Income Taxes

12 Months Ended

Dec. 31, 2023

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,
	2023			2022			2021
Income (loss) before income taxes:
Canada	$	(6,490	)	$	(4,946	)	$	(1,371	)
U.S.		38,992			28,365			19,168
Other		51,246			63,740			38,375
Total	$	83,748		$	87,159		$	56,172

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

	Year Ended December 31,
	2023			2022			2021
Current
Canada	$	59		$	65		$	95
U.S.		14,424			17,205			205
Other		11,113			14,492			9,486
		25,596			31,762			9,786
Deferred
Canada		—			—			493
U.S.		(12,224	)		(15,370	)		(2,133	)
Other		(2,502	)		(3,284	)		(2,305	)
		(14,726	)		(18,654	)		(3,945	)
Total	$	10,870		$	13,108		$	5,841

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,
	2023			2022			2021
Statutory Canadian tax rate		29.00	%		29.00	%		29.00	%
Expected income tax provision at Canadian statutory tax rate	$	24,287		$	25,276		$	16,291
International tax rate differences		(4,804	)		(6,289	)		(3,621	)
U.S. state income taxes, net		860			3			(249	)
Withholding and other taxes		300			789			429
Transaction costs and permanent differences		423			140			1,169
Disallowed compensation		2,571			2,138			1,111
Foreign-derived intangible income		(4,500	)		(4,467	)		(1,211	)
Tax credits		(3,602	)		(2,256	)		(1,408	)
Statutory tax rate changes		165			—			489
Uncertain tax positions		90			(168	)		(472	)
Change in valuation allowance		2,068			2,048			918
Acquisition contingent consideration adjustments		—			(698	)		87
Provision to return differences		(1,056	)		(19	)		33
Windfall benefit from share-based compensation		(1,685	)		(254	)		(5,131	)
U.K. patent box		(4,247	)		(3,135	)		(2,594	)
Reported income tax provision	$	10,870		$	13,108		$	5,841
Effective tax rate		13.0	%		15.0	%		10.4	%

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, 2023 and 2022 are as follows (in thousands):

	December 31,
	2023			2022
Deferred tax assets:
Losses	$	11,274		$	9,954
Operating lease liabilities		10,194			11,117
Compensation related deductions		8,457			9,010
Inventories		12,497			9,368
Tax credits		3,222			2,624
Capitalized R&D		25,238			13,623
Warranty		964			836
Other		724			284
Total deferred tax assets		72,570			56,816
Valuation allowance on deferred tax assets		(16,674	)		(14,568	)
Net deferred tax assets	$	55,896		$	42,248
Deferred tax liabilities:
Depreciation	$	(5,389	)	$	(4,049	)
Amortization		(24,436	)		(26,746	)
Operating lease right-of-use assets		(9,198	)		(10,477	)
Deferred revenue		(5,316	)	$	(3,057	)
Total deferred tax liabilities	$	(44,339	)	$	(44,329	)
Net deferred tax assets (liabilities)	$	11,557		$	(2,081	)

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.

The Company began to capitalize research and development (“R&D”) expenditures in 2022 in accordance with the Tax Cuts and Jobs Act of 2017 (“TCJA”) which requires that 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. In 2023 the Company’s deferred tax assets related to capitalized R&D expenditures increased $11.6 million, which also creates an effective tax rate benefit of 2.4% by increasing the Company's Foreign Derived Intangible Income deduction.

In 2023, the Company recorded an additional $2.1 million valuation allowance. In 2022, the Company recorded an additional $2.0 million valuation allowance. In 2021, the Company recorded an additional $0.9 million valuation allowance.

As of December 31, 2023, the Company had valuation allowances on Canada net Operating and capital loss carryforwards, U.K. capital loss carryforwards, certain U.S. state net operating losses, and state and foreign tax credits that 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, 2023, the Company had net operating loss carryforwards of $5.7 million (tax effected). Of this amount, approximately $5.2 million relates to Canada and begins to expire starting in 2033 and had a full valuation allowance. The remaining $0.5 million relates to various U.S. jurisdictions, which will begin to expire in 2024 through 2043. 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, approximately $4.9 million related to Canada and the remaining $0.7 million relates to the U.K, respectively.

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, approximately $4.9 million related to Canada and the remaining $0.7 million related to U.K.

As of December 31, 2023, the Company had tax credit carryforwards of approximately $3.7 million. Approximately $3.0 million relates to the U.S. and other immaterial foreign jurisdictions that will expire through 2039, and $0.7 million tax credit carryforwards relate to Canada that can be carried forward indefinitely. The Company had a $2.9 million valuation allowance on the tax credit carryforwards.

As of December 31, 2022, the Company had tax credit carryforwards of approximately $3.0 million. 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 relates to Canada that can be carried forward indefinitely. The Company had a $2.5 million valuation allowance on the tax credit carryforwards.

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 $405.8 million as of December 31, 2023. The estimated unrecognized income tax and foreign withholding tax liability on these undistributed earnings is approximately $5.5 million.

As of December 31, 2023, the Company’s total amount of unrecognized tax benefits was $4.3 million, of which $3.8 million would favorably affect the effective tax rate if benefited. Over the next twelve months, the Company may need to reverse up to $0.3 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 consolidated 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, 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
Additions based on tax positions related to the current year		561
Additions for tax positions of prior years		47
Reductions to tax positions of prior years		(22	)
Reductions to tax positions resulting from a lapse of the applicable statute of limitations		(492	)
Settlements with tax authorities		—
Balance at December 31, 2023	$	4,343

The Company recognizes interest and penalties related to uncertain tax positions in income tax provision. As of December 31, 2023 and 2022, the Company had approximately $0.7 million and $0.7 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2023, 2022 and 2021, the Company recognized less than $0.1 million, $0.1 million and ($0.1) 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 2013.

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	2021 - Present
Germany	2017 - Present
Czech Republic	2021 - Present
China	2013 - Present
Japan	2018 - Present