Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES

On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) was signed into law. Significant provisions that have impacted (and will in the future impact) our effective tax rate include the reduction in the corporate tax rate from 35% to 21%, effective in 2018; a one-time deemed repatriation (“transition tax”) on earnings of certain foreign subsidiaries that were previously tax deferred; and new taxes on certain foreign sourced earnings. At December 31, 2017, we had not completed our accounting for the tax effects of the TCJA; however, in certain cases, as described below, we made reasonable estimates of the effects on our existing deferred tax balances and impact of the one-time transition tax. In accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the TCJA may be refined upon obtaining, preparing, and/or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.

As of December 31, 2017, we were able to determine a reasonable estimate and recognize the provisional impacts of the rate reduction on our existing deferred tax balances and the impact of the transition tax. The reduction in the U.S. corporate tax rate resulted in a net tax benefit of approximately $8.4 million related to the revaluation of our U.S. net deferred tax liability. The transition tax resulted in a one-time tax expense of approximately $10.6 million.

As of December 31, 2018, we have revised these estimated amounts based upon further analysis of the TCJA and notices and regulations issued and proposed by the U.S. Department of Treasury and the Internal Revenue Service. We recognized an additional tax benefit of approximately $71,000 on the difference between the 2017 U.S. enacted tax rate of 35%, and the 2018 enacted tax rate of 21%. We recognized a tax benefit of approximately $3.3 million from the revised transition tax calculation, which included the completion of our calculation of the total post-1986 foreign earnings and profits (“E&P”) of our foreign subsidiaries, and related foreign tax credits. We elected to pay our transition tax over the eight-year period provided by the TCJA.

For tax years beginning after December 31, 2017, the TCJA introduces new provisions of U.S. taxation of certain Global Intangible Low-Tax Income (“GILTI”). The FASB provided guidance that companies should make an accounting policy election to either treat taxes on GILTI as period costs or use the deferred method. We have elected to treat taxes on GILTI as period costs and recognized tax expense of approximately $347,000 in December 2018.

As of December 31, 2018, we have completed our accounting for the tax effects of the enactment of the TCJA; however, we continue to expect U.S. regulatory and standard-setting bodies to issue guidance and regulations that could have a material financial statement impact on our effective tax rate in future periods.

We have historically asserted indefinite reinvestment of the earnings of certain non-U.S. subsidiaries outside the U.S. The TCJA eliminated certain material tax effects on the repatriation of cash to the U.S. As such, future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal income tax. Therefore, after reevaluation of the permanent reinvestment assertion, we no longer consider our foreign earnings to be permanently reinvested as of December 31, 2018. As a result of the change in the assertion, during 2018 we recorded tax expense of approximately $5.6 million for foreign withholding taxes on unremitted foreign earnings as of December 31, 2018.

For the years ended December 31, 2018, 2017 and 2016, income before income taxes is broken out between U.S. and foreign-sourced operations and consisted of the following (in thousands):



	2018		2017		2016
Domestic	$	21,084	$	14,531	$	6,174
Foreign	28,435		21,350		19,212
Total	$	49,519	$	35,881	$	25,386

The components of the provision for income taxes for the years ended December 31, 2018, 2017 and 2016, consisted of the following (in thousands):



	2018			2017			2016
Current expense (benefit):
Federal	$	(1,132	)	$	3,849		$	1,933
State	582			645			492
Foreign	6,000			5,168			3,802
Total current expense	5,450			9,662			6,227

Deferred expense (benefit):
Federal	4,400			(314		)	(144		)
State	(667		)	(216		)	(195		)
Foreign	(1,681		)	(774		)	(623		)
Total deferred (benefit) expense	2,052			(1,304		)	(962		)

Total income tax expense	$	7,502		$	8,358		$	5,265

The difference between the income tax expense reported and amounts computed by applying the statutory federal rate of 21.0% to pretax income for the year ended December 31, 2018, and 35% for years ended December 31, 2017 and 2016, consisted of the following (in thousands):



	2018			2017			2016
Computed federal income tax expense at applicable statutory rate	$	10,399		$	12,559		$	8,885
State income taxes	(59		)	279			193
Tax credits	(1,734		)	(1,377		)	(1,164		)
Production activity deduction	—			—			(53		)
Foreign tax rate differential	(1,361		)	(3,329		)	(3,717		)
Uncertain tax positions	267			(19		)	597
Deferred compensation insurance assets	186			(479		)	(307		)
Transaction-related expenses	223			90			274
U.S. transition tax	(3,271		)	10,612			—
TCJA remeasurement of deferred taxes	(71		)	(8,383		)	—
Stock-based payments	(4,278		)	(2,264		)	—
Bargain purchase gain	—			(1,570		)	—
In-process research and development	—			1,486			—
Net GILTI	347			—			—
Foreign withholding tax	5,590			—			—
Other — including the effect of graduated rates	1,264			753			557
Total income tax expense	$	7,502		$	8,358		$	5,265

Deferred income tax assets and liabilities at December 31, 2018 and 2017, consisted of the following temporary differences and carry-forward items (in thousands):



	2018			2017
Deferred income tax assets:
Allowance for uncollectible accounts receivable	$	606		$	467
Accrued compensation expense	7,414			5,154
Inventory differences	1,269			2,505
Net operating loss carryforwards	20,226			15,741
Deferred revenue	46			58
Stock-based compensation expense	2,833			2,281
Other	9,243			8,986
Total deferred income tax assets	41,637			35,192

Deferred income tax liabilities:
Prepaid expenses	(1,142		)	(930		)
Property and equipment	(20,045		)	(20,352		)
Intangible assets	(58,883		)	(28,588		)
Foreign withholding tax	(5,590		)	—
Other	(4,350		)	(1,830		)
Total deferred income tax liabilities	(90,010		)	(51,700		)
Valuation allowance	(4,989		)	(4,422		)
Net deferred income tax assets (liabilities)	$	(53,362	)	$	(20,930	)

Reported as:
Deferred income tax assets - Long-term	$	3,001		$	2,359
Deferred income tax liabilities - Long-term	(56,363		)	(23,289		)
Net deferred income tax liabilities	$	(53,362	)	$	(20,930	)

The long-term deferred income tax balances are not netted as they represent deferred amounts applicable to different taxing jurisdictions. Deferred income tax balances reflect the temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered.

The valuation allowance is primarily related to state credit carryforwards, non-US net operating loss carryforwards, and capital loss carryforwards for which we believe it is more likely than not that the deferred tax assets will not be realized. The valuation allowance increased by approximately $567,000, $636,000 and $1.8 million during the years ended December 31, 2018, 2017 and 2016, respectively.

As of December 31, 2018 and 2017, we had U.S federal net operating loss carryforwards of approximately $86.3 million and $67.9 million, respectively, which were generated by Cianna Medical, VAT, DFINE and Biosphere Medical, Inc. prior to our acquisition of these companies. Cianna Medical, Inc. was acquired on November 13, 2018. These net operating loss carryforwards, which expire at various dates through 2035, are subject to an annual limitation under Internal Revenue Code Section 382. We anticipate that we will utilize the net operating loss carryforwards over the next 17 years. We utilized a total of approximately $11.9 million and $9.1 million in U.S. federal net operating loss carryforwards during the years ended December 31, 2018 and 2017, respectively.

As of December 31, 2018, we had approximately $5.9 million of non-U.S. net operating loss carryforwards, of which approximately $5.2 million have no expiration date and approximately $761,000 expire at various dates through 2027. As of December 31, 2017, we had $5.4 million of non-U.S. net operating loss carryforwards, of which approximately $4.9 million had no expiration date and approximately $526,000 expire at various dates through 2027. Non-U.S. net operating loss carryforwards utilized during the years ended December 31, 2018 and 2017 were not material.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. In our opinion, we have made adequate provisions for income taxes for all years subject to audit. We are no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2015. In foreign jurisdictions, we are no longer subject to income tax examinations for years before 2012.

Although we believe our estimates are reasonable, the final outcomes of these matters may be different from those which we have reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and operating results in the period in which we make such determination.

The total liability for unrecognized tax benefits at December 31, 2018, including interest and penalties, was approximately $3.3 million, of which approximately $3.0 million would favorably impact our effective tax rate if recognized. The total liability for unrecognized tax benefits at December 31, 2017, including interest and penalties, was approximately $3.1 million, of which approximately $2.7 million would favorably impact our effective tax rate if recognized. As of December 31, 2018 and 2017, the total liability for uncertain tax benefits, as presented on our consolidated balance sheets, has been reduced by approximately $307,000 related to certain liabilities for unrecognized tax benefits, which, if realized, would reduce the transition tax under the TCJA by approximately $307,000. As of December 31, 2018 and 2017, we had accrued approximately $373,000 and $304,000 respectively, in total interest and penalties related to unrecognized tax benefits. We account for interest and penalties for unrecognized tax benefits as part of our income tax provision. During the years ended December 31, 2018, 2017 and 2016, we added interest and penalties of approximately $69,000, $88,000 and $30,000, respectively, to our liability for unrecognized tax benefits. It is reasonably possible that within the next 12 months the total liability for unrecognized tax benefits may change, net of potential decreases due to the expiration of statutes of limitation, up to $400,000.

A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits for the years ended December 31, 2018, 2017 and 2016, consisted of the following (in thousands):



Tabular Roll-forward	2018			2017			2016

Unrecognized tax benefits, opening balance	$	2,749		$	2,549		$	1,982
Gross increases in tax positions taken in a prior year	35			80			77
Gross increases in tax positions taken in the current year	586			403			856
Lapse of applicable statute of limitations	(423		)	(283		)	(366		)
Unrecognized tax benefits, ending balance	$	2,947		$	2,749		$	2,549

The tabular roll-forward ending balance does not include interest and penalties related to unrecognized tax benefits.