Income Taxes

12 Months Ended

Dec. 31, 2017

INCOME TAXES

Income Tax Expense

Income from continuing operations before income taxes was as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
U.S.	$	34,259	$	50,651	$	39,242
Non-U.S.	1,446		930		780
	$	35,705	$	51,581	$	40,022

Income tax expense (benefit) from continuing operations was as follows (in thousands):



	Year Ended December 31,
	2017			2016		2015
Current:
U.S. federal	$	14,409		$	6,765	$	858
U.S. state	1,887			318		171
Non-U.S.	330			118		355
Total current	16,626			7,201		1,384
Deferred:
U.S. federal	(9,418		)	8,130		11,324
U.S. state	819			1,037		573
Non-U.S.	53			112		(62		)
Total deferred	(8,546		)	9,279		11,835
	$	8,080		$	16,480	$	13,219

Following is a reconciliation of the U.S. statutory federal income tax rate with our effective income tax rate for continuing operations:



	Year Ended December 31,
	2017		2016		2015
U.S. statutory income tax rate	35.0	%	35.0	%	35.0	%
State tax, net of U.S. federal tax benefit	5.0		2.4		2.6
Non-U.S. income taxes	(0.1	)	0.3		(0.1	)
Nondeductible operating expenses	0.8		0.3		0.8
Research and development credit	(1.5	)	(1.0	)	(0.6	)
Change in deferred tax measurement rate⁽¹⁾	(15.3	)	(0.1	)	—
Change in uncertain tax positions	0.8		(5.1	)	1.1
Excess tax benefits from stock plans	(2.1	)	—		—
Change in valuation allowance	0.1		0.2		(5.8	)
Other	(0.1	)	(0.1	)	—
Effective income tax rate	22.6	%	31.9	%	33.0	%

⁽¹⁾ Effective income tax rate for 2017 includes impacts related to the Tax Cuts and Jobs Act (the “TCJ Act”).

Deferred Income Taxes

Individually significant components of deferred income tax assets and liabilities were as follows (in thousands):



	As of December 31,
	2017			2016
Deferred income tax assets:
Accrued liabilities	$	3,000		$	5,089
Allowance for doubtful accounts	12			40
Inventory valuation	254			199
Capitalized indirect inventory costs	383			497
Stock-based compensation expense	897			1,346
Deferred rent	588			865
Accrued royalty	—			429
Net operating loss carryforward	1,715			2,377
Basis difference on long-lived assets	548			1,052
Credit carryforward	634			615
Other	179			140
Gross deferred income tax assets	8,210			12,649
Valuation allowance	(914		)	(886		)
Deferred income tax assets, net of valuation allowance	7,296			11,763
Deferred income tax liabilities:
Prepaid advertising	(370		)	(1,302		)
Other prepaids	(610		)	(744		)
Basis difference of long-lived assets	(14,856		)	(26,215		)
Undistributed earnings of foreign subsidiaries	—			(457		)
Other	(18		)	(25		)
Deferred income tax liabilities	(15,854		)	(28,743		)
Net deferred income tax liabilities	$	(8,558	)	$	(16,980	)

Our net deferred income tax assets (liabilities) were recorded on our consolidated balance sheets as follows (in thousands):



	As of December 31,
	2017			2016
Deferred income tax assets, non-current	—			11
Deferred income tax liabilities, non-current	(8,558		)	(16,991		)
Net deferred income tax liabilities	$	(8,558	)	$	(16,980	)

On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986 that impact corporate taxation requirements, such as the reduction of the federal tax rate for corporations from 35% to 21%, changes or limitations to certain tax deductions, implementing the territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.

We made an effort to reasonably estimate the impact of the TCJ Act, however, due to the complexities and the timing of the enactment, our accounting under ASC 740 for certain income tax effects of the TCJ Act is provisional as of December 31, 2017. We reported, as provisional amounts, the specific effect of those items for which the accounting is not complete but for which we determined a reasonable estimate. These provisional amounts are subject to adjustment during a “measurement period” until the accounting under ASC 740 is complete.

Further, on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJ Act. In accordance with SAB 118, we have calculated and recorded a $5.6 million income tax benefit in the fourth quarter of 2017 related to the remeasurement of certain deferred tax assets

and liabilities. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We have recorded a valuation allowance to reduce our deferred income tax assets to the amount we believe is more likely than not to be realized. Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require us to interpret existing tax law and other published guidance as applied to our circumstances. As part of this assessment, we consider both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which the strength of the evidence can be objectively verified.

As of December 31, 2017, we had a valuation allowance against net deferred income tax assets of $0.9 million. Of the remaining valuation allowance, $0.7 million primarily relates to domestic state tax credit carryforwards as we currently do not anticipate generating income of appropriate character to utilize those credits. The remainder of $0.2 million relates to foreign net operating loss carryforwards. Should it be determined in the future that it is more likely than not that our domestic deferred income tax assets will be realized, an additional valuation allowance would be released during the period in which such an assessment is made. There have been no material changes to our foreign operations since December 31, 2016, and, accordingly, we maintain our existing valuation allowance on foreign deferred income tax assets in such jurisdictions at December 31, 2017.

Income Tax Carryforwards

As of December 31, 2017, we had the following income tax carryforwards (in millions):



	Amount		Expires in
Net operating loss carryforwards
U.S. state	$	32.0	2018 - 2035
China	$	0.8	2020 - 2022
Income tax credit carryforwards
U.S. state	$	0.9	2018 - 2031

The timing and manner in which we are permitted to utilize our net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change.

Unrecognized Tax Benefits

Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest (in thousands):



	Year Ended December 31,
	2017			2016			2015
Balance, January 1	$	1,970		$	2,519		$	2,768
Additions for tax positions taken in prior years	38			21			1
Reductions for tax positions taken in prior years	(5		)	(523		)	(426		)
Additions for tax positions related to the current year	211			83			43
Lapses of statutes of limitations	(11		)	(130		)	—
Other	(9		)	—			133
Balance, December 31	$	2,194		$	1,970		$	2,519

Of the $2.2 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2017, $2.0 million would affect our effective tax rate if recognized.

We recorded tax-related interest and penalty expense (benefit) of $0.3 million, $(1.9) million and $0.5 million in 2017, 2016 and 2015, respectively. We had a cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2017 and 2016 of $1.0 million and $0.7 million, respectively.

Our U.S. federal income tax returns for 2009 through 2017 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 2007 through 2017 are open to review, depending on the respective statute of limitation in each state. In addition, we file income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.

As of December 31, 2017, we believe it is reasonably likely that, within the next 12 months, $0.8 million of the previously unrecognized tax benefits related to certain non-U.S. filing positions may be recognized.