Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

10.    Income Taxes

Total (loss) income before income taxes summarized by region was as follows:

	Year Ended December 31,
(in thousands)	2021			2020			2019
United States	$	21,096		$	(45,534	)	$	74,721
Foreign		(79,480	)		(2,011	)		5,796
Total (loss) income before income taxes	$	(58,384	)	$	(47,545	)	$	80,517

The income tax provision (benefit) was as follows:

	Year Ended December 31,
(in thousands)	2021			2020			2019
Current:
Federal	$	3,607		$	(35	)	$	4,802
State		2,989			2,309			4,638
Foreign		3,268			4,675			2,205
Total current provision		9,864			6,949			11,645
Deferred:
Federal		(902	)		(13,800	)		5,873
State		(6,573	)		(8,315	)		(4,565	)
Foreign		(23,040	)		(3,849	)		(819	)
Total deferred provision		(30,515	)		(25,964	)		489
Changes in tax rate		47			(579	)		606
Changes in valuation allowance		26,306			9,202			2,543
Total provision (benefit)	$	5,702		$	(10,392	)	$	15,283

The differences between the income tax provision at the United States federal statutory tax rate and the Company’s effective tax rate were as follows:

	Year Ended December 31,
(in thousands)	2021			2020			2019
Tax provision (benefit) at federal statutory rate	$	(12,261	)	$	(9,984	)	$	16,909
Valuation allowance		26,306			9,202			2,543
Compensation expense		2,153			3,314			1,643
Acquisition related charges		1,338			687			(1,808	)
State income tax		979			(1,243	)		3,763
Nondeductible meals and entertainment		171			351			717
Return to provision adjustments		116			(881	)		(2,323	)
Change in tax rates		47			(579	)		606
Income tax reserves		(447	)		(4,217	)		(1,146	)
Foreign tax rate differences from federal statutory rate		(7,166	)		(1,215	)		716
Income tax credits and incentives		(7,286	)		(7,155	)		(7,209	)
Other		1,752			1,328			872
Total provision (benefit)	$	5,702		$	(10,392	)	$	15,283

Significant components of the Company’s deferred tax assets and liabilities were as follows:

	December 31,
(in thousands)	2021			2020
Deferred tax assets:
Net operating loss carryforwards	$	87,671		$	47,407
Amortization		66,482			67,945
Inventory		48,244			35,763
Lease liability		28,402			28,356
General business and other credit carryforwards		25,913			26,542
Original issue discount		22,130			3,735
Stock-based compensation		10,042			9,918
Other		34,666			27,479
Gross deferred tax assets		323,550			247,145
Less valuation allowance		(168,409	)		(130,434	)
Net deferred tax assets		155,141			116,711
Deferred tax liabilities:
Depreciation		(46,597	)		(44,760	)
Acquired intangibles		(34,181	)		(27,544	)
Right-of-use assets		(23,904	)		(24,122	)
Other		(3,137	)		(5,176	)
Total deferred tax liabilities		(107,819	)		(101,602	)
Net deferred tax assets	$	47,322		$	15,109

The Company consolidates subsidiaries in foreign jurisdictions which use the local currency as their functional currency. Since income taxes for these subsidiaries are assessed in their local currency, deferred tax balances are translated into the Company’s reporting currency and adjusted for changes in the exchange rates over time through the cumulative translation account. During 2021, as a result of the adoption of ASU 2020-06, net decreases in deferred tax liabilities of $28.9 million and valuation allowance of $0.9 million were recorded against stockholders’ equity. Additionally, during 2021, as a result of the Simplify Medical acquisition, the Company recorded an increase in deferred tax assets of $10.7 million and an offsetting increase in valuation allowance of the same amount against goodwill. Accordingly, these changes in deferred tax balances are not reflected in income tax expense and create differences between changes in net deferred tax assets and deferred tax expense for the year ended December 31, 2021.

As a result of the acquisition of Simplify Medical, the Company changed its judgment with respect to the ability to realize approximately $0.7 million on the deferred tax assets that existed at January 1, 2021.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

	Year Ended December 31,
(in thousands)	2021			2020			2019
Gross unrecognized tax benefits at January 1	$	18,316		$	20,328		$	19,545
Increases in tax positions for prior years		165			1,758			62
Decreases in tax positions for prior years		—			—			(112	)
Increases in tax positions for current year relating to ongoing operations		2,087			2,159			2,073
Decreases in tax positions as a result of a lapse of statute of limitations		(769	)		(5,929	)		(616	)
Increases in tax positions for current year relating to acquisitions		—			—			—
Decreases in tax positions due to settlements with taxing authorities		(56	)		—			(624	)
Gross unrecognized tax benefits at December 31	$	19,743		$	18,316		$	20,328

At December 31, 2021, 2020, and 2019, $17.8 million, $16.5 million, and $18.7 million, respectively, of the Company’s total unrecognized tax benefits, if recognized, would impact the effective income tax rate.

In accordance with the disclosure requirements as described in ASC Topic 740, Income Taxes, the Company classified uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2021, 2020, and 2019, the Company recognized approximately $0.1 million, $(0.1) million, and $0.1 million, respectively, in interest and penalties as income tax (expense) benefit in the Consolidated Statements of Operations. The Company had approximately $0.1 million and $0.1 million accrued for interest and penalties at December 31, 2021 and 2020, respectively, in the Consolidated Balance Sheets.

The Company believes there are no significant unrecognized tax positions that are expected to reverse by the end of 2022.

The Company is subject to routine compliance reviews on various tax matters around the world in the ordinary course of business. Currently, the only active audits are with the U.S. Internal Revenue Service for 2014 – 2016 tax years and New York State for 2018 – 2019 tax years. California is subject to examination in all years due to prior year net operating losses and research and development credits. Other major state and foreign jurisdictions remain subject to examination from 2017 and 2014 forward, respectively.

The Company made the accounting policy election to treat taxes due on U.S. inclusions in taxable income related to Global Intangible Low-Taxed Income as a current period expense when incurred (the "period cost method").

The Company has a deficit in undistributed earnings attributable to operations in its controlled foreign corporations as of December 31, 2021. Additionally, due to recent tax reform in the United States and favorable treaties between the United States and countries in which its controlled foreign corporations operate, the Company has the ability to repatriate earnings without incurring additional tax liabilities. Accordingly, the Company has not recorded a liability for taxes associated with any future distributions of these undistributed earnings.

At December 31, 2021, the Company had $1.8 million, $55.1 million and $0.3 million of federal, state and foreign net operating loss carryforwards, respectively. Federal net operating loss carryforwards begin to expire in 2026, state net operating loss carryforwards begin to expire in 2021, and foreign net operating losses carry forward indefinitely.

The Company also has federal and California research and development income tax credit carryforwards of $7.9 million and $41.3 million, respectively. The federal credits will begin to expire in 2038, while the California credits can be carried forward indefinitely.

Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of the Company’s net operating loss and credit carryforwards may be subject to an annual limitation against taxable income in future periods. As a result of any future ownership changes, the annual limitation of loss and credit carryforwards may cause them to expire before ultimately becoming available to reduce future income tax liabilities.