Note 12 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

12.  INCOME TAXES

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

	Year Ended December 31,
	2021			2020		2019
United States	$	(15,542	)	$	39,286	$	(4,134	)
Foreign		287,761			130,056		117,254
Income before income taxes	$	272,219		$	169,342	$	113,120

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

	Year Ended December 31,
	2021			2020			2019
Current:
Federal	$	24,955		$	2,842		$	1,682
State		35			(1	)		8
Foreign		3,801			3,814			3,105
Deferred:
Federal		4,929			(1,221	)		(213	)
Foreign		(3,524	)		(467	)		(301	)
Income tax expense	$	30,196		$	4,967		$	4,281

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

	Year Ended December 31,
	2021			2020			2019
U.S. statutory federal tax rate		21.0	%		21.0	%		21.0	%
Foreign income at lower rates		(23.2	)		(15.2	)		(20.7	)
GILTI		11.4			11.1			11.0
Changes in valuation allowance		0.5			1.6			2.1
Stock-based compensation		1.6			(11.2	)		(1.5	)
Tax credits, net of reserves		(1.1	)		(3.8	)		(6.2	)
State income taxes		(0.5	)		(1.6	)		(0.7	)
Other adjustments		1.4			1.0			(1.2	)
Effective tax rate		11.1	%		2.9	%		3.8	%

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

	December 31,
	2021			2020
Deferred tax assets:
Tax credits	$	26,302		$	23,501
Stock-based compensation		2,027			2,392
Deferred compensation		8,526			7,895
Net operating losses		5,818			1,150
Other expenses not currently deductible		5,151			4,617
Deferred tax assets, gross		47,824			39,555
Valuation allowance		(19,520	)		(18,190	)
Deferred tax assets, net of valuation allowance		28,304			21,365
Deferred tax liabilities:
Depreciation and amortization		(5,067	)		(1,600	)
Undistributed foreign earnings		(375	)		(77	)
Other expenses currently deductible		(945	)		(1,132	)
Deferred tax liabilities		(6,387	)		(2,809	)
Net deferred tax assets	$	21,917		$	18,556

GILTI:

The Company accounts for GILTI as a period cost. 

Valuation Allowance:

The Company periodically evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability to utilize the assets using a more likely than not analysis. 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. As of December 31, 2021 and 2020, the Company has evaluated the realization of its deferred tax assets and recorded a valuation allowance for assets that do not meet the more-likely-than-not recognition threshold. 

Undistributed Earnings of Subsidiaries:

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 years ended December 31, 2021, 2020 and 2019, the Company repatriated $70.0 million, $30.0 million and $75.0 million from its Bermuda subsidiary, respectively. 

For all other foreign subsidiaries, the Company expects to indefinitely reinvest undistributed earnings to fund their operations and research and development. As of December 31, 2021 and 2020, the undistributed earnings were approximately $46.2 million and $27.7 million, respectively. An actual repatriation of the undistributed earnings could be subject to additional foreign withholding taxes and U.S. state taxes. The Company expects to be able to take a dividend received deduction to offset any U.S. federal income tax liability on the undistributed earnings. Determination of the unrecognized state and withholding deferred tax liability is not practicable at this time due to the complexities associated with the hypothetical calculation.

Other Income Tax Provision Matters

As of December 31, 2021, the Company did not have federal net operating loss carryforwards. As of December 31, 2021, the state net operating loss carryforwards for income tax purposes were $20.0 million, which will expire beginning in 2024. As of December 31, 2021, the Company has foreign net operating loss carryforwards for income tax purposes of $34.1 million, which will expire beginning in 2029. 

As of December 31, 2021, the Company had $1.5 million in R&D tax credit carryforwards for federal income tax purposes, which will begin to expire in 2040, and $33.4 million for state income tax purposes, which can be carried forward indefinitely.

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.

 

As of December 31, 2021, the Company had $41.5 million of unrecognized tax benefits, $31.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance. As of December 31, 2020, the Company had $33.5 million of unrecognized tax benefits, $24.3 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, 2019	$	20,491
Increase for tax position of prior year		1,589
Increase for tax position of current year		4,663
Decrease due to settlement with tax authorities		(560	)
Decrease due to lapse of statute of limitation		(776	)
Balance as of December 31, 2019		25,407
Increase for tax position of current year		9,782
Decrease for tax position of prior year		(907	)
Decrease due to settlement with tax authorities		(560	)
Decrease due to lapse of statute of limitation		(223	)
Balance as of December 31, 2020		33,499
Increase for tax position of current year		9,191
Decrease for tax position of prior year		(657	)
Decrease due to settlement with tax authorities		(54	)
Decrease due to lapse of statute of limitation		(458	)
Balance as of December 31, 2021	$	41,521

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2021 and 2020, the Company has $3.3 million and $2.4 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities on 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 the balance of gross unrecognized tax benefits could significantly change in the next 12 months. 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 through 2030 and 2023, respectively, for performing research and development activities.

Income Tax Examination

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. In general, the tax years for 2007 and forward are open for examination for U.S. federal and state income tax purposes.