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Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

Note 9. Income Taxes

Income before income taxes and the provision for income taxes consisted of the following:

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

United States

 

$

42,124

 

 

$

16,035

 

 

$

32,237

 

International

 

 

28,679

 

 

 

13,536

 

 

 

10,967

 

Total

 

$

70,803

 

 

$

29,571

 

 

$

43,204

 

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

$

12,913

 

 

$

4,761

 

 

$

(587

)

State

 

 

3,587

 

 

 

791

 

 

 

(2,338

)

Foreign

 

 

5,178

 

 

 

(386

)

 

 

4,267

 

 

 

 

21,678

 

 

 

5,166

 

 

 

1,342

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

 

(3,052

)

 

 

(574

)

 

 

20,930

 

State

 

 

(6,408

)

 

 

104

 

 

 

2,514

 

Foreign

 

 

292

 

 

 

(916

)

 

 

1,092

 

 

 

 

(9,168

)

 

 

(1,386

)

 

 

24,536

 

Total

 

$

12,510

 

 

$

3,780

 

 

$

25,878

 

 

Net deferred tax assets consisted of the following:

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Deferred Tax Assets:

 

 

 

 

 

 

 

 

Accruals and allowances

 

$

25,041

 

 

$

20,743

 

Net operating loss carryforwards

 

 

1,352

 

 

 

1,267

 

Stock-based compensation

 

 

5,374

 

 

 

6,381

 

Operating lease liability

 

 

5,303

 

 

 

6,456

 

Deferred revenue

 

 

641

 

 

 

1,449

 

Tax credit carryforwards

 

 

 

 

 

896

 

Acquired intangibles

 

 

33,860

 

 

 

31,708

 

Depreciation and amortization

 

 

1,651

 

 

 

1,639

 

Other

 

 

3,285

 

 

 

1,080

 

Total deferred tax assets

 

 

76,507

 

 

 

71,619

 

Deferred Tax Liabilities:

 

 

 

 

 

 

 

 

Right of use asset

 

 

(4,264

)

 

 

(5,218

)

Other

 

 

(987

)

 

 

(1,053

)

Total deferred tax liabilities

 

 

(5,251

)

 

 

(6,271

)

 

 

 

 

 

 

 

 

 

Valuation Allowance(1)

 

 

(2,933

)

 

 

(6,418

)

Net deferred tax assets

 

$

68,323

 

 

$

58,930

 

 

(1)

Valuation allowance is presented gross. The valuation allowance net of the federal tax effect was $2.9 million and $5.2 million for the years ended December 31, 2020 and 2019, respectively.

Management's judgment is required in determining the Company's provision for income taxes, its deferred tax assets and any valuation allowance recorded against its deferred tax assets. As of December 31, 2020, a valuation allowance of $2.9 million was placed against certain federal tax and state attributes since the recovery of the assets is uncertain. There was a valuation allowance of $6.4 million placed against deferred tax assets as of December 31, 2019. Accordingly, the valuation allowance decreased $3.5 million during 2020, largely as a result of a $5.2 million state valuation allowance release in 2020. The $5.2 million valuation release resulted from the Company concluding that nearly all of the Company’s California state deferred tax assets will be realizable based upon the Company’s profitable state operations and reduced state research tax credits. In management's judgment it is more likely than not that the remaining deferred tax assets will be realized in the future as of December 31, 2020, and as such no valuation allowance has been recorded against the remaining deferred tax assets.

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Tax at federal statutory rate

 

 

21.0

%

 

 

21.0

%

 

 

21.0

%

State, net of federal benefit

 

 

2.9

%

 

 

2.4

%

 

 

1.5

%

Impact of international operations

 

 

(5.0

%)

 

 

(0.8

)%

 

 

1.9

%

Stock-based compensation

 

 

5.4

%

 

 

10.7

%

 

 

(0.3

)%

Tax credits

 

 

(2.3

)%

 

 

(5.9

)%

 

 

(2.6

)%

Valuation allowance

 

 

1.8

%

 

 

0.9

%

 

 

1.4

%

State Valuation Allowance Release

 

 

(5.8

)%

 

 

%

 

 

%

Impact of the Tax Act

 

 

%

 

 

%

 

 

(15.4

)%

Base Erosion Anti-Abuse Tax

 

 

%

 

 

7.2

%

 

 

%

Write-off of future tax benefits related to Arlo

 

 

%

 

 

%

 

 

52.2

%

Transaction costs

 

 

%

 

 

(2.5

)%

 

 

%

Recognition of previously unrecognized tax benefits

 

 

0.3

%

 

 

(20.6

)%

 

 

%

Others

 

 

(0.6

%)

 

 

0.4

%

 

 

0.2

%

Provision for income taxes

 

 

17.7

%

 

 

12.8

%

 

 

59.9

%

 

As a result of changes in fair value of available-for-sale securities and foreign currency hedging, income tax (provision) benefits of $8,000, $(10,000), and $(0.1) million were recorded in comprehensive income related to the years ended December 31, 2020, 2019, and 2018, respectively.

As of December 31, 2020, the Company has approximately $4.0 million of acquired federal net operating loss carry forwards. All of the losses are subject to annual usage limitations under Internal Revenue Code Section 382. The federal losses expire in different years beginning in fiscal 2021.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

The Company files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years before 2015. The Company is no longer subject to foreign income tax examinations before 2004. The Italian Tax Authority (ITA) has audited the Company’s 2004 through 2012 tax years. The Company is currently in litigation with the ITA with respect to all of these years. During the fiscal year ended December 31. 2020, the U.S. Internal Revenue Service began an audit of fiscal 2018. Additionally, the State of California began an examination of the 2016, 2017 and 2018 tax years. During 2020, the US Internal Revenue Service began an examination of the 2018 tax year. Additionally, the state of California commenced an examination of the 2016 through 2018 tax years. The Company has limited audit activity in various other states and foreign jurisdictions. Due to the uncertain nature of ongoing tax audits, the Company has recorded its liability for uncertain tax positions as part of its long-term liability as payments cannot be anticipated over the next 12 months. The existing tax positions of the Company continue to generate an increase in the liability for uncertain tax positions. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. The possible reduction in liabilities for uncertain tax positions resulting from the expiration of statutes of limitation in multiple jurisdictions in the next 12 months is approximately $0.5 million, excluding the interest, penalties and the effect of any related deferred tax assets or liabilities.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:

 

 

 

Federal, State,

and Foreign Tax

 

 

 

(In thousands)

 

Balance as of December 31, 2017

 

$

12,567

 

Additions based on tax positions related to the current year

 

 

637

 

Additions for tax positions of prior years

 

 

280

 

Reductions for tax positions of prior years

 

 

(116

)

Reductions due to lapse of applicable statutes

 

 

(999

)

Adjustments due to foreign exchange rate movement

 

 

(386

)

Balance as of December 31, 2018

 

$

11,983

 

Additions based on tax positions related to the current year

 

 

385

 

Additions for tax positions of prior years

 

 

996

 

Settlements

 

 

(705

)

Reductions for tax positions of prior years

 

 

(3,440

)

Reductions due to lapse of applicable statutes

 

 

(609

)

Adjustments due to foreign exchange rate movement

 

 

459

 

Balance as of December 31, 2019

 

$

9,069

 

Additions based on tax positions related to the current year

 

 

442

 

Additions for tax positions of prior years

 

 

253

 

Reductions due to lapse of applicable statutes

 

 

(744

)

Adjustments due to foreign exchange rate movement

 

 

522

 

Balance as of December 31, 2020

 

$

9,542

 

 

The total amount of net UTB that, if recognized would affect the effective tax rate as of December 31, 2020 is $7.8 million. The ending net UTB results from adjusting the gross balance at December 31, 2020 for items such as U.S. federal and state deferred tax, interest, and deductible taxes. The net UTB is included as a component of non-current income taxes payable within the consolidated balance sheets.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2020, 2019, and 2018, total interest and penalties expensed were $0.2 million, $(1.4) million, and $0.1 million, respectively. As of December 31, 2020 and 2019, accrued interest and penalties on a gross basis was $2.3 million, and $2.0 million, respectively. Included in accrued interest are amounts related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

The Company has not provided deferred taxes on earnings of $6.1 million of undistributed earnings of foreign subsidiaries that are indefinitely reinvested outside of the U.S.  The Company estimates that if these earnings were repatriated to the U.S., it would result in approximately $1.3 million in associated tax without consideration of foreign tax credits.  Determination of foreign tax credit limitations depends on a number of factors which cannot be estimated.