. INCOME TAXES

The components of income before income taxes are as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
United States	$	(19,115	)	$	(14,431	)	$	(247	)
Foreign		102,059			71,695			42,738
Total income before income taxes	$	82,944		$	57,264		$	42,491

The components of the income tax provision are as follows (in thousands):

	Year Ended December 31,
	2017			2016		2015
Current:
Federal	$	31,025		$	2,527	$	6,042
State		2			-		2
Foreign		1,967			2,013		1,213
Deferred:
Federal		(15,426	)		-		-
Foreign		173			4		62
Total income tax provision	$	17,741		$	4,544	$	7,319

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

	Year Ended December 31,
	2017			2016			2015
U.S. statutory federal tax rate		35.0	%		34.0	%		34.0	%
Settlement with tax authorities		-			-			6.2
Foreign income at lower rates		(41.2	)		(41.1	)		(43.1	)
Impact of the 2017 Tax Act:
One-time deemed repatriation transition tax		50.5			-			-
Remeasurement of deferred taxes		11.8			-			-
Changes in valuation allowance		(36.2	)		11.0			17.6
Stock-based compensation		2.2			2.2			-
Other adjustments		(0.7	)		1.8			2.5
Effective tax rate		21.4	%		7.9	%		17.2	%

The components of

net deferred tax assets consist of the following (in thousands):

	December 31,
	2017			2016
Deferred tax assets:
R&D tax credits	$	10,331		$	9,817
Stock-based compensation		9,157			7,283
Deferred compensation		5,505			6,752
Depreciation and amortization		191			161
Net operating losses		1,377			-
Other expenses not currently deductible		1,924			3,974
Total deferred tax assets		28,485			27,987
Valuation allowance		(12,568	)		(27,354	)
Net deferred tax assets	$	15,917		$	633

2017

U.S. Tax Reform

Under

Accounting Standards Codification (“ASC”)

740,

Income Taxes

, the effects of a new legislation are recognized upon enactment. Accordingly, the Company was required to recognize the tax effects of the

2017

Tax Act beginning in the

fourth

quarter of

2017.

December 22, 2017,

the Securities and Exchange Commission issued Staff Accounting Bulletin

No.

118

("SAB

118"

), which addresses the application of ASC

740

in situations when a registrant does

not

have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the

2017

Tax Act. In accordance with SAB

118,

for matters that have

not

been completed, the Company would recognize provisional amounts to the extent that they are reasonably estimable. If a reasonable estimate cannot be determined, the Company would

not

be required to report provisional amounts and would continue to apply ASC

740

based on the provisions of the tax laws that were in effect immediately before the enactment of the

2017

Tax Act.

As of

December 31, 2017,

the Company

has

not

completed its accounting for the tax effects of the

2017

Tax Act and recorded certain provisional amounts, as discussed below, based on reasonable estimates for the year ended

December 31, 2017.

The provisional amounts are subject to revisions, possibly materially, as the Company performs further analysis of the

2017

Tax Act, collects and prepares necessary financial data, continues to assess its tax positions, and interprets any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies.

Any subsequent adjustment to these amounts will be recorded to the income tax provision in the period when the analysis is complete. The Company expects to complete the analysis within the

one

-year measurement period ending

December 21, 2018,

pursuant to SAB

118.

Corporate Tax Rate

and Re

asurement of Deferred Taxes

The

2017

Tax Act reduces the corporate tax rate from

35%

21%,

effective

January 1, 2018.

Because ASC

740

requires the effect of a change in tax laws to be recognized as of the date of enactment, th

e Company remeasured its deferred tax balance as of

December 22, 2017

and recorded a provisional amount of

$9.8

million to the income tax provision as a result of the remeasurement for the year ended

December 31, 2017.

Deemed Repatriation

Transition

Tax:

2017

Tax Act mandates a

one

-time deemed repatriation transition tax of post-

1986

undistributed foreign earnings and profits (“E&P”) on which U.S. income taxes were previously deferred. The rate applied varies depending on whether the E&P is held in liquid or non-liquid assets. A proportional deduction on the deemed repatriation results in a transition tax of

15.5%

for cash and liquid assets and

for non-liquid assets. The transition tax is assessed regardless of whether the Company repatriates the earnings. The transition tax is determined on the greater of E&P as of

two

measurement dates (

November 2, 2017

December 31, 2017).

The amount of cash and liquid assets is determined based on the greater of the amounts calculated using

two

alternative measurement periods.

For the year ended

December 31, 2017,

the Company recorded a provisional amount of

$41.9

million related to the transition tax expense. After the utilization of R&D tax credits of

$18.0

million, the transition tax payable is

$23.9

million. As permitted by t

2017

Tax Act, the Company has elected to pay the transition tax in installments over

eight

years. As a result,

$1.9

million was recorded in current accrued liabilities and

$22.0

million was recorded in long-term income tax liabilities as of

December 31, 2017.

Undistributed Earnings of Subsidiaries:

The Company previously considered the earnings in its non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded

deferred income ta

xes. Prior to the transition tax, the Company had an excess of the amount for financial reporting over the tax basis in its foreign subsidiaries including undistributed foreign earnings of

$390.2

million. While the transition tax resulted in the reduction of the excess of the amount for financial reporting over the tax basis in its foreign subsidiaries and subjected a provisional amount of

$119.7

million of undistributed foreign earnings to tax, an actual repatriation from its non-U.S. subsidiaries could be subject to additional foreign withholding taxes and U.S. state taxes.

The Company has analyzed its

global working capital and cash requirements, and has determined that it plans to repatriate cash from its Bermuda subsidiary on an ongoing basis to fund its future U.S. based expenditures and dividends. For the other foreign subsidiaries, the Company expects to indefinitely reinvest undistributed earnings to fund foreign operations and their research and development. For those undistributed foreign earnings from which the Company was

not

able to make a reasonable estimate of the tax effects of such repatriation, the Company has

not

recorded any deferred taxes or accrued for any withholding taxes or state taxes as of December

31,

2017.

The Company will record the tax effects of any change in its prior assertion with respect to those undistributed foreign earnings in the period that it is

first

able to make a reasonable estimate,

later than the end of the measurement period under SAB

118

Global Intangible Low-Taxed Income:

The

2017

Tax Act subjects a U.S. parent shareholder to

taxation of its global intangible low-taxed income (“GILTI”), effective

January 1, 2018.

The GILTI inclusions will impact companies that have foreign earnings generated without a large aggregate foreign fixed asset base and whose earnings are being taxed at a low tax rate. GILTI is calculated based on foreign income in excess of a deemed return on tangible assets of foreign corporations. The income inclusion under GILTI is eligible for a deduction that is intended to lower the effective tax rate to

10.5%

for taxable years

2018

2025,

and rise to

13.125%

for taxable years after

2025.

The enactment of the GILTI tax will result in addition

al Subpart F income recognition for the Company in

2018

and onwards.

Executive Compensation

Deductions

The

2017

Tax Act retains the

million limitation on deductible compensation to covered employees, which include the Chief Executive Officer and

four

other highest paid officers, under IRC Section

162

(m). However, it eliminates the exception for performance-based cash or stock compensation and expands the definition of covered employees to include the Chief Financial O

fficer. Accordingly, beginning

January 1, 2018,

the deductible compensation to covered employees will generally be subject to the

million limitation.

Release of Valuation Allowance

Management periodically eva

luates the realizability of the Company’s deferred tax assets based on all available evidence. The realizability of the Company’s net deferred tax assets is dependent on its ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. The Company maintained a full valuation allowance on its U.S. deferred tax assets as of the

third

quarter of

2017.

In the

fourth

quarter of

2017,

the Company assessed the realizability of the deferred tax assets and concluded that

it was more likely than

not

that its federal deferred tax assets would be realizable

, due principally to the enactment of the

2017

Tax Act.

In accordance with ASC

740,

management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax asset was needed. The Company’s conclusion was primarily driven by the following positive evidence:

●

The Company

forecasts taxable income in the U.S. in future periods. The

enactment of GILTI will result in additional Subpart F income each year.

●

Executive performance-based equity awards are now subject to the Section

162

(m) deduction limitation.

●

The Company has a history of utilizing all federal tax attributes

before expiration.

As a result, t

he Company released

$21.6

million of valuation allowance on federal deferred tax assets, which was recorded as a benefit in the income tax provision in the

fourth

quarter of

2017.

The Company continues to maintain a full valuation allowance on the deferred tax assets in California, primarily due to a low apportionment factor and the amount of R&D tax credits generated is greater than the amount utilized.

Other

Income Tax Provision

Matters

As of

December 31, 2017

, the Company did

not

have federal net operating loss carryforwards. As of

December 31, 2017,

the state net operating loss carryforwards for income tax purposes were

$19.7

million, which will expire beginning in

2028.

As of

December 31, 2017

, the Company had R&D tax credit carryforwards of

$0.8

million for federal income tax purposes, which will begin to expire in

2037,

and

$21.0

million for state income tax purposes, which can be carried forward indefinitely.

Upon adoption of ASU

No.

2016

09,

Compensation—Stock Compensation (Topic

718

): Improvements to Employee Share-Bas

ed Payment Accounting,

January 1, 2017,

all excess tax benefits and deficiencies related to equity awards are recognized in the income tax provision in the Consolidated Statements of Operations prospectively, rather than in additional paid-in-capital in the Consolidated Balance Sheets. In addition, the standard eliminates the requirement to defer recognition of excess tax benefits until they are realized through a reduction to income taxes payable.

The Company applied the modified retrospective method and there was

net adjustment to retained earnings as of

January 1, 2017,

as the deferred tax assets related to the previously unrecognized excess tax benefits were fully offset by a valuation allowance. The Company expects increased volatility to the income tax provision in future periods dependent upon, among other variables, the price of its common stock and the timing and volume of equity award vesting.

In the event of a change in ownership, as defined under federal and state tax laws, the Company's net operating loss and tax credit carryforwards could be subject to annual limitations.

The annual limitations could result in the expiration of the net operating loss and tax credit carryforwards prior to utilization.

July 27, 2015,

Altera Corp. v. Commissioner

, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in

December 2015,

and the IRS appealed the decision in

February 2016.

At this time, the U.S. Department of the Treasury has

not

withdrawn the requirement from its regulations to include stock-based compensation

in the cost pool to be shared under a cost-sharing arrangement

. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has

not

recorded any adjustments as of

December 31, 2017.

The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements.

December 31, 2017,

the Company had $

16.3

million of unrecognized tax benefits,

$9.1

million of which would affect its effective tax rate if recognized after considering the valuation allowance. At

December 31, 2016,

the Company had

$14.4

million of unrecognized tax benefits,

$3.5

million of which would affect its effective tax rate if recognized after considering the valuation allowance.

A reconciliation of the gross unrecognized tax benefits is as follows (in thousands):

Balance as of January 1, 2015	$	16,406
Increase for tax position of current year		1,964
Decrease related to settlement with tax authorities		(4,162	)
Decrease due to lapse of statue of limitation		(669	)
Decrease for tax position of prior year		(1,446	)
Balance as of December 31, 2015		12,093
Increase for tax position of prior year		243
Increase for tax position of current year		2,095
Balance as of December 31, 2016		14,431
Increase for tax position of prior year		169
Increase for tax position of current year		2,360
Decrease due to lapse of statue of limitation		(688	)
Balance as of December 31, 2017	$	16,272

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of

December 31,

2017

and

2016,

the Company has

$0.5

million and

$0.3

million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities in the Consolidated Balance Sheets.

Uncertain tax positions relate to the allocation of income and deductions among the Company

’s global entities and to the determination of the research and development tax credit. It is reasonably possible that over the next

twelve

-month period, the Company

may

experience increases or decreases in its unrecognized tax benefits. However, it is

not

possible to determine either the magnitude or the range of increases or decreases at this time.

The Company currently has reduced tax rates in its subsidiaries in

Chengdu and Hangzhou, China for performing research and development activities through

2020

and

2019,

respectively. In addition, the Company currently has a tax holiday in Switzerland, which allows for tax-free operations through

2018.

The tax holiday and tax incentives had an insignificant impact on earnings per share for the periods presented.

Income Tax Examinations

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. The Company

’s U.S. Federal income tax return for the year ended

December 31,

2014

was under examination by the IRS in

2016.

January 2017,

the IRS completed its examination with

adjustments.

The Company

’s U.S. Federal income tax returns for the years ended

December 31, 2005

through

December 31, 2007

were under examination by the IRS. In

April 2011,

the Company received from the IRS a Notice of Proposed Adjustment ("NOPA") relating to a cost-sharing agreement entered into by the Company and its international subsidiaries on

January 1, 2004.

In the NOPA, the IRS objected to the Company’s allocation of certain litigation expenses between the Company and its international subsidiaries and the amount of "buy-in payments" made by the international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase the Company’s U.S. taxable income according to a few alternative methodologies. In

February 2012,

the Company received a revised NOPA from the IRS (“Revised NOPA”). In this Revised NOPA, the IRS raised the same issues as in the NOPA issued in

April 2011

but under a different methodology. Under the Revised NOPA, the largest potential federal income tax payment, if the IRS were to prevail on all matters in dispute, was

$10.5

million, plus interest and penalties, if any. The Company responded to the Revised NOPA in

May 2012.

June 2013,

the IRS responded and continued to disagree with the Company’s rebuttal. The Company met with the IRS Office of Appeals in

2014

and both parties engaged in continuous discussions for a resolution of the matter in the

first

quarter of

2015.

Meanwhile, the Company granted the IRS an extension of the statute of limitations for taxable years

2005

through

2007

September 30, 2015.

The IRS also audited the research and development credits carried forward into year

2005

and the credits generated in the years

2005

through

2007.

The Company received a NOPA from the IRS in

February 2011,

proposing to reduce the research and development credits generated in years

2005

through

2007

and the carryforwards, which would then reduce the value of such credits carried forward to subsequent tax years.

April 2015,

the Company reached a final resolution with the IRS in connection with the income tax audits for the years

2005

through

2007.

Under the agreement, the Company made a

one

-time buy-in payment of

$1.2

million for taxes related primarily to the revaluation of a license for certain intellectual property rights of the Company to

one

of its international subsidiaries.

This buy-in payment was final and

additional payment would be required with respect to the intellectual property license for the years under examination or for a previous or subsequent tax year. In addition, the Company made an interest payment of

$1.0

million as well as a tax payment of

$0.1

million for the tax years

2008

2013

2015.

There were

penalties assessed on the Company as a result of the audits.

For the

second

quarter of

2015,

the Company's income tax provision included a

one

-t

ime net charge of

$2.7

million reflecting the taxes and interest, partially offset by the reversal of previously accrued tax liabilities and valuation allowances. Of the

$2.7

million charge,

$1.6

million was related to taxes and

$1.1

million was related to interest.