INCOME TAXES
Income (loss) from continuing operations before taxes for the years ended December 31, 2017, 2016, and 2015 consisted of the following:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
US operations | $ | 37,850 |
| | $ | (22,220 | ) | | $ | 26,852 |
|
Foreign operations | 5,502 |
| | (1,339 | ) | | (1,154 | ) |
Total | $ | 43,352 |
| | $ | (23,559 | ) | | $ | 25,698 |
|
The components of income tax benefit (provision) for the years ended December 31, 2017, 2016 and 2015, are:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current benefit (provision): | | | | | |
Federal | $ | (779 | ) | | $ | (89 | ) | | $ | (9,429 | ) |
State | (532 | ) | | 138 |
| | (1,783 | ) |
Foreign | (786 | ) | | (31 | ) | | (61 | ) |
Total current | (2,097 | ) | | 18 |
| | (11,273 | ) |
Deferred benefit (provision): | | | | | |
Federal | (25,919 | ) | | 7,612 |
| | 973 |
|
State | (345 | ) | | 342 |
| | 189 |
|
Foreign | 109 |
| | — |
| | — |
|
Total deferred | (26,155 | ) | | 7,954 |
| | 1,162 |
|
Total benefit (provision) | $ | (28,252 | ) | | $ | 7,972 |
| | $ | (10,111 | ) |
The following is a reconciliation of the income taxes computed using the federal statutory rate to the provision for income taxes for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Tax at statutory rate (35%) | (15,173 | ) | | 8,246 |
| | (8,994 | ) |
State tax, net of federal tax benefit | (1,217 | ) | | 1,041 |
| | (1,089 | ) |
Non-deductible expense and other | (830 | ) | | 333 |
| | 116 |
|
Restricted stock units | (831 | ) | | — |
| | — |
|
Foreign tax rate differential | 1,248 |
| | (491 | ) | | (464 | ) |
Domestic production activities deduction | — |
| | — |
| | 459 |
|
Mandatory repatriation of foreign earnings | (547 | ) | | — |
| | — |
|
Return to provision adjustment | (212 | ) | | (36 | ) | | 126 |
|
Reserve related to unrecognized tax benefits | 107 |
| | (452 | ) | | (264 | ) |
Interest and penalties | (1 | ) | | (14 | ) | | (1 | ) |
Effect of federal rate change | (11,806 | ) | | — |
| | — |
|
Effect of state rate changes, net of federal tax benefit | 1,010 |
| | (655 | ) | | — |
|
| (28,252 | ) | | 7,972 |
| | (10,111 | ) |
On December 22, 2017, the U.S. President signed into law a sweeping tax reform bill known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.
Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the Company recorded the following reasonable estimates of the tax impact in its earnings for the year ended December 31, 2017.
| |
• | For the year ended December 31, 2017, the Company accrued a reasonable estimate of $547 of tax expense for the Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings. This amount includes the projected effect of foreign tax credits as well as projected state tax effects. |
| |
• | For the year ended December 31, 2017, the Company accrued $11,806 in provisional tax expense related to the net change in deferred tax assets stemming from the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21%. |
The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The Company will be subject to the GILTI and BEAT provisions effective beginning January 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from an accounting policy standpoint.
The final impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned reasonable estimates of $11,806 and $547 due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax's reasonable estimate.
Pursuant to the SAB118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Accordingly, the Company accrued the transition tax of $547 and a tax expense related to the net change in deferred tax assets of $11,806 for 2017 based on the reasonable estimate guidance. The Company will continue to calculate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We recorded a provisional adjustment to our U.S. deferred income taxes as of December 31, 2017 to reflect the reduction in the U.S. statutory tax rate from 35% to 21% resulting from the Tax Act. Significant components of our deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Allowance for doubtful accounts | $ | 146 |
| | $ | 286 |
|
Property and equipment | 396 |
| | — |
|
Deferred revenue | 11 |
| | 27 |
|
Inventories | 7,265 |
| | 12,724 |
|
Stock-based compensation | 790 |
| | 1,857 |
|
Sales returns accrual | 4,343 |
| | 7,788 |
|
Acquisition costs, net of amortization | 116 |
| | 191 |
|
Intangible assets | 2,230 |
| | 77 |
|
Goodwill | 1,009 |
| | 1,663 |
|
HzO investment | 1,007 |
| | 1,483 |
|
Capital loss carry-over | 184 |
| | 271 |
|
Reserve on note receivable | — |
| | 328 |
|
Net operating loss carryforward | 3,338 |
| | 21,313 |
|
Federal and state credit carryforwards | 3,440 |
| | 2,816 |
|
Other liabilities | 1,586 |
| | 1,619 |
|
Total gross deferred tax assets | 25,861 |
| | 52,443 |
|
Valuation allowance | (1,458 | ) | | (1,753 | ) |
Total deferred tax assets | $ | 24,403 |
| | $ | 50,690 |
|
| | | |
Deferred tax liabilities: | | | |
Property and equipment | $ | — |
| | $ | 323 |
|
Other | — |
| | 4 |
|
Total gross deferred tax liabilities | — |
| | 327 |
|
Net deferred tax assets | $ | 24,403 |
| | $ | 50,363 |
|
The Company recorded a full valuation allowance against a deferred tax asset generated by potential capital losses on its investment in HzO. HzO is a development stage enterprise and given current operations and uncertainty of future profitability, management has determined that it is more likely than not that the deferred tax asset will not be realizable. Given this, a full valuation allowance at December 31, 2017 and 2016 of $1,007 and $1,483, respectively, has been recorded against this deferred tax asset. In addition, at December 31, 2017 and 2016, the Company recorded a full valuation allowance against deferred tax assets resulting from capital loss carry-overs of $184 and $271, respectively, as the Company determined that it was unlikely the capital loss carry-overs would be utilized. Additionally, a valuation allowance of $267 was recorded on California research and development credit carryforwards that were added upon the acquisition of mophie.
At December 31, 2017, we had federal net operating loss carryforwards of approximately $18,854, and state net operating loss carryforwards of $3,150, which may be used to offset future taxable income. The net operating loss carryforwards will expire on various dates from 2034 through 2036.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets, the Company considers all available positive and negative evidence, including but not limited to scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Additionally, we consider historical performance in our evaluation of the realizability of deferred tax assets, specifically, three years of cumulative operating income (loss). Weighing both the positive and negative evidence, management concludes no valuation allowance needs to be recorded at December 31, 2017 except for the items discussed above. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. Moreover, historical data provides evidence of sustained profitability.
Immediately prior to the enactment of the Tax Act on December 22, 2017, the Company had approximately $3,608 of undistributed foreign earnings. Upon passage of the Tax Act, all $3,608 of undistributed foreign earnings became subject to U.S. federal tax. The Company recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries, resulting in an increase in income tax expense of $547. This amount may change when we finalize both the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and the amounts held in cash or other specified assets. Future foreign earnings will be taxed according to regulatory calculations in the period earned or eligible for a 100% dividends received deduction. No additional income taxes or withholding taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
The Company recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained upon audit, based on the technical merits of the position. As of December 31, 2017 and 2016, the Company recorded a tax contingency of $2,278 and $2,230, respectively. The tax contingencies are primarily related to the Company's global tax strategy, certain transactions in foreign jurisdictions in prior periods, and research and development credits taken for federal and state purposes. Another component of the tax contingency relates to the mophie acquisition which relate to research and development credits taken for federal and state purposes. The tax contingencies, on a gross basis, are reconciled in the table below:
|
| | | | | | | |
| 2017 | | 2016 |
Unrecognized tax benefits, as of January 1 | $ | 2,230 |
| | $ | 1,265 |
|
Unrecognized tax benefits assumed in acquisition | — |
| | 513 |
|
Gross increases (decreases) – tax positions in current period | 444 |
| | 479 |
|
Gross increases (decreases) – prior year tax positions | 58 |
| | — |
|
Gross increases (decreases) – lapse of statute | (454 | ) | | (27 | ) |
Total benefit | $ | 2,278 |
| | $ | 2,230 |
|
As of December 31, 2017, the Company's liability related to unrecognized tax benefits was $2,278 of which $1,323 would impact the Company’s effective tax rate if recognized.
mophie, on a separate company basis, is currently under examination by the IRS for the years 2012 to 2015. The Company and the IRS have agreed to the audit findings, however, the audit is still subject to IRS Joint Committee review. The Company has agreed to the adjustments for the 2012 to 2015 years of the following: (1) an increase taxable income by $231 during the 2012 to 2014 period, (2) increase the research and development credit by $21 during the 2012 to 2014 period and (3) an adjustment of a $11,948 increase to taxable income in relation to bad debt reserve for the 2015 period. mophie is not currently under examination by any state tax authority, but remains subject to income tax examinations for each of its open tax years, which extend back to 2013 for federal income tax purposes and 2012 for state income tax purposes.