Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

15. Income Taxes

Components of the Company’s income (loss) before income taxes are as follows (in thousands):

	Year Ended December 31,
	2022			2021			2020
Income (loss) before income taxes:
Canada	$	(4,946	)	$	(1,371	)	$	(2,278	)
U.S.		28,365			19,168			16,875
Other		63,740			38,375			33,806
Total	$	87,159		$	56,172		$	48,403

Components of the Company’s income tax provision (benefit) are as follows (in thousands):

	Year Ended December 31,
	2022			2021			2020
Current
Canada	$	65		$	95		$	82
U.S.		17,205			205			1,324
Other		14,492			9,486			6,589
		31,762			9,786			7,995
Deferred
Canada		—			493			(493	)
U.S.		(15,370	)		(2,133	)		(1,256	)
Other		(3,284	)		(2,305	)		(2,364	)
		(18,654	)		(3,945	)		(4,113	)
Total	$	13,108		$	5,841		$	3,882

The Company is incorporated in Canada and therefore uses the Canadian statutory rate for income tax disclosure. The reconciliation of the statutory Canadian tax rate to the effective tax rate related to income before income taxes is as follows (in thousands, except percentage data):

	Year Ended December 31,
	2022			2021			2020
Statutory Canadian tax rate		29.00	%		29.00	%		29.00	%
Expected income tax provision at Canadian statutory tax rate	$	25,276		$	16,291		$	14,037
International tax rate differences		(6,289	)		(3,621	)		(3,483	)
U.S. state income taxes, net		3			(249	)		(108	)
Withholding and other taxes		789			429			485
Permanent differences and other		(39	)		921			259
Disallowed compensation		2,138			1,111			685
Foreign-derived intangible income		(4,467	)		(1,211	)		(1,063	)
Tax credits		(2,256	)		(1,408	)		(2,016	)
Statutory tax rate changes		—			489			429
Uncertain tax positions		(168	)		(472	)		(176	)
Change in valuation allowance		2,048			918			(727	)
Acquisition contingent consideration adjustments		(698	)		87			(1,513	)
Transaction costs		179			248			(23	)
Provision to return differences		(19	)		33			750
Windfall benefit from share-based compensation		(254	)		(5,131	)		(2,322	)
U.K. patent box		(3,135	)		(2,594	)		(1,332	)
Reported income tax provision	$	13,108		$	5,841		$	3,882
Effective tax rate		15.0	%		10.4	%		8.0	%

Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items and operating loss and tax credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows (in thousands):

	December 31,
	2022			2021
Deferred tax assets:
Losses	$	9,954		$	9,358
Operating lease liabilities		11,117			12,200
Compensation related deductions		9,010			6,795
Inventories		9,368			6,594
Tax credits		2,624			2,786
R&D Capitalization		13,623			—
Warranty		836			700
Other		284			403
Total deferred tax assets		56,816			38,836
Valuation allowance on deferred tax assets		(14,568	)		(12,608	)
Net deferred tax assets	$	42,248		$	26,228
Deferred tax liabilities:
Depreciation	$	(4,049	)	$	(2,585	)
Amortization		(26,746	)		(32,117	)
Operating lease right-of-use assets		(10,477	)		(11,667	)
Deferred revenue		(3,057	)	$	(1,391	)
Total deferred tax liabilities	$	(44,329	)	$	(47,760	)
Net deferred income tax assets (liabilities)	$	(2,081	)	$	(21,532	)

In determining its income tax provisions, the Company calculated deferred tax assets and liabilities for each separate jurisdiction. The Company then considered a number of factors, including positive and negative evidence related to the realization of its deferred tax assets, to determine whether a valuation allowance should be recognized with respect to its deferred tax assets.

Beginning in January 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) requires that research and development (“R&D”) expenditures be capitalized and amortized for income tax purposes over five years for domestic research and fifteen years for foreign research, rather than being deducted as incurred. This has the effect of increasing the Company’s cash taxes and deferred tax assets. Since January 2022, the Company has recognized deferred tax assets of $13.6 million for the relevant R&D expenditures. This provision also has an indirect benefit of 2.7% on the Company’s effective tax rate for the twelve months ended December 31, 2022, as the Company’s estimated Foreign Derived Intangible Income deduction has increased as a result of increased U.S. taxable income.

In 2022, the Company recorded an additional $2.0 million valuation allowance. In 2021, the Company recorded an additional $0.9 million valuation allowance. In 2020, the Company reversed valuation allowance of $0.7 million recorded on net operating losses and other timing items in certain tax jurisdictions due to current and forecast taxable income.

Valuation allowances continue to be provided on the remaining balances of certain U.S. state net operating losses and certain foreign tax attributes that the Company has determined that it is not more likely than not that they will be realized. In addition, the Company has established a valuation allowance on state R&D credits in 2022 which the Company has determined that it is not more likely than not that they will be realized. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.

As of December 31, 2022, the Company had net operating loss carryforwards of $4.4 million (tax effected). Of this amount, approximately $3.9 million relates to Canada and begins to expire starting in 2033 and had a full valuation allowance. The remainder $0.5 million relates to various U.S. and other foreign jurisdictions, of which $0.1 million can be carried forward indefinitely and the remaining $0.4 million will begin to expire in 2023 through 2036. In addition, the Company had capital loss carryforwards of $5.6 million, which can be carried forward indefinitely and had a full valuation allowance. Of this amount, $4.9 million and $0.7 million related to Canada and the U.K, respectively.

As of December 31, 2021, the Company had net operating loss carryforwards of $3.5 million (tax effected). Of this amount, approximately $2.9 million relates to Canada and begin to expire starting in 2033 and have a full valuation allowance. The remainder $0.6 million relates to various U.S. and other foreign jurisdictions, of which $0.2 million can be carried forward indefinitely and the remaining $0.4 million will begin to expire in 2022 through 2036. In addition, the Company had capital loss carryforwards of $5.9 million, which can be carried forward indefinitely and had a full valuation allowance. Of this amount, $5.1 million and $0.8 million related to Canada and the U.K, respectively.

As of December 31, 2022, the Company had tax credit carryforwards of approximately $3.0 million, which consist of approximately $2.3 million relates to the U.S. and other immaterial foreign jurisdictions that will expire through 2038 and $0.7 million tax credit carryforwards related to Canada that can be carried forward indefinitely. The Company has a $2.5 million valuation allowance on the tax credit carryforwards.

As of December 31, 2021, the Company had tax credit carryforwards of approximately $3.8 million. Of this amount approximately $2.6 million relates primarily to the U.S. and other immaterial foreign jurisdictions and will expire through 2042. The remaining $1.2 million tax credit carryforwards were related to Canada, of which $0.5 million expired in 2022 and $0.7 million can be carried forward indefinitely.

Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon a repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The amount of undistributed earnings of foreign subsidiaries totaled $330.8 million as of December 31, 2022. The estimated unrecognized income tax and foreign withholding tax liability on these undistributed earnings is approximately $3.6 million.

As of December 31, 2022, the Company’s total amount of unrecognized tax benefits was $4.2 million, of which $3.7 million would favorably affect the effective tax rate if benefited. Over the next twelve months, the Company may need to reverse up to $0.5 million of previously recorded unrecognized tax benefits due to statute of limitations closures. The Company believes there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes that it has adequately provided for all significant income tax uncertainties.

The reconciliation of the total amounts of unrecognized tax benefits is as follows (in thousands):

Balance at December 31, 2019	$	4,929
Additions based on tax positions related to the current year		476
Additions for tax positions of prior years		356
Reductions to tax positions of prior years		(5	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(498	)
Settlements with tax authorities		—
Balance at December 31, 2020		5,258
Additions based on tax positions related to the current year		1,162
Additions for tax positions of prior years		9
Reductions to tax positions of prior years		(41	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(1,591	)
Settlements with tax authorities		—
Balance at December 31, 2021		4,797
Additions based on tax positions related to the current year		553
Additions for tax positions of prior years		34
Reductions to tax positions of prior years		(563	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(572	)
Settlements with tax authorities		—
Balance at December 31, 2022	$	4,249

The Company recognizes interest and penalties related to uncertain tax positions in income tax provision. As of December 31, 2022 and 2021, the Company had approximately $0.7 million and $0.6 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $0.1

million, ($0.1) million and $0.2 million, respectively, of expense for an increase in interest and penalties related to uncertain tax positions.

The Company files income tax returns in Canada, the U.S., and various foreign jurisdictions. Generally, the Company is no longer subject to U.S. or foreign income tax examinations, including transfer pricing tax audits, by tax authorities for the years before 2012.

The Company’s income tax returns may be reviewed by tax authorities in the following countries for the following periods under the appropriate statute of limitations:

United States	2019 - Present
Canada	2017 - Present
United Kingdom	2020 - Present
Germany	2017 - Present
The Netherlands	2018 - Present
China	2012 - Present
Japan	2017 - Present