Income Taxes

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



	Year Ended December 31,
(in thousands)	2019		2018		2017
U.S.	$	25,432	$	46,945	$	39,559
International	3,195		2,603		80
Income before income taxes	$	28,627	$	49,548	$	39,639

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



	Year Ended December 31,
(in thousands)	2019			2018			2017
Current
Federal	$	287		$	(21	)	$	(58	)
State	(13,166		)	3,424			3,242
International	114			(135		)	16
	(12,765		)	3,268			3,200
Deferred
Federal	8,712			7,821			(71,742		)
State	790			1,411			(15,220		)
International	223			(3,470		)	16
	9,725			5,762			(86,946		)
Income tax (benefit) expense	$	(3,040	)	$	9,030		$	(83,746	)

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)	2019			2018			2017
U.S. statutory rate	$	6,012		$	10,405		$	13,873
Permanent items	3,737			505			(1,916		)
Uncertain tax positions	(13,156		)	3,227			3,128
Other tax credits	(1,685		)	(742		)	(175		)
State and local taxes	1,914			2,125			1,252
Impact of rate change on deferred taxes	—			—			45,129
True-up of prior year tax	—			—			7
Foreign tax rate differential	(238		)	30			97
Valuation allowance	(22		)	(4,073		)	(141,094		)
Benefit of windfall related to stock compensation	(2,768		)	(1,760		)	(2,723		)
Increase in indemnification deferred tax asset	2,531			(731		)	(1,055		)
Other	635			44			(269		)
Income tax (benefit) expense	$	(3,040	)	$	9,030		$	(83,746	)

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



	December 31,
(in thousands)	2019			2018
Deferred Tax Assets
Federal benefit of state tax liabilities	$	5,278		$	7,809
Reserves, accruals and other	15,026			11,005
Inventory obsolescence	550			428
Capitalized research and development	5,086			7,491
Amortization of intangibles other than goodwill	1,569			2,809
Net operating loss carryforwards	47,095			55,938
Depreciation	56			—
Deferred tax assets	74,660			85,480
Deferred Tax Liabilities
Reserves, accruals and other	(881		)	(1,078		)
Customer relationships	(707		)	(986		)
Depreciation	—			(727		)
Deferred tax liability	(1,588		)	(2,791		)
Less: valuation allowance	(1,238		)	(1,240		)
	$	71,834		$	81,449
Recorded in the accompanying consolidated balance sheets as:
Noncurrent deferred tax assets, net	$	71,834		$	81,449

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 outweigh the negative evidence, and 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, 2018	$	5,368
Charged to income tax (benefit) expense	(103		)
Foreign currency	(56		)
Release valuation allowance	(3,969		)
Balance, December 31, 2018	1,240
Charged to income tax (benefit) expense	(22		)
Foreign currency	20
Release valuation allowance	—
Balance, December 31, 2019	$	1,238

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, 2019, the Company has U.S. federal net operating loss carryovers of approximately $174.0 million, which will expire between 2032 and 2037, and U.S. federal research credits of $1.4 million which will begin to expire in 2037. The Company has state research credit carryforwards of $3.0 million, which will expire between 2024 and 2033. The Company has state investment tax credit carryforwards of $2.1 million, of which $0.7 million have no expiration date, and the remainder of which will begin to expire in 2020 and fully expire in 2022.

A reconciliation of the Company’s changes in uncertain tax positions for 2019 and 2018 is as follows:



(in thousands)	Amount
Balance of uncertain tax positions as of January 1, 2018	$	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
Additions related to current year tax positions	—
Reductions related to prior year tax positions	(4,496		)
Settlements	—
Lapse of statute of limitations	—
Balance of uncertain tax positions as of December 31, 2019	$	5,292

In connection with the Company’s acquisition of the medical imaging business from Bristol-Myers Squibb (“BMS”) in 2008, the Company recorded a liability for uncertain tax positions related to the acquired business and simultaneously entered into a tax indemnification agreement with BMS under which BMS agreed to indemnify the Company for any payments made to settle those uncertain tax positions with the taxing authorities. Accordingly, 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, to be paid on behalf of the Company by BMS. The tax indemnification receivable is recorded within other long-term assets.

In accordance with the Company’s accounting policy, the change in the tax liability, penalties and interest associated with these uncertain tax positions (net of any offsetting federal or state benefit) is recognized within income tax (benefit) expense. Contemporaneously, changes in the tax indemnification receivable are recognized within other expense (income) in the consolidated statement of operations. Accordingly, as these reserves change, adjustments are included in income tax (benefit) expense with an offsetting adjustment included in other expense (income). Assuming that the receivable from BMS continues to be considered recoverable by the Company, there will be no effect on net income and no net cash outflows related to these liabilities.

For the year ended December 31, 2019, the Company released $17.1 million of liabilities for uncertain tax positions, including interest and penalties of $12.7 million. This included a release of a liability of $1.9 million, including interest and penalties of $1.4 million, arising from a settlement during the year. The remaining release of $15.2 million of liability was due to a change in estimate with respect to the Company’s indemnified uncertain tax positions. In late 2019 the Company reassessed its indemnified uncertain tax positions and obtained, with the assistance of third-party tax experts, additional technical insights with respect to the indemnified uncertain tax positions. On the basis of the new information obtained, the Company changed its estimate with respect to certain of its indemnified uncertain tax positions and consequently released $15.2 million of related reserves.

The combined release of $17.1 million was recorded to income tax (benefit) expense and offset by a reduction in deferred tax assets of $3.3 million and a $13.8 million reduction of the indemnification receivable recorded to other expense (income). The amount due from BMS as of December 31, 2019, was also increased by $3.2 million, due to the accrual of interest on the liability with respect to the remaining uncertain tax positions. Similarly, the amount due from BMS increased by $3.3 million in 2018, due to the accrual of interest on the existing liability for uncertain tax positions. In 2017, the amount due from BMS increased by $8.4 million, primarily due to the decrease in U.S. corporate tax rates effective January 1, 2018. As noted above, there is no effect on net income or net cash flows in any period due to the indemnification agreement in place.

As of December 31, 2019 and 2018, total liabilities for uncertain tax positions including interest and penalties were $27.0 million and $40.2 million, respectively, consisting of uncertain tax positions of $5.3 million and $9.8 million, interest accruals of $20.7 million and $28.2 million, and penalty accruals of $1.0 million and $2.2 million, respectively. As of December 31, 2019 and 2018, all of these liabilities were included in other long-term liabilities. Included in the 2019, 2018 and 2017 tax provisions are a benefit of $13.2 million and expense of $3.2 million and $3.1 million, respectively, relating to accrual of interest, net of benefits for reversals of uncertain tax positions, recognized upon settlements, effective settlements or lapses of relevant statutes of limitation.

The total long-term asset related to the indemnification was $18.9 million and $29.5 million at December 31, 2019 and 2018, respectively. Included in other expense (income) for the years ended December 31, 2019, 2018 and 2017, is tax indemnification expense (income), net of $10.6 million, $(2.9) million and $(8.4) 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.