Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

9. Income Taxes

“Income before income taxes” in the Consolidated Statements of Operations included the following components for the periods presented (in thousands):

	Years Ended December 31,
	2018		2017			2016
U.S.	$	28,840	$	7,115		$	23,928
Foreign		3,190		(3,853	)		4,890
Income before income taxes	$	32,030	$	3,262		$	28,818

“Income tax expense” in the Consolidated Statements of Operations consisted of the following for the periods presented (in thousands):

	Years Ended December 31,
	2018			2017			2016
Current
Federal	$	6,710		$	(1,941	)	$	7,008
State		1,772			323			950
Foreign		1,734			2,002			1,909
Total — Current		10,216			384			9,867
Deferred
Federal		(1,253	)		1,478			1,385
State		230			289			272
Foreign		64			(1,484	)		(367	)
Total — Deferred		(959	)		283			1,291
Income tax expense	$	9,257		$	667		$	11,158

The provision for income taxes differed from the amount computed by applying the U.S. federal statutory rate to “Income before income taxes” due to the effects of the following (dollars in thousands):

	Years Ended December 31,
	2018					2017					2016
Expected taxes at federal statutory tax rate	$	6,727		21.0	%	$	1,142		35.0	%	$	10,086		35.0	%
State income taxes, net of federal income tax benefit		1,441		4.5			166		5.1			1,091		3.8
Stock-based compensation		(532	)	(1.7	)		(2,476	)	(75.9	)		—		—
Remeasurement of deferred taxes		144		0.5			(1,870	)	(57.3	)		—		—
Deemed repatriation of foreign earnings, net of credits		173		0.5			669		20.5			—		—
Change in valuation allowance		745		2.3			1,049		32.2			(201	)	(0.7	)
Non-deductible business expenses		562		1.8			1,162		35.6			440		1.5
Foreign rate differential		356		1.1			725		22.2			(392	)	(1.4	)
Research tax credits		—		—			—		—			(57	)	(0.2	)
Change in unrecognized tax benefits		(120	)	(0.4	)		—		—			—		—
Other		(239	)	(0.7	)		100		3.0			191		0.7
Total	$	9,257		28.9	%	$	667		20.4	%	$	11,158		38.7	%

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

	At December 31,
	2018			2017
Deferred tax assets:
Accounts receivable	$	380		$	535
Inventories		73			194
Deferred revenue		230			279
Accrued expenses and reserves		5,942			2,642
Stock-based compensation		1,061			1,034
Tax credits and loss carryforwards		3,763			4,053
Other		16			6
Total gross deferred tax assets		11,465			8,743
Less: Valuation allowance		(2,981	)		(2,274	)
Total deferred tax assets		8,484			6,469
Deferred tax liabilities:
Property and equipment		(5,192	)		(4,154	)
Intangibles		(2,582	)		(1,659	)
Foreign employment tax subsidy		—			(517	)
Prepaid expenses		(648	)		(944	)
Other		(474	)		(538	)
Total deferred tax liabilities		(8,896	)		(7,812	)
Net deferred tax liabilities	$	(412	)	$	(1,343	)

Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowance relates to certain foreign and state net operating loss carryforwards and other foreign and state deferred tax assets generated by subsidiaries in a cumulative loss position. The valuation allowance increased by $0.7 million during the year ended December 31, 2018 primarily due to foreign and state net operating losses and revaluing of state deferred tax assets.

At December 31, 2018, we had state net operating loss carryforwards of $24.0 million, of which $1.9 million expiring between 2019 and 2021, and the remainder expiring between 2022 and 2038. Included in these amounts are $0.5 million of state net operating loss carryforwards which relate to pre-acquisition losses from an acquired subsidiary and, accordingly, are subject to annual limitations as to their use under the provisions of IRC Section 382. As such, the extent to which these losses may offset future taxable income may be limited. At December 31, 2018, we also had foreign net operating loss carryforwards of $8.1 million, the majority of which have no expiration date.

At December 31, 2018, we had federal tax credits of $0.1 million, which begin to expire at the end of 2033, and state research credits of $0.6 million, which have no expiration date.

On December 22, 2017, U.S. tax legislation was enacted, known as the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”), containing a broad range of tax reform provisions, including a corporate tax rate reduction from 35% to 21% and changes in the U.S. taxation of non-U.S. earnings. The provisions included a one-time transition tax, payable over eight years, resulting from the mandatory deemed repatriation of previously-untaxed foreign earnings. Also in December 2017 the SEC issued Staff Accounting Bulletin No. 118, which provides additional guidance on how to account for the financial statement effects of U.S. tax reform, and allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have completed our accounting for the tax effects of the 2017 Tax Act, including the transition tax and the remeasurement of deferred taxes, and as of December 31, 2018 have recorded a cumulative incremental charge of $0.3 against our provisional net tax benefit of $1.2 million recorded in December 2017.

The 2017 Tax Act introduced a provision, effective for years beginning on or after January 1, 2018, which taxes global intangible low-taxed income (GILTI) in excess of a deemed return on the tangible assets of foreign corporations. We have made an accounting policy election to recognize the current tax on GILTI as an expense in the period the tax is incurred. As of December 31, 2018, we recognized $0.1 million in net income tax expense related to GILTI.

Due to the impact of the transition tax and other provisions of tax reform, we have no material taxable temporary differences with respect to our investment in foreign subsidiaries as of December 31, 2018.

Unrecognized Tax Benefits

ASC 740 clarifies the accounting for uncertainty in tax positions by subscribing the recognition threshold a tax position is required to meet before being measured and then recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We elected to classify interest and penalties related to income tax liabilities, when applicable, as part of our “Interest expense, net” rather than as a component of income tax expense in our Consolidated Statements of Operations.

Activity relating to our unrecognized tax benefits were as follows (in thousands):

	Years Ended December 31,
	2018			2017		2016
Beginning balance	$	474		$	474	$	420
Additions to tax positions		—			—		54
Lapses in statutes of limitations		(134	)		—		—
Ending balance	$	340		$	474	$	474

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, we do not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the years ended December 31, 2018 and 2017, no interest or penalties were required to be recognized relating to unrecognized tax benefits.

We are subject to U.S. and foreign income tax examinations for years subsequent to 2014, and state income tax examinations for years following 2013. However, to the extent allowable by law, the tax authorities may have a right to examine prior periods when net operating losses or tax credits were generated and carried forward for subsequent utilization, and make adjustments up to the amount of the net operating losses or credit carryforwards.