PROVISION FOR INCOME TAXES

12 Months Ended

Dec. 31, 2019

PROVISION (BENEFIT) FOR INCOME TAXES:

Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, Income Taxes. Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

U.S. and foreign components of income before income taxes were:



	Year Ended December 31,
(in thousands)	2019		2018			2017
U.S. operations	$	82,692	$	(6,529	)	$	(6,944	)
Foreign operations	139,722		66,293			67,243
Total income before income taxes	$	222,414	$	59,764		$	60,299

The components of the provision (benefit) for income taxes are as follows:



	Year Ended December 31,
(in thousands)	2019			2018			2017
Current provision (benefit):
Federal	$	18,293		$	(6,382	)	$	35,311
State	184			4			4
Foreign	1,293			938			1,483
	19,770			(5,440		)	36,798
Deferred provision (benefit):
Federal	9,683			(4,593		)	(3,640		)
State	—			—			—
Foreign	(507		)	(187		)	(468		)
	9,176			(4,780		)	(4,108		)
Total	$	28,946		$	(10,220	)	$	32,690

The provision (benefit) for income taxes differs from the amount that would result by applying the applicable federal income tax rate to income before income taxes, as follows:



	Year Ended December 31,
	2019		2018		2017
Provision (benefit) computed at Federal statutory rate	21.0	%	21.0	%	35.0	%
Business tax credits	(2.4	)	(9.1	)	(5.7	)
Stock-based compensation	(0.2	)	(2.2	)	(5.0	)
Foreign income taxed at different rate	(12.7	)	(25.0	)	(37.3	)
GILTI inclusion	6.2		10.6		—
U.S. Tax Act - transition tax	0.1		(16.2	)	54.1
U.S. Tax Act - deferred tax asset and liability adjustment	—		—		8.1
Valuation allowance	0.8		2.8		2.2
Other	0.2		1.0		2.8
Total	13.0	%	(17.1	)%	54.2	%

The Company’s effective tax rate is impacted by the geographic distribution of the Company’s world-wide earnings in lower-tax jurisdictions, federal research tax credits and the recognition of excess tax benefits related to share-based payments. These benefits were partially offset by foreign income subject to U.S. tax, known as global intangible low-taxed income. The Company’s primary jurisdiction where foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. The Company has not been granted any incentivized tax rates and does not operate under any tax holidays in any jurisdiction. Additionally, in 2018 the Company’s effective tax rate was favorably impacted by revisions to the Tax Act resulting in a $9.7 million income tax benefit. In 2017 our effective tax rate was also impacted by a $37.5 million charge resulting from the enactment of the Tax Act.

The components of the net deferred income tax assets (liabilities) were as follows:



	December 31,
(in thousands)	2019			2018
Deferred tax assets:
Other reserves and accruals	$	3,099		$	3,695
Tax credit carry-forwards	18,968			18,052
Stock compensation	1,644			3,050
Capital losses	157			157
Net operating loss	899			3,144
Other	1,000			—
Valuation allowance	(20,822		)	(19,955		)
	4,945			8,143
Deferred tax liabilities:
Depreciation	(2,273		)	(1,423		)
Other	—			(30		)
	(2,273		)	(1,453		)
Net deferred tax assets	$	2,672		$	6,690

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income. In the event that the Company determines, based on available evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the future, the Company would record a valuation allowance in the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position.

As of December 31, 2019, the Company continues to maintain a valuation allowance primarily as a result of capital losses for federal purposes, and on its California, New Jersey and Canada deferred tax assets as the Company believes that it is not more likely than not that the deferred tax assets will be fully realized.

As of December 31, 2019, the Company had utilized all of its federal research and development tax credit carry-forwards. As of December 31, 2019, the Company had California research and development tax credit carry-forwards of approximately $27.5 million (there is no expiration of research and development tax credit carry-forwards for the state of California) and California net operating losses of $24.6 million which will begin to expire in 2031. As of December 31, 2019, the Company had Canadian scientific research and experimental development tax credit carry-forwards of approximately $3.1 million and New Jersey research and experimental development tax credit carry-forwards of approximately $0.7 million, which will start to expire in 2030 and 2026, respectively.

The Tax Act signed into law on December 22, 2017, generally allows companies to repatriate accumulated foreign earnings without incurring additional U.S. federal taxes beginning after December 31, 2017. Accordingly, the Company has not provided for U.S. taxes on its undistributed earnings of foreign subsidiaries. The determination of the future tax consequences of the remittance of these earnings is not practicable.

Unrecognized Tax Benefits

The Company applies the provisions of ASC 740-10, relating to accounting for uncertain income taxes. Reconciliation of the beginning and ending amount of unrecognized tax benefits:



(in thousands)	Unrecognized Tax Benefits
Unrecognized Tax Benefits Balance at January 1, 2017	$	15,393
Gross Increase for Tax Positions of Current Year	1,699
Gross Decrease for Tax Positions of Prior Years	(409		)
Unrecognized Tax Benefits Balance at December 31, 2017	16,683
Gross Increase for Tax Positions of Current Year	1,994
Gross Decrease for Tax Positions of Prior Years	(70		)
Unrecognized Tax Benefits Balance at December 31, 2018	18,607
Gross Increase for Tax Positions of Current Year	1,379
Gross Decrease for Tax Positions of Prior Years	(937		)
Unrecognized Tax Benefits Balance at December 31, 2019	$	19,049

The Company's total unrecognized tax benefits as of December 31, 2019, 2018 and 2017, were $19.0 million, $18.6 million and $16.7 million, respectively. An income tax benefit of $10.6 million, net of valuation allowance adjustments, would be recorded if these unrecognized tax benefits are recognized. The Company cannot reasonably estimate the amount of the unrecognized tax benefit that could be adjusted in the next twelve months.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had accrued interest and penalties of $0.1 million as of both December 31, 2019 and 2018, which have been recorded in long-term income taxes payable in the accompanying consolidated balance sheets.

As of December 31, 2019, the Company has concluded all U.S. federal income tax matters for the years through 2012. However, due to tax attributes, the IRS may calculate tax adjustments for subsequent years for positions taken prior to 2012. There are currently no pending income tax audits.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. In February 2016, the Commissioner appealed the Tax Court decision. On July 24, 2018, the U.S. Ninth Circuit Court of Appeals reversed the U.S. Tax Court’s decision Altera Corp. v. Commissioner; the reversal was subsequently withdrawn. On June 7, 2019, the Ninth Circuit Court of Appeals overturned the U.S. Tax Court decision. The Company has reviewed this case and its impact and concluded that no adjustment to the consolidated financial statements is appropriate at this time. The Company will continue to monitor ongoing developments and potential impacts to the consolidated financial statements.