |
|
|
— |
|
|
Other liabilities |
|
|
(743 |
) |
|
|
(303 |
) |
|
Total deferred tax liabilities |
|
|
(22,095 |
) |
|
|
(11,133 |
) |
|
Net deferred tax liability |
|
$ |
(9,564 |
) |
|
$ |
(36 |
) |
At December 29, 2017, the Company had federal and state net operating loss carryforwards of $16.4 million and $13.6 million, respectively. The federal and state net operating loss carryforwards, if not utilized, will begin to expire in 2031 and 2026, respectively. At December 29, 2017, the Company had federal and state research and development credits of $1.3 million and $0.5 million, respectively. The federal and state research and development credits, if not utilized, will begin to expire in 2032 and 2018, respectively. Additionally, the Company had foreign tax credits of $1.3 million, which if not utilized, will begin to expire in 2022.
We have determined the amount of our valuation allowance based on our estimates of taxable income by jurisdiction in which we operate over the periods in which the related deferred tax assets will be recoverable. During 2017, the Company completed the acquisitions of Cal‑Weld and Talon, resulting in a release of valuation allowance against the Company’s net deferred tax assets. During the third quarter of 2017, the Company re‑characterized intercompany debt to equity between its U.S. and Singapore entities resulting in a discrete tax benefit of $1.6 million related to the reversal of previously accrued withholding taxes. As of December 29, 2017, the Company had determined it was more-likely-than-not to realize its U.S. deferred tax assets and had released all of its valuation allowance against its net deferred tax assets, with the exception of foreign tax credits and certain state and foreign net operating loss carryforwards the Company believes are not likely to be realized within the carryforward period.
The Company was granted a tax holiday for its Singapore operations effective 2011 through 2021. The net impact of the tax holiday in Singapore as compared to the Singapore statutory rate was a benefit of $7.4 million, $5.7 million, and $3.9 million during 2017, 2016, and 2015, respectively.
As of December 29, 2017, the Company has recognized $1.6 million of unrecognized tax benefits in long-term liabilities and $0.3 million of unrecognized tax benefits in noncurrent deferred tax liabilities on the accompanying consolidated balance sheet. If recognized, $1.8 million of this amount would impact the Company’s effective tax rate. The Company does not expect a significant decrease to the total amount of unrecognized tax benefits within the next twelve months.
The Company's ongoing practice is to recognize potential accrued interest and penalties related to unrecognized tax benefits within its global operations in income tax expense (benefit). During 2017, the Company recognized a net increase of approximately $0.1 million in potential interest and penalties associated with uncertain tax positions in the consolidated statements of operations. At December 29, 2017, the Company had approximately $0.1 million and $0.4 million of interest and penalties, respectively, associated with uncertain tax positions, which are excluded from the unrecognized tax benefits table below.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
Unrecognized tax benefits |
|
|
|
Balance at December 26, 2014 |
|
$ |
1,385 |
|
|
Increase in tax positions for current year |
|
|
85 |
|
|
Decrease in tax positions for prior period |
|
|
(912 |
) |
|
Balance at December 25, 2015 |
|
|
558 |
|
|
Increase in tax positions for current year |
|
|
118 |
|
|
Decrease in tax positions for prior period |
|
|
(100 |
) |
|
Balance at December 30, 2016 |
|
|
576 |
|
|
Increase in tax positions for current year |
|
|
458 |
|
|
Increase in tax positions for prior period |
|
|
214 |
|
|
Increase in tax positions due to acquisitions |
|
|
710 |
|
|
Decrease in tax positions for prior period |
|
|
— |
|
|
Impact of Tax Cuts and Jobs Act |
|
|
(48 |
) |
|
Balance at December 29, 2017 |
|
$ |
1,910 |
|
The Company’s three major filing jurisdictions are the United States, Singapore and Malaysia. The Company is no longer subject to US Federal examination for tax years ending before 2014, to state examinations before 2013, or to foreign examinations before 2012. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward.