Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Domestic income before taxes was $121,729,000 in 2021, $39,425,000 in 2020, and $31,396,000 in 2019. Foreign income before taxes was $197,171,000 in 2021, $147,486,000 in 2020, and $131,598,000 in 2019.

Income tax expense (benefit) consisted of the following (in thousands):

	Year Ended December 31,
	2021		2020		2019
Current:
Federal	$	27,870	$	160	$	15,854
State	5,372		921		2,108
Foreign	8,406		13,197		30,670
	41,648		14,278		48,632
Deferred:
Federal	(19,266)		(18,266)		352,808
State	(769)		(556)		183
Foreign	17,406		15,269		(442,494)
	(2,629)		(3,553)		(89,503)
	$	39,019	$	10,725	$	(40,871)

A reconciliation of the U.S. federal statutory corporate tax rate to the Company’s income tax expense (benefit), or effective tax rate, was as follows:

	Year Ended December 31,
	2021		2020		2019
Income tax expense at U.S. federal statutory corporate tax rate	21	%	21	%	21	%
State income taxes, net of federal benefit	1		1		2
Foreign tax rate differential	(5)		(6)		(9)
Tax credit	(2)		(1)		(1)
Discrete tax benefit related to employee stock options	(3)		(7)		(4)
Discrete tax benefit related to tax return filings	(1)		(5)		—
Discrete tax expense related to German withholding	—		1		—
Discrete tax expense related to migration of acquired IP	—		—		18
Discrete tax benefit related to change in tax structure	—		—		(268)
Discrete tax expense related to GILTI impact of change in tax structure	—		—		214
Other discrete tax events	—		—		(1)
Other	1		2		3
Income tax expense (benefit)	12	%	6	%	(25)	%

Change in Accounting Policy

In 2019, the Company elected to change its method of accounting for the United States Global Intangible Low-Taxed Income (GILTI) tax from recording the tax impact in the period it is incurred to recognizing deferred taxes for temporary tax basis differences expected to reverse as GILTI tax in future years. The change is considered preferable, as it appropriately matches the Company's current and deferred income tax implications related to the change in international tax structure noted above.

The change in this accounting policy impacted the Company's 2019 reported results as follows (in thousands):

Statement of Operations
	Year Ended December 31, 2019
	As reported under the new accounting policy		As computed under the previous accounting policy		Effect of change
Income before income tax expense	$	162,994	$	162,994	$	—
Income tax expense (benefit)	(40,871)		(393,317)		352,446
Net income	$	203,865	$	556,311	$	(352,446)
Net income per weighted-average common and common-equivalent share:
Basic	$	1.19	$	3.25	$	(2.06)
Diluted	$	1.16	$	3.17	$	(2.01)

Balance Sheet
	December 31, 2019
	As reported under the new accounting policy		As computed under the previous accounting policy		Effect of change
Deferred tax assets	$	449,519	$	469,621	$	(20,102)
Deferred tax liabilities	$	332,344	$	—	$	332,344

Statement of Shareholders' Equity
	Year Ended December 31, 2019
	As reported under the new accounting policy		As computed under the previous accounting policy		Effect of change
Retained earnings	$	753,268	$	1,105,714	$	(352,446)

Discrete Tax Items

Income tax expense included a decrease of $11,036,000 in 2021, $12,788,000 in 2020, and $6,472,000 in 2019 related to stock options, primarily from the excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises. The Company cannot predict the level of stock option exercises by employees in future periods.

Income tax expense in 2021 and 2020 also included discrete tax items related to the final true-up of the prior year's tax accrual upon filing the related tax return. In 2020, this included a tax benefit of $13,984,000 primarily to recognize a foreign tax benefit on certain gains taxed outside of the United States based on clarifications to rules relating to the use of foreign tax credits. This benefit was partially offset by tax expense for a transfer price adjustment in China of $3,267,000 and smaller tax expense adjustments related to foreign tax filings of $843,000.

In 2020, interpretations of a German law relating to withholding taxes on intellectual property rights emerged. The Company conducted a careful review of the interpretation, submitted required tax filings, and believes it has adequate reserves for this German tax exposure.

In 2019, the Company made changes to its international tax structure as a result of legislation by the European Union regarding low tax structures that resulted in an intercompany sale of intellectual property. The Company recorded an associated deferred tax asset and income tax benefit of $437,500,000 in Ireland based on the fair value of the intellectual property, that is being realized over 15 years as future tax deductions. From a United States perspective, the sale was disregarded, and any future deductions claimed in Ireland were added back to taxable income as part of GILTI minimum tax. The Company recorded an associated deferred tax liability and income tax expense of $350,000,000, representing the GILTI minimum tax related to the fair value of the intellectual property. The result of these transactions was a net discrete tax benefit of $87,500,000. Management expects an immaterial impact on its current effective tax rate excluding discrete items in future years as a result of this change.

In 2019, in connection with the acquisition of Sualab, Co. Ltd., the Company migrated acquired intellectual property to certain subsidiaries to align with its corporate tax structure. As a result of this transaction, the Company recorded a discrete tax expense of $28,528,000, which included a reserve of $3,700,000 for certain related tax uncertainties.

Tax Reserves

The changes in the reserve for income taxes, excluding gross interest and penalties, were as follows (in thousands):

Balance of reserve for income taxes as of December 31, 2019	$	11,591
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods	162
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period	3,383
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations	(1,184)
Balance of reserve for income taxes as of December 31, 2020	13,952
Gross amounts of decreases in unrecognized tax benefits as a result of tax positions taken in prior periods	(280)
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in prior periods	100
Gross amounts of increases in unrecognized tax benefits as a result of tax positions taken in the current period	525
Gross amounts of decreases in unrecognized tax benefits as a result of the expiration of the applicable statutes of limitations	(485)
Balance of reserve for income taxes as of December 31, 2021	$	13,812

The Company’s reserve for income taxes, including gross interest and penalties, was $15,808,000 as of December 31, 2021, which included $14,780,000 classified as a non-current liability and $1,028,000 recorded as a reduction to non-current deferred tax assets. The Company's reserve for income taxes, including gross interest and penalties, was $15,285,000 as of December 31, 2020, which included $14,257,000 classified as a non-current liability and $1,028,000 recorded as a reduction to non-current deferred tax assets. The amount of gross interest and penalties included in these balances was $1,996,000 and $1,332,000 as of December 31, 2021 and 2020, respectively. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $2,000,000 to $3,500,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, China, and Korea and within the United States, Massachusetts. The statutory tax rate is 12.5% in Ireland, 25% in China, and 22% in Korea, compared to the U.S. federal statutory corporate tax rate of 21%. These differences resulted in a favorable impact to the effective tax rate of 5 percentage points for 2021, 6 percentage points for 2020, and 9 percentage points for 2019. Management has determined that earnings from its legal entity in China will be indefinitely reinvested to provide local funding for growth, and that earnings from all other jurisdictions will not be indefinitely reinvested.

Within the United States, the tax years 2017 through 2020 remain open to examination by the Internal Revenue Service ("IRS") and various state taxing authorities. The tax years 2016 through 2020 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates. The Company is under audit by the IRS for the tax years 2017 and 2018. Additionally, the Company is under audit by the Commonwealth of Massachusetts for tax years 2017 and 2018. Management believes the Company is adequately reserved for these

audits. The final determination of tax audits could result in favorable or unfavorable changes in our estimates. Any reserves associated with this audit period will not be released until the issue is settled or the audit is concluded.

Interest and penalties included in income tax expense were $281,000, $340,000, and $116,000 in 2021, 2020, and 2019, respectively.

Cash paid for income taxes totaled $49,435,000 in 2021, $33,695,000 in 2020, and $13,443,000 in 2019.

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities, presented on a gross basis by jurisdiction, consisted of the following (in thousands):

	December 31,
	2021		2020
Gross deferred tax assets:
Intangible asset in connection with change in tax structure	$	404,526	$	424,156
Stock-based compensation expense	15,279		13,294
Federal and state tax credit carryforwards	11,051		10,171
Inventory and revenue related	7,426		5,976
Bonuses, commissions, and other compensation	7,263		4,932
Depreciation	5,395		4,211
Foreign net operating losses	751		602
Other	9,023		4,342
Gross deferred tax assets	460,714		467,684
Valuation allowance	(8,188)		(8,568)
	$	452,526	$	459,116
Gross deferred tax liabilities:
GILTI tax basis differences in connection with change in tax structure	$	(327,725)	$	(339,364)
Net deferred taxes	$	124,801	$	119,752

As of December 31, 2021, the Company had a deferred tax asset for foreign tax credit carryforwards of $1,730,000. These credits are considered to be realizable and will be utilized in a future period.

As of December 31, 2021, the Company had a valuation allowance for state research and development tax credits of $11,750,000 that was not considered to be realizable. Should these credits be utilized in a future period, the reserve associated with these credits would be reversed in the period when it is determined that the credits can be utilized to offset future state income tax liabilities. As of December 31, 2021, the Company had state research and development tax credit carryforwards of $13,250,000, which will begin to expire for the 2025 tax return.

While the deferred tax assets, net of valuation allowance, are not assured of realization, management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized. In reaching this conclusion, we have evaluated certain relevant criteria including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating losses, and other carryforwards. Should the Company fail to generate sufficient pre-tax profits in future periods, we may be required to establish valuation allowances against these deferred tax assets, resulting in a charge to current operations in the period of determination.