Income Taxes

Income (loss) before income taxes is as follows:

	Year ended December 31,
	2018		2017		2016
	(in thousands)

United States	$	22,256	$	17,778	$	12,600
Foreign		6,188		3,328		3,642

Total	$	28,444	$	21,106	$	16,242

Certain of our foreign subsidiaries are included in the U.S. tax return as branches but are included as foreign for purposes of the table above.

The provision (benefit) for income taxes is as follows:

	Year ended December 31,
	2018			2017			2016
				(in thousands)
Current:
Federal	$	4,262		$	2,451		$	4,409
State		673			292			393
Foreign		2,718			886			710

		7,653			3,629			5,512
Deferred:
Federal		(1,512	)		(268	)		197
State		(145	)		390			166
Foreign		(495	)		178			(223	)

		(2,152	)		300			140

Provision for income taxes	$	5,501		$	3,929		$	5,652

We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of

December

31,

2018,

the gross amount of unrecognized tax benefits exclusive of interest and penalties was

$0.7

million, which

may

increase within the

twelve

months ending

December

31,

2019.

We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction. The statute of limitations will be open with respect to these tax positions through

2026.

A reconciliation of beginning and ending amount of our unrecognized tax benefits is as follows:

	2018		2017			2016
	(in thousands)
Unrecognized tax benefits at the beginning of year	$	525	$	390		$	82
Additions for tax positions of current year		73		83			95
Additions for tax positions of prior years		113		57			213
Reductions for settlements with taxing authorities.		-		-			-
Reductions for lapses of the applicable statutes of limitations		-		(5	)		-
Unrecognized tax benefits at the end of the year	$	711	$	525		$	390

Deferred taxes are attributable to the following temporary differences:

	As of December 31,
	2018			2017
	(in thousands)
Deferred tax assets:
Inventory	$	976		$	569
Net operating loss carryforwards		1,421			1,898
Tax credit carryforwards		828			760
Capital loss carryforwards		279			1,168
Reserves and accruals		802			629
Intangible assets		2,737			1,138
Stock options		373			322
Other		91			65

Total deferred tax assets		7,507			6,549

Deferred tax liabilities:
Property and equipment		(1,416	)		(1,203	)
Goodwill		(3,023	)		(2,932	)
Foreign branch deferred offset		(1,032	)		(1,177	)
Other		(50	)		(44	)

Total deferred tax liabilities		(5,521	)		(5,356	)

Net deferred tax assets before valuation allowance		1,986			1,193

Valuation allowance		(1,255	)		(1,991	)

Net deferred tax liabiltity	$	731		$	(798	)

Deferred tax classification
Long-term deferred tax asset	$	1,215		$	1,378
Long-term deferred tax liability		(484	)		(2,176	)

Net long-term deferred tax liability	$	731		$	(798	)

We elected to adopt ASU

2016

during the

third

quarter of

2016.

Consequently, we recorded excess tax benefits related to certain stock option exercises of

$0.3

million,

$3.7

million, and

$1.1

million in

2016,

2017,

and

2018

respectively.

2016,

we released approximately

$0.3

million of valuation allowances on deferred assets in Spain and Switzerland. Our

2016

assessment considered evidence such as current profitability, utilization of certain available tax assets and liabilities, and projected future earnings. Based on this evidence, we concluded that it was more likely than

not

that we would generate sufficient pre-tax income in future periods to utilize all of these deferred tax assets for which the valuation allowance was removed. In

2017,

we increased our valuation by a net

$0.2

million mainly attributable to Massachusetts credit carryforwards. In

2018,

we decreased our valuation allowance by a net

$0.7

million mainly attributable to Australian net operating loss and capital loss carry forwards that are now expected to be realized.

As of

December 31, 2018,

we have provided a valuation allowance of

$1.3

million for deferred tax assets primarily related to Australian net operating loss and capital loss carry forwards and Massachusetts tax credit carry forwards that are

not

expected to be realized. The valuation allowance against our deferred tax assets

may

require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance.

Realization of our deferred tax assets is dependent on our generating sufficient taxable income in future periods. Although we believe it is more likely than

not

that future taxable income will be sufficient to allow us to recover substantially all of the value of our deferred tax assets remaining after we apply the valuation allowances, realization is

not

assured and future events could cause us to change our judgment. In the event that actual results differ from our estimates, or we adjust these estimates in the future periods, further adjustments to our valuation allowance

may

be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.

As of

December

31,

2018,

we have net operating loss carryforwards in Australia of

$1.3

million that do

not

expire, in France of

$2.7

million that do

not

expire, in Spain of

$0.9

million that do

not

expire, in Norway of

$0.1

million that do

not

expire, in Italy of

$33,000

that do

not

expire, and in Sweden of

$4,000

that do

not

expire. We have a capital loss carryforward in Australia of

$0.9

million that does

not

expire. We also have state tax credit carryforwards of approximately

$1.4

million that are available to reduce future tax liabilities, which begin to expire in

2020,

or can be carried forward indefinitely.

December 2018,

we reevaluated our international operations and as a result, are

longer indefinitely reinvested with respect to undistributed earnings from our German and Australian subsidiaries. There was

material deferred tax expense recorded for foreign and state tax costs associated with the future remittance of these undistributed earnings. We remain permanently reinvested with respect to undistributed earnings from our other foreign subsidiaries. It is

not

practicable to estimate the amount of deferred tax liability, if any, with respect to these permanently reinvested undistributed earnings.

A reconciliation of the federal statutory rate to our effective tax rate is as follows:

	2018			2017			2016

Federal statutory rate		21.0	%		35.0	%		35.0	%
State tax, net of federal benefit		1.4	%		1.7	%		1.3	%
Effect of foreign taxes		3.8	%		(0.6%	)		(1.9%	)
Federal tax on foreign income		1.4	%		1.7	%		1.6	%
Valuation allowance		(3.2%	)		0.1	%		(2.6%	)
Foreign deferred tax liability offset		(0.3%	)		(0.2%	)		1.5	%
Manufacturing deduction		0.0	%		(1.5%	)		(2.5%	)
Research & development tax credits		(0.7%	)		(0.6%	)		(0.7%	)
Stock options		(3.3%	)		(15.8%	)		(0.7%	)
Uncertain tax positions		0.8	%		0.6	%		2.0	%
Other permanent differences		(0.7%	)		1.0	%		1.2	%
Change in tax laws		0.0	%		2.9	%		0.0	%
Deferred tax remeasurement		0.0	%		(5.0%	)		0.0	%
Other		(0.9%	)		(0.7%	)		0.5	%

Effective tax rate		19.3	%		18.6	%		34.8	%

2016

the Internal Revenue Service completed an audit of our

2013

and

2014

U.S. federal tax returns. As a result of the audit we paid

$0.2

million in additional federal income taxes. Additionally, the adjustment settled on for this audit resulted in an additional

$0.2

million increase to our uncertain tax provisions for a state carryforward. In

August 2018,

the German tax authority commenced an audit of our German subsidiary for the tax years

2013

through

2016.

While it is difficult to predict the final outcome or timing of the resolution of this audit, at this time we believe there will be

material changes to our German Subsidiary’s income tax liability as a result of the audit. We are

not

currently under audit in any other tax jurisdictions.

As of

December

31,

2018,

a summary of the tax years that remain subject to examination in our most significant tax jurisdictions are:


United States	2015 and forward
Foreign	2011 and forward