7. Income Taxes
U.S. and foreign components of income before income taxes were (in thousands):
|
|
Year Ended |
|
||||||||||||
|
|
December 29, |
|
|
December 30, |
|
|
December 25, |
|
||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
||||||
|
U.S. operations |
$ |
|
8,869 |
|
|
$ |
|
(17,459 |
) |
|
$ |
|
(10,910 |
) |
|
Foreign operations |
|
|
78,073 |
|
|
|
|
36,406 |
|
|
|
|
14,517 |
|
|
Total pretax income |
$ |
|
86,942 |
|
|
$ |
|
18,947 |
|
|
$ |
|
3,607 |
|
The provision for income taxes consisted of the following (in thousands):
|
|
Year Ended |
|
||||||||||||
|
|
December 29, |
|
|
December 30, |
|
|
December 25, |
|
||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
|
3,662 |
|
|
$ |
— |
|
|
$ |
|
(52 |
) |
|
|
State |
|
240 |
|
|
|
110 |
|
|
|
158 |
|
|||
|
Foreign |
|
|
11,719 |
|
|
|
|
5,321 |
|
|
|
|
3,777 |
|
|
Total current |
|
|
15,621 |
|
|
|
|
5,431 |
|
|
|
|
3,883 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(5,556 |
) |
|
|
|
1,706 |
|
|
|
|
12,043 |
|
|
State |
|
|
176 |
|
|
|
|
202 |
|
|
|
|
714 |
|
|
Foreign |
|
|
1,616 |
|
|
|
|
1,557 |
|
|
|
|
(2,301 |
) |
|
Total deferred |
|
|
(3,764 |
) |
|
|
|
3,465 |
|
|
|
|
10,456 |
|
|
Total provision |
$ |
|
11,857 |
|
|
$ |
|
8,896 |
|
|
$ |
|
14,339 |
|
Significant components of net deferred tax assets and deferred tax liabilities for federal and state income taxes were as follows (in thousands):
|
|
|
Year Ended |
|
|||||||
|
|
|
December 29, |
|
|
December 30, |
|
||||
|
|
|
2017 |
|
|
2016 |
|
||||
|
Net non-current deferred tax asset: |
|
|
|
|
|
|
|
|
|
|
|
Inventory valuation and basis difference |
|
$ |
|
2,703 |
|
|
$ |
|
3,359 |
|
|
State taxes |
|
|
|
50 |
|
|
|
|
49 |
|
|
Stock compensation |
|
|
|
1,398 |
|
|
|
|
1,788 |
|
|
Other accrued expenses |
|
|
|
1,148 |
|
|
|
|
1,748 |
|
|
Depreciation |
|
|
|
302 |
|
|
|
|
1,347 |
|
|
Intangibles |
|
|
|
3,387 |
|
|
|
|
5,105 |
|
|
Net operating losses |
|
|
|
3,055 |
|
|
|
|
9,588 |
|
|
Research & other credits |
|
|
— |
|
|
|
|
980 |
|
|
|
|
|
|
|
12,043 |
|
|
|
|
23,964 |
|
|
Valuation allowance |
|
|
|
(8,064 |
) |
|
|
|
(23,844 |
) |
|
Net non-current deferred tax asset |
|
|
|
3,979 |
|
|
|
|
120 |
|
|
Total deferred tax asset |
|
|
|
3,979 |
|
|
|
|
120 |
|
|
Current deferred tax liability: |
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings |
|
|
|
(2,516 |
) |
|
|
|
(1,126 |
) |
|
Non-current deferred tax liability: |
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
(6,493 |
) |
|
|
|
(7,556 |
) |
|
Net deferred tax asset (liability) |
|
$ |
|
(5,030 |
) |
|
$ |
|
(8,562 |
) |
The effective tax rate differs from the U.S. federal statutory tax rate as follows:
|
|
|
Year Ended |
|
|
|||||||||||
|
|
|
December 29, |
|
|
|
December 30, |
|
|
|
December 25, |
|
|
|||
|
|
|
2017 |
|
|
|
2016 |
|
|
|
2015 |
|
|
|||
|
Federal income tax provision at statutory rate |
|
|
35.0 |
|
% |
|
|
34.0 |
|
% |
|
|
34.0 |
|
% |
|
State income taxes, net of federal benefit |
|
|
0.3 |
|
% |
|
|
(0.6 |
) |
% |
|
|
(3.1 |
) |
% |
|
Effect of foreign operations |
|
|
(18.7 |
) |
% |
|
|
(15.3 |
) |
% |
|
|
(102.5 |
) |
% |
|
Change in valuation allowance |
|
|
(19.8 |
) |
% |
|
|
30.8 |
|
% |
|
|
445.8 |
|
% |
|
China withholding taxes |
|
— |
|
% |
|
— |
|
% |
|
|
10.3 |
|
% |
||
|
Acquisition related costs |
|
— |
|
% |
|
|
1.0 |
|
% |
|
|
8.3 |
|
% |
|
|
Tax law changes |
|
|
15.8 |
|
% |
|
— |
|
% |
|
— |
|
% |
||
|
Other |
|
|
1.0 |
|
% |
|
|
(3.0 |
) |
% |
|
|
4.7 |
|
% |
|
Effective Tax Rate |
|
|
13.6 |
|
% |
|
|
46.9 |
|
% |
|
|
397.5 |
|
% |
The Company earns a significant amount of its operating income outside the United States, which is deemed to be indefinitely reinvested in foreign jurisdictions, except as disclosed below. As a result, most of the Company’s cash and cash equivalents are held by foreign subsidiaries. The Company currently does not intend nor foresee a need to repatriate any other funds to the U.S. The Company expects domestic cash and cash flows from operations to continue to be sufficient to fund its domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for the foreseeable future. If the Company should require more capital in the U.S. than is generated by its domestic operations, for example to fund significant discretionary activities such as business acquisitions, the Company could raise capital in the United States through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest expense, or dilution of our earnings. The Company has borrowed funds domestically and continues to believe it has the ability to do so at reasonable interest rates. The Company does not provide for U.S. taxes on its undistributed earnings of foreign subsidiaries that it intends to invest indefinitely outside the U.S., unless such taxes are otherwise required under U.S. tax law. In 2017, the Company determined that a portion of the current year earnings of one of its China subsidiaries may be remitted in the future to one of its foreign subsidiaries outside of mainland China and, accordingly, the Company provided for the related withholding taxes in its consolidated financial statements. As of December 29, 2017, the Company had undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S. of approximately $176.7 million. If the Company were to distribute these earnings to the United States, these earnings could be subject to withholding taxes in the countries where the cash was earned.
The U.S. Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the TCJA reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings. In addition, in 2017 the Company was subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Due to the complexities involved in accounting for the enactment of TCJA, SEC Staff Accounting Bulletin 118 allows us to provide a provisional estimate of the impacts of the TCJA in our earnings for the fourth quarter and year ending December 29, 2017. Accordingly, based on currently available information, the Company estimates that the enactment of the TCJA will result in a one-time reduction in net deferred income tax liabilities of approximately $7.3M, due primarily to the re-measurement of U.S. deferred tax liabilities at the lower 21% U.S. federal corporate income tax rate. As the Company collects and analyzes data, interprets the TCJA, and receives additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may impact the provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the TCJA will be completed in 2018.
Provisional amounts for the one-time transition tax have been recorded as of December 29, 2017 and are subject to change during 2018. The TCJA requires the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. Based on cumulative foreign earnings of $176.7 million, the Company has recorded a provisional amount for the one-time transitional tax liability and income tax expense of $3.7 million. The provisional amount is based on estimates of the effects of the TCJA, as a full analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed.
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):
|
Balance as of December 25, 2015 |
$ |
|
337 |
|
|
Decreases related to prior year tax positions |
|
|
(28 |
) |
|
Increases related to current year tax positions |
|
|
13 |
|
|
Expiration of the statute of limitations for the assessment of taxes |
|
|
(24 |
) |
|
Balance as of December 30, 2016 |
|
|
298 |
|
|
Increases related to current year tax positions |
|
|
17 |
|
|
Expiration of the statute of limitations for the assessment of taxes |
|
|
(13 |
) |
|
Balance as of December 29, 2017 |
$ |
|
302 |
|
The Company’s gross liability for unrecognized tax benefits as of December 29, 2017 and December 30, 2016 was $0.3 million and $0.3 million, respectively. Increases or decreases to interest and penalties on uncertain tax positions are included in the income tax provision in the Consolidated Statements of Operations. Interest related to uncertain tax positions for the periods ended December 29, 2017, December 30, 2016 and December 25, 2015 was considered to be de minimis. Although it is possible some of the unrecognized tax benefits could be settled within the next twelve months, the Company cannot reasonably estimate the outcome at this time.
As of December 29, 2017, the Company had California net operating loss carryforwards (“NOLs”) of approximately $24.3 million. The California NOLs begin expiring after 2031.
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company’s 2014 through 2016 federal income tax returns are open to audit through the statute of limitations by the Internal Revenue Service. The Company’s 2013 through 2016 state income tax returns are open to audit by the California Franchise Tax Board. The Company is also subject to examination in various other jurisdictions for various periods.