Income Taxes

The components of income before income taxes is summarized as follows:



	Year Ended December 31,
(in thousands)	2018		2017		2016
U.S.	$	46,945	$	39,559	$	23,736
International	2,603		80		4,558
Income before income taxes	$	49,548	$	39,639	$	28,294

The income tax expense (benefit) is summarized as follows:



	Year Ended December 31,
(in thousands)	2018			2017			2016
Current
Federal	$	(21	)	$	(58	)	$	(91	)
State	3,424			3,242			1,689
International	(135		)	16			(49		)
	3,268			3,200			1,549
Deferred
Federal	7,821			(71,742		)	—
State	1,411			(15,220		)	—
International	(3,470		)	16			(17		)
	5,762			(86,946		)	(17		)
Income tax expense (benefit)	$	9,030		$	(83,746	)	$	1,532

The reconciliation of income taxes at the U.S. federal statutory rate to the actual income taxes is as follows:



	Year Ended December 31,
(in thousands)	2018			2017			2016
U.S. statutory rate	$	10,405		$	13,873		$	9,903
Permanent items	505			(1,916		)	(570		)
Write-off of foreign tax and research credits	—			—			7,125
Foreign tax credits	—			—			(319		)
Uncertain tax positions	3,227			3,128			1,529
Other tax credits	(742		)	(175		)	90
State and local taxes	2,125			1,252			433
Impact of rate change on deferred taxes	—			45,129			(383		)
True-up of prior year tax	—			7			(2,751		)
Foreign tax rate differential	30			97			(242		)
Valuation allowance	(4,073		)	(141,094		)	(13,292		)
Benefit of windfall related to stock compensation	(1,760		)	(2,723		)	—
Increase in indemnification deferred tax asset	(731		)	(1,055		)	—
Other	44			(269		)	9
Income tax expense (benefit)	$	9,030		$	(83,746	)	$	1,532

The components of deferred income tax assets (liabilities) are as follows:



	December 31,
(in thousands)	2018			2017
Deferred Tax Assets
Federal benefit of state tax liabilities	$	7,809		$	7,510
Reserves, accruals and other	11,005			9,251
Inventory obsolescence	428			239
Capitalized research and development	7,491			9,941
Amortization of intangibles other than goodwill	2,809			3,903
Net operating loss carryforwards	55,938			63,202
Depreciation	—			972
Deferred tax assets	85,480			95,018
Deferred Tax Liabilities
Reserves, accruals and other	(1,078		)	(1,346		)
Customer relationships	(986		)	(1,294		)
Depreciation	(727		)	—
Deferred tax liability	(2,791		)	(2,640		)
Less: valuation allowance	(1,240		)	(5,368		)
	$	81,449		$	87,010
Recorded in the accompanying consolidated balance sheets as:
Noncurrent deferred tax assets	$	81,449		$	87,010

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act is significant and has wide-ranging effects.

The Company has completed its study of the ramifications of the Act, and has confirmed the primary material impact of the Act to be the remeasurement of the Company’s deferred tax assets, which was recorded in fiscal 2017 as a result of the reduction in U.S. corporate tax rates from 35% to 21%. As of December 31, 2017, the Company determined it had no accumulated unrepatriated foreign earnings, and therefore recorded no liability for the repatriation transition tax.

The Company has also completed its evaluation of and accounting for all other relevant changes resulting from the Act, and has determined that through December 31, 2018, these changes do not materially impact the Company's effective tax rate.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realizability of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more-likely-than-not realizable, the Company evaluated all available positive and negative evidence, and weighed the objective evidence and expected impact. During the fourth quarter of fiscal year 2018, the Company's Canada subsidiary entered an accumulated three year period of profitability, removing a strong item of negative evidence previously supporting the recording of a full valuation allowance. Management has determined that the weight of the relevant positive evidence now outweighs the negative evidence, and has released the valuation allowance against its Canada subsidiary's net deferred tax assets, resulting in an income tax benefit of $4.0 million in fiscal 2018. The Company continues to record a valuation allowance of $1.2 million against the net deferred tax assets of its U.K. subsidiary.

During the fourth quarter of 2017, the Company determined based on its consideration of the weight of positive and negative evidence that there was sufficient positive evidence that its U.S. federal and state deferred tax assets were more-likely-than-not realizable. The Company’s conclusion was primarily driven by the achievement of a sustained level of U.S. profitability, the expectation of sustained future profitability, and mitigating factors related to external supplier and customer risk sufficient to outweigh the available negative evidence. Accordingly, the Company released the valuation allowance previously recorded against its U.S. net deferred tax assets, resulting in a fiscal 2017 income tax benefit of $141.1 million.

The Company will continue to assess the level of the valuation allowance required. If the weight of negative evidence exists in future periods to again support the recording of a partial or full valuation allowance against the Company’s deferred tax assets, there would likely be a material negative impact on the Company’s results of operations in that future period.

A summary of the changes in the Company’s valuation allowance is summarized below:



(in thousands)	Amount
Balance, January 1, 2017	$	140,915
Charged to income tax expense (benefit)	2,305
Adoption of ASU 2016-09	2,929
Foreign currency	313
Release valuation allowance	(141,094		)
Balance, December 31, 2017	5,368
Charged to income tax expense (benefit)	(103		)
Foreign currency	(56		)
Release valuation allowance	(3,969		)
Balance, December 31, 2018	$	1,240

The Company’s U.S. federal income tax returns are subject to examination for three years. The state and foreign income tax returns are subject to examination for periods varying from three to four years depending on the specific jurisdictions’ statutes of limitation.

At December 31, 2018, the Company has U.S. federal net operating loss carryovers of $207.2 million, which will expire between 2032 and 2037, and U.S. federal research credits of $0.4 million which will begin to expire in 2037. The Company has Massachusetts state research credit carryforwards of $2.8 million, which will expire between 2024 and 2033. The Company has Massachusetts investment tax credit carryforwards of $1.4 million, of which $0.6 million have no expiration date, and the remainder of which will begin to expire in 2019 and fully expire in 2021.

A reconciliation of the Company’s changes in uncertain tax positions for 2018 and 2017 is as follows:



(in thousands)	Amount
Balance of uncertain tax positions as of January 1, 2017	$	10,441
Additions related to current year tax positions	—
Reductions related to prior year tax positions	(506		)
Settlements	—
Lapse of statute of limitations	(69		)
Balance of uncertain tax positions as of December 31, 2017	9,866
Additions related to current year tax positions	—
Reductions related to prior year tax positions	(4		)
Settlements	—
Lapse of statute of limitations	(74		)
Balance of uncertain tax positions as of December 31, 2018	$	9,788

As of December 31, 2018 and 2017, total liabilities for uncertain tax positions including interest and penalties were $40.2 million and $37.0 million, respectively, consisting of uncertain tax positions of $9.8 million and $9.9 million, interest accruals of $28.2 million and $24.9 million, and penalty accruals of $2.2 million and $2.2 million, respectively. As of December 31, 2018, all of the liabilities were included in other long-term liabilities, and as of December 31, 2017, $36.3 million were included in other long-term liabilities, while $0.7 million reduced the Company’s deferred tax assets. Included in the 2018, 2017 and 2016 tax provisions are $3.2 million, $3.1 million and $1.5 million, respectively, relating to interest and penalties, net of benefits for reversals of uncertain tax positions, interest and penalties, recognized upon settlements or lapses of relevant statutes of limitation.

In connection with the Company’s acquisition of the medical imaging business from BMS in 2008, the Company entered into a tax indemnification agreement with BMS. A long-term receivable is recorded to account for the expected value to the Company of future indemnification payments, net of actual tax benefits received. The tax indemnification receivable is recognized within other long-term assets. The total long-term asset related to the indemnification was $29.5 million and $26.3 million at December 31, 2018 and 2017, respectively. The changes in the tax indemnification asset are recognized within other income in the consolidated statement of operations. In accordance with the Company’s accounting policy, the change in the tax liability, penalties and interest associated with these obligations (net of any offsetting federal or state benefit) is recognized within income tax expense. Accordingly, as these reserves change, adjustments are included in income tax expense while the offsetting adjustment is included in other income. Assuming that the receivable from BMS continues to be considered recoverable by the Company, there will be minimal effect on net income and no net cash outflows related to these liabilities.

During the year ended December 31, 2018 and 2017, BMS made no payments on behalf of the Company with respect to indemnified contingent tax liabilities. In 2016, BMS made payments on behalf of the Company totaling $0.7 million to several states in connection with prior year state income tax filings. The amount due from BMS as of December 31, 2018, increased by $3.3 million, due to the accrual of interest on the existing contingent liabilities. The amount due from BMS, included within other long-term assets, increased by $8.4 million in 2017, primarily due to the decrease in U.S. corporate tax rates effective January 1, 2018. In 2016, the amount due from BMS decreased by $1.3 million for the year ended December 31, 2016, which represented the release of asset balances associated with pre-acquisition year-related tax payments made by BMS.

Included in other income for the years ended December 31, 2018, 2017 and 2016, is tax indemnification income of $2.9 million, $8.4 million and $1.1 million, respectively. For the year ended December 31, 2017, $6.5 million of the tax indemnification income is related to the impact of the U.S. federal tax rate reduction, and the remainder arises from increases in the indemnified liabilities.