Income Taxes

12 Months Ended

Dec. 31, 2019

The Company accounts for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"), under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases.

The provision for income taxes consisted of the following components for the years ended December 31, 2019, 2018 and 2017 (in thousands):



	Year Ended December 31,
	2019			2018			2017
Current income tax expense (benefit):
Federal	$	795		$	(781	)	$	3,037
State	(13		)	180			53
Foreign	3,797			4,558			4,094
Total current income tax expense	4,579			3,957			7,184
Deferred income tax expense (benefit):
Federal	(565		)	(3,385		)	1,984
State	840			(90		)	1,556
Foreign	(1,154		)	(1,129		)	533
Total deferred income tax expense	(879		)	(4,604		)	4,073
Provision (benefit) for income taxes	$	3,700		$	(647	)	$	11,257

The provision for income taxes for the years ended December 31, 2019, 2018 and 2017 differs from the amount computed by applying the U.S. federal income tax rate of 21% to pretax income (loss) because of the effect of the following items (in thousands):



	Year Ended December 31,
	2019			2018			2017
Tax (benefit) provision at U.S. federal income tax rate	$	(1,342	)	$	(16,239	)	$	9,506
State income taxes, net of federal income tax effect	(775		)	(307		)	883
Federal, state and international deferred tax rate change	1,222			1,135			(4,907		)
Transition tax	—			(924		)	5,323
Effect of non-US operations	(1,859		)	(2,424		)	(2,228		)
Nontaxable contingent liability fair value changes and goodwill impairment	—			11,254			237
Research and development credit	(202		)	(40		)	(38		)
Change in valuation allowances	(98		)	3,973			2,103
Prior year provision to return adjustment	(57		)	942			(581		)
Write-off of deferred taxes and tax receivables	1,961			431			70
Nondeductible expense and other	904			428			889
Tax reform global intangible low-taxed income	3,178			1,124			—
Tax reform BEAT	768			—			—
Provision (benefit) for income taxes	$	3,700		$	(647	)	$	11,257

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the Company's tax assets and liabilities for financial reporting purposes and the amounts used for income tax return reporting purposes. At December 31, 2019 and 2018, the Company’s deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Inventory reserve	$	271		$	992
Other reserves and allowances	7,870			3,470
Income tax basis in excess of financial statement basis in intangible assets	509			1,085
Deductible stock-based compensation	2,829			3,257
ASC 842 lease liability	8,989			—
Net operating loss carryforward	17,100			19,409
Tax credit carryforwards	402			500
Deferred tax assets	37,970			28,713
Valuation allowance	(13,809		)	(13,946		)
Net deferred tax assets	$	24,161		$	14,767

Deferred tax liabilities:
Prepaid & other expenses	$	(184	)	$	(284	)
Fixed assets	(3,735		)	(4,826		)
Intangible assets	(17,762		)	(16,067		)
ASC 842 right of use asset	(8,351		)	—
Deferred tax liabilities	$	(30,032	)	$	(21,177	)
Net deferred tax liability	$	(5,871	)	$	(6,410	)

The realizability of deferred income tax assets is based on a more likely than not threshold. If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. Realization of deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, the Company considers historical taxable income along with other positive and negative evidence in assessing the realizability of its deferred tax assets. The Company’s accounting policy is to consider deferred tax liabilities related to indefinite-lived intangible assets as a source of future taxable income when assessing the realizability of its indefinite-lived deferred tax assets.

For the years ended December 31, 2019 and 2018, the Company recorded a reduction of valuation allowances of $0.1 million and additional valuation allowances of $3.2 million, respectively. The Company believes that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $1.7 million on the deferred tax assets related to these state net operating carryforwards for the year ended December 31, 2019. In addition, the Company recorded a decrease in valuation allowances of $1.8 million primarily related to the revaluation of French net operating losses from 28% to 25% based on law changes enacted during 2019.

As of December 31, 2019, the Company has gross federal and state net operating loss (“NOLs”) carryforwards of $10.8 million and $1.8 million, respectively. Of the $10.8 million federal NOL carryforwards, $10.4 million have an indefinite carryover to offset eighty percent of taxable income in a future period based on new legislation. The Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards related to acquired corporations based on a statutory rate of return (usually the “applicable federal funds rate” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change in ownership” as defined by Section 382. The Company’s total federal NOL as of December 31, 2019 includes $0.4 million of NOLs from acquired corporations. These acquired NOLs have an annual limitation under Section 382 of the Internal Revenue Code of $0.2 million and begin to expire in 2023. The $1.8 million state NOL carryforwards begin to expire in 2024.

As of December 31, 2019, the Company had tax effected NOLs in Chile, China, Czech Republic, France, Germany, Italy, Japan, and Mexico of $0.6 million, $0.6 million, $0.5 million, $7.3 million, $1.5 million, $0.3 million, $0.5 million, and $0.1 million, respectively, which have an indefinite carryover period.

A reserve for an uncertain tax position was recorded during prior years as a result of certain intercompany charges and expenses and as a result of a sale of intellectual property between the Company's subsidiaries. The following table summarizes the Company's uncertain tax positions (in thousands):



	December 31,
	2019			2018		2017
Beginning balance	$	522		$	499	$	517
Additions (subtractions) based on tax positions related to the current year	—			—		(35		)
Additions (subtractions) based on tax positions related to the prior year	(257		)	—		—
Interest and penalties	14			23		17
Statute of limitations lapses	—			—		—
Ending balance	$	279		$	522	$	499

The Company reversed $0.3 million of its uncertain tax positions during the year ended December 31, 2019. The gross unrecognized tax benefit had a 3.8% impact on the effective tax rate as of December 31, 2019. As of December 31, 2019, we had $0.3 million of gross unrecognized tax benefits of which $0.3 million, if recognized, would affect our effective tax rate.

The Company's intention is to indefinitely reinvest all undistributed earnings of its foreign subsidiaries in accordance with ASC 740. Deferred income taxes were not calculated on undistributed earnings (deficit) of foreign subsidiaries. The potential unrecorded deferred tax liability is impracticable to calculate for purposes of the financial statements.

The Company's income (loss) before taxes for its foreign operations was $14.9 million, $(31.6) million and $14.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company’s unremitted earnings permanently reinvested was $46.7 million as of December 31, 2019.

The Company operates under a grant of income tax exemption in Puerto Rico, that became effective for certain operations occurring during the period ending December 31, 2018 and should remain in effect for 20 years as long as specific requirements are satisfied. The impact of this income tax exemption grant decreased foreign taxes by $2.9 million and $2.0 million for 2019 and 2018, respectively. The benefit of the tax exemption on diluted earnings per share was $0.05 and $0.04 per share for 2019 and 2018, respectively.