Entity information:
Income Taxes
The components of income (loss) before income taxes is summarized as follows:
 
Year Ended
December 31,
(in thousands)
2017
 
2016
 
2015
U.S.
$
39,559

 
$
23,736

 
$
(2,670
)
International
80

 
4,558

 
(9,108
)
Income (loss) before income taxes
$
39,639

 
$
28,294

 
$
(11,778
)

The income tax (benefit) provision is summarized as follows:
 
Year Ended
December 31,
(in thousands)
2017
 
2016
 
2015
Current
 
 
 
 
 
Federal
$
(58
)
 
$
(91
)
 
$
265

State
3,242

 
1,689

 
2,386

International
16

 
(49
)
 
218

 
3,200

 
1,549

 
2,869

Deferred
 
 
 
 
 
Federal
(71,742
)
 
—

 
—

State
(15,220
)
 
—

 
—

International
16

 
(17
)
 
99

 
(86,946
)
 
(17
)
 
99

Income tax (benefit) provision
$
(83,746
)
 
$
1,532

 
$
2,968


A reconciliation of the income tax (benefit) provision with amounts determined by applying the U.S. federal income tax rate to income (loss) before income taxes is as follows:
 
Year Ended
December 31,
(in thousands)
2017
 
2016
 
2015
U.S. statutory rate
$
13,873

 
$
9,903

 
$
(4,122
)
Permanent items
(1,916
)
 
(570
)
 
(782
)
Write-off of foreign tax and research credits
—

 
7,125

 
—

Foreign tax credits
—

 
(319
)
 
306

Uncertain tax positions
3,128

 
1,529

 
2,523

Other tax credits
(175
)
 
90

 
(120
)
State and local taxes
1,252

 
433

 
478

Impact of rate change on deferred taxes
45,129

 
(383
)
 
749

True-up of prior year tax
7

 
(2,751
)
 
1,191

Foreign tax rate differential
97

 
(242
)
 
46

Valuation allowance
(141,094
)
 
(13,292
)
 
2,704

Benefit of windfall related to stock compensation
(2,723
)
 
—

 
—

Increase in indemnification deferred tax asset
(1,055
)
 
—

 
—

Other
(269
)
 
9

 
(5
)
Income tax (benefit) provision
$
(83,746
)
 
$
1,532

 
$
2,968


The components of deferred income tax assets (liabilities) are as follows:
 
December 31,
(in thousands)
2017
 
2016
Deferred Tax Assets
 
 
 
Federal benefit of state tax liabilities
$
7,510

 
$
11,420

Reserves, accruals and other
9,251

 
10,906

Inventory obsolescence
239

 
14,138

Capitalized research and development
9,941

 
18,861

Amortization of intangibles other than goodwill
3,903

 
8,040

Net operating loss carryforwards
63,202

 
80,808

Depreciation
972

 
492

Deferred tax assets
95,018

 
144,665

Deferred Tax Liabilities
 
 
 
Reserves, accruals and other
(1,346
)
 
(287
)
Customer relationships
(1,294
)
 
(3,398
)
Depreciation
—

 
—

Deferred tax liability
(2,640
)
 
(3,685
)
Less: valuation allowance
(5,368
)
 
(140,915
)
 
$
87,010

 
$
65

Recorded in the accompanying consolidated balance sheets as:
 
 
 
Noncurrent deferred tax assets
$
87,010

 
$
65


On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act is significant and has wide-ranging effects. The Company is still studying all of the ramifications of the Act, but expects the primary material impact will be on the Company’s ending net U.S. deferred tax assets, which have been reduced as a result of the reduction in U.S. corporate tax rates from 35% to 21% for years beginning on or after January 1, 2018. The Company recorded tax expense of $45.1 million during the year ended December 31, 2017, to reflect the impact of the Act on its ending net deferred tax assets carrying value. The Company has reviewed recent guidance issued by the U.S. Treasury concerning the repatriation transition tax. The repatriation transition tax is expected to impact U.S. entities with accumulated yet unrepatriated foreign earnings. As of December 31, 2017, the Company has no accumulated unrepatriated foreign earnings, and therefore has recorded no liability for the repatriation transition tax.
The Company regularly assesses its ability to realize its deferred tax assets, and that assessment requires significant management judgment. In determining whether its deferred tax assets are more-likely-than-not realizable, the Company evaluated all available positive and negative evidence, and weighed that evidence on its objective verifiability and expected impact. Historically, the Company considered its history of net operating losses, customer concentration and contractual risk, DEFINITY supplier risk, the risk of Moly supply availability and cost, and certain product development risks, which resulted in the Company recording a full valuation allowance against its domestic net deferred tax assets beginning in the year ended December 31, 2011, and each year thereafter through the year ended December 31, 2016. The Company was profitable on a cumulative basis for the three-year period ended December 31, 2017, but all of that profitability was achieved during 2017 and 2016.
During the fourth quarter of 2017, the Company determined based on its consideration of the weight of positive and negative evidence that there was sufficient positive evidence that its federal and state deferred tax assets are more-likely-than-not realizable as of December 31, 2017. The Company’s conclusion was primarily driven by the Company achieving a sustained level of profitability, the expectation of sustained future profitability, and mitigating factors related to external supplier and customer risk sufficient to outweigh the available negative evidence. Accordingly, the Company released the valuation allowance previously recorded against its domestic net deferred tax assets, resulting in an income tax benefit of $141.1 million. The Company will continue to assess the level of the valuation allowance required and if the weight of negative evidence exists in future periods to again support the recording of a partial or full valuation allowance against the Company’s U.S. deferred tax assets, that would likely have a material negative impact on the Company’s results of operations in that future period.
The Company continues to maintain a valuation allowance of $5.4 million on the portion of its foreign net deferred tax assets generated in jurisdictions with an insufficient history of cumulative profitability.
A summary of the changes in the Company’s valuation allowance is summarized below:
(in thousands)
Amount
Balance, January 1, 2015
$
152,138

Charged to income tax (benefit) provision
2,704

Foreign currency
(590
)
Deductions
—

Balance, December 31, 2015
154,252

Charged to income tax (benefit) provision
(13,292
)
Foreign currency
(45
)
Deductions
—

Balance, December 31, 2016
140,915

Charged to income tax (benefit) provision
2,305

Adoption of ASU 2016-09
2,929

Foreign currency
313

Deductions
—

Release valuation allowance
(141,094
)
Balance, December 31, 2017
$
5,368


The Company’s U.S. federal income tax returns are subject to examination for three years. The state and foreign income tax returns are subject to examination for periods varying from three to four years depending on the specific jurisdictions’ statutes of limitation.
At December 31, 2017, the Company has U.S. federal net operating loss carryovers of $233.5 million, which will begin to expire in 2030 and fully expire in 2037. The Company has Massachusetts state research credit carryforward of $2.6 million, which will expire between 2024 and 2032. The Company has Massachusetts investment tax credit carryforwards of approximately $1.1 million, of which $0.4 million have no expiration date, and the remainder of which will begin to expire in 2029 and fully expire in 2032.
The Company has concluded that an ownership change, as defined under Section 382 of the Internal Revenue Code, occurred during the year ended December 31, 2016. A Section 382 limitation now applies to the Company’s pre-change U.S. federal net operating loss carryforwards and other U.S. tax attributes. The limitation was computed based on the value of the Company just prior to the ownership change. It is the Company’s view that its ability to utilize U.S. federal net operating losses within the carryforward period is not reduced by the limitation imposed by this ownership change. However, the Company’s U.S. research credit carryforwards and U.S. foreign tax credit carryforwards will not be utilizable and as such these credits totaling $7.1 million were removed from the gross deferred tax asset balances as of December 31, 2016.
A reconciliation of the Company’s changes in uncertain tax positions for 2017, 2016 and 2015 is as follows:
(in thousands)
Amount
Balance of uncertain tax positions as of January 1, 2015
$
12,144

Additions related to current year tax positions
—

Reductions related to prior year tax positions
—

Settlements
(694
)
Lapse of statute of limitations
—

Balance of uncertain tax positions as of December 31, 2015
11,450

Additions related to current year tax positions
—

Reductions related to prior year tax positions
—

Settlements
(593
)
Lapse of statute of limitations
(416
)
Balance of uncertain tax positions as of December 31, 2016
10,441

Additions related to current year tax positions
—

Reductions related to prior year tax positions
(506
)
Settlements
—

Lapse of statute of limitations
(69
)
Balance of uncertain tax positions as of December 31, 2017
$
9,866


As of December 31, 2017 and 2016, the total amount of unrecognized tax benefits were $9.9 million and $10.4 million, respectively, all of which, if recognized, would affect the effective tax rate. These amounts are primarily associated with domestic state tax issues, such as the allocation of income among various state tax jurisdictions.
As of December 31, 2017 and 2016, total liabilities for tax obligations and associated interest and penalties were $37.0 million and $34.4 million, respectively, consisting of income tax provisions for uncertain tax benefits of $9.9 million and $10.4 million, interest accruals of $24.9 million and $21.9 million, and penalty accruals of $2.2 million and $2.1 million, respectively. As of December 31, 2017 and 2016, $36.3 million and $33.2 million, respectively, were included in other long-term liabilities on the consolidated balance sheets and $0.7 million and $1.2 million, respectively, have reduced the Company’s deferred tax assets. Included in the 2017, 2016 and 2015 tax provisions are $3.1 million, $1.5 million and $2.5 million, respectively, relating to interest and penalties, net of benefits for reversals of uncertain tax positions and interest and penalties recognized upon settlements and lapses of relevant statutes of limitation.
In accordance with the Company’s acquisition of the medical imaging business from Bristol Myers Squibb (“BMS”) in 2008, the Company entered into a tax indemnification agreement with BMS related to certain tax obligations arising prior to the acquisition of the Company, for which the Company has the primary legal obligation. A long-term receivable is recorded to account for the expected value to the Company of future indemnification payments, net of actual U.S. federal tax benefits. The tax indemnification receivable is recognized within other noncurrent assets. The total noncurrent asset related to the indemnification was $26.3 million and $17.9 million at December 31, 2017 and 2016, respectively. The changes in the tax indemnification asset are recognized within other (income) expense, in the consolidated statement of operations. In accordance with the Company’s accounting policy, the change in the tax liability and penalties and interest associated with these obligations (net of any offsetting federal or state benefit) is recognized within the tax provision. Accordingly, as these reserves change, adjustments are included in the tax provision while the offsetting adjustment is included in other (income) expense. Assuming that the receivable from BMS continues to be considered recoverable by the Company, there will be minimal net effect on earnings and net cash outflows related to these liabilities.
During the year ended December 31, 2017, BMS made no payments on behalf of the Company with respect to indemnified contingent tax liabilities. In 2016 and 2015, BMS, on behalf of the Company, made payments totaling $0.7 million and $1.9 million, respectively to several states in connection with prior year state income tax filings. The amount due from BMS, included within other long-term assets, increased by $8.4 million, primarily due to the decrease in U.S. corporate tax rates effective January 1, 2018. In 2016 and 2015, the amount due from BMS decreased by $1.3 million and $1.6 million for the years ended December 31, 2016, and 2015, respectively, which represented the release of asset balances associated with pre-acquisition year-related tax payments made by BMS.
Included in other (income) expense for the years ended December 31, 2017, 2016 and 2015, is tax indemnification income of $8.4 million, $1.1 million and $1.7 million, respectively. For the year ended December 31, 2017, $6.5 million of the tax indemnification income is related to the impact of the U.S. federal tax rate reduction, and the remainder arises from increases in the indemnified liabilities.