Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes The provision for income taxes charged to operations consists of the following for the years ended December 31, (in thousands):

	2020		2019		2018
Current Expense:
Federal	$	17,248	$	1,709	$	31
State	4,196		803		99
	21,444		2,512		130
Deferred Expense (Benefit):
Federal	(2,799)		20,576		(15,955)
State	60		1,746		(4,107)
	(2,739)		22,322		(20,062)
Total Income Tax Expense (Benefit)	$	18,705	$	24,834	$	(19,932)

Significant components of the Company’s deferred tax assets and liabilities were as follows as of December 31, (in thousands):

	2020		2019
Deferred Tax Assets:
Bad debts	$	156	$	37
Inventories	2,050		1,632
Accrued warranties	841		599
Accrued compensation	271		843
Accrued settlement	524		—
Net operating loss	506		795
Equity-based compensation	154		—
Other	239		124
Deferred Tax Assets	4,741		4,030
Valuation allowance	(208)		(208)
Deferred Tax Assets, net	4,533		3,822
Deferred Tax Liabilities:
Property, plant, and equipment	(1,043)		(1,093)
Intangible assets	(16,604)		(18,582)
Deferred Tax Liabilities	(17,647)		(19,675)
Deferred Tax Asset (Liability), net	$	(13,114)	$	(15,853)

A reconciliation of income tax expense computed at the federal statutory rate of 21% for the years ended December 31, to actual income tax expense at the Company’s effective rate is as follows (in thousands):

	2020		2019		2018
Income tax rate reconciliation
Income tax expense (benefit) at U.S. statutory rate	$	16,333	$	13,562	$	(16,947)
State income taxes	3,375		2,049		(3,365)
Permanent differences:
Derecognition of tax assets from IRS examination	—		9,284		—
Equity-based compensation	852		168		—
Contingent consideration	5,553		134		49
Credits	(79)		(284)		—
Other nondeductible expenses	437		40		48
Effect of CARES Act	(6,608)		—		—
Foreign income benefit	(1,201)		(155)		—
Change in valuation allowance	—		(45)		253
Other	43		81		30
Total Income Tax Expense (Benefit)	$	18,705	$	24,834	$	(19,932)

The Company files income tax returns in the U.S. federal jurisdiction and in multiple states. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014.

As of December 31, 2020, the Company had no federal income tax net operating loss (“NOL”) carryforwards. The Company has state income tax NOL carryforwards of approximately $7.6 million that will expire in future years beginning in 2036.

Realization of deferred tax assets associated with net operating loss carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdictions prior to their expirations, if any expiration. The existence of reversing temporary differences supports the recognition by the Company of certain deferred tax assets. It is not more likely than not that those deferred tax assets from certain state net operating loss carryforwards would be realized due to the Company’s lack of earnings history and as such the Company established a valuation allowance of $208 thousand for the years ended years ended December 31, 2020 and 2019.

ASC 740, Income Taxes, addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. In accordance with ASC 740, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company’s assessments of its tax positions in accordance with ASC 740 did not result in changes that had a material impact on results of operations, financial condition or liquidity. The Company had no unrecognized income tax benefits at either December 31, 2020 or 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. The Company generated a significant

NOL during its tax year ended March 31, 2019 and filed a carryback claim in June 2020 for this NOL. As a result of the carryback claim, the Company recorded an income tax benefit of $6.6 million on its consolidated statement of operations for the year ended December 31, 2020, resulting from the difference in the current U.S. federal tax rate of 21% and the tax rate of 35% applicable in the carryback year.

The Company’s 2017 federal income tax return was selected for examination by the IRS in 2018. As a result of the examination, an adjustment related to the value allocated to the developed technology for tax purposes was potentially required. During 2019, the Company settled the 2017 examination and agreed to a reduction in the developed technology value from $210 million to $188 million for federal income tax purposes. As a result of this change in the value of the acquired developed technology, the Company reduced its NOL carryforwards by approximately $2.8 million for previously taken amortization and increased the deferred tax liability related to the revised developed technology tax basis by approximately $4.6 million. In addition, the Company will no longer receive tax basis upon payment of the Tax Receivable Agreement (“TRA”) liability, as such the related deferred tax asset of $4.7 million for the TRA was also written off during 2019. The adjustments resulting from the change in developed technology value have been recorded as an income tax expense for the year ended December 31, 2019. Refer to Note 13 - Commitments and Contingencies, for detail on the TRA, which was contingent consideration at the time of the Array acquisition.