Income Taxes

12 Months Ended

Dec. 31, 2017

Note 9—Income Taxes
Income tax expense (benefit) based on income before income taxes consisted of the following:
			Year Ended December 31,
(in thousands)				2017		2016		2015
	Current:
		U.S. Federal	$	85,634	$	(1,033)	$	619
		State and local		804		498		798
		Foreign		9,047		(2,379)		6,002
				95,485		(2,914)		7,419
	Deferred:
		U.S. Federal		10,177		3,926		(12,322)
		State and local		(213)		1,196		1,194
		Foreign		(702)		1,933		(1,653)
				9,262		7,055		(12,781)
			$	104,747	$	4,141	$	(5,362)

Worldwide income (loss) before income taxes consisted of the following:
			Year Ended December 31,
(in thousands)			2017		2016		2015
	United States	$	(12,131)	$	6,520	$	18,599
	Foreign		84,913		61,668		71,440
		$	72,782	$	68,188	$	90,039

Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income taxes as a result of the following:

				Year Ended December 31,
(in thousands)				2017		2016		2015
	Tax at statutory rate		$	25,474	$	23,866	$	31,514
	State taxes, net of federal tax effect			384		1,102		1,295
	Effect of foreign operations and tax incentives			(20,703)		(15,496)		(21,820)
	Change in valuation allowance			(203)		(1,152)		(19,640)
	Excess tax-benefits of stock-based compensation			(1,658)		—		—
	Provisional impact of U.S. Tax Reform			97,707		—		—
	Losses in foreign jurisdictions for which no benefit has
		been provided		106		2,106		3,711
	Change in uncertain tax benefits reserve			—		(8,270)		(1,653)
	Other			3,640		1,985		1,231
	Total income tax expense		$	104,747	$	4,141	$	(5,362)

The U.S. Tax Cuts and Jobs Act (U.S. Tax Reform), which was signed into law on December 22, 2017, significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted.

As of December 31, 2017, the Company had approximately $928 million in cumulative undistributed foreign earnings outside the U.S. All of these undistributed earnings are subject to the U.S. mandatory transition tax and are eligible to be repatriated to the U.S. without additional U.S. tax under the U.S. Tax Reform. As of December 31, 2017, the Company has provisional income tax expense of $101.6 million for the estimated mandatory deemed repatriation of undistributed foreign earnings. After reduction by U.S. tax loss carryforwards and U.S. tax credit carryforwards, the Company accrued U.S. income tax liabilities of $87.7 million in 2017. The Company intends to pay this estimated tax liability over an eight-year payment schedule as prescribed by the U.S. Tax Reform. As such, other long-term liabilities includes $80.7 million of this estimated liability. Though these foreign earnings have been deemed to be repatriated from a U.S. federal tax perspective, the Company has not yet completed its assessment of the U.S. Tax Reform on its plans to reinvest foreign earnings and as such has not changed its prior conclusion that the earnings are indefinitely reinvested. The repatriation tax is based on currently available information and technical guidance related to the new tax law. The provisional estimate will be updated when additional information related to undistributed foreign earnings, foreign taxes and foreign cash and equivalents becomes available, prepared and analyzed.

In addition, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, the Company remeasured its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $3.9 million deferred tax benefit.

Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Reform Act. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. Tax Reform enactment date for companies to complete their accounting. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. These preliminary estimates are subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the U.S. Tax Reform, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the U.S. Tax Reform may require further adjustments and changes in the Company’s estimates. The Company will finalize its accounting of the impact no later than the fourth quarter of 2018.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

				December 31,
(in thousands)				2017		2016
	Deferred tax assets:
		Carrying value of inventories	$	2,474	$	2,400
		Accrued liabilities and allowances deductible for tax purposes on a cash basis		6,387		5,663
		Goodwill		2,732		4,814
		Stock-based compensation		2,359		3,856
		Net operating loss carryforwards		22,096		38,988
		Tax credit carryforwards		2,007		8,688
		Other		5,924		6,812
				43,979		71,221
		Less: valuation allowance		(15,823)		(16,026)
		Net deferred tax assets		28,156		55,195

	Deferred tax liabilities:
		Plant and equipment, due to differences in depreciation		(8,543)		(11,499)
		Intangible assets, due to differences in amortization		(20,891)		(35,492)
		Other		(1,715)		(1,632)
		Gross deferred tax liability		(31,149)		(48,623)
		Net deferred tax asset (liability)	$	(2,993)	$	6,572

	The net deferred tax asset (liability) is classified as follows:
		Long-term asset	$	4,034	$	6,572
		Long-term liability		(7,027)		—
		Total	$	(2,993)	$	6,572

All deferred taxes are classified as non-current on the balance sheet as of December 31, 2017 and 2016. All deferred tax assets and liabilities are offset and presented as a single net noncurrent amount by each tax jurisdiction. During 2017, the Company utilized its U.S. federal tax loss carryforwards, and various US federal tax credit carryforwards against the provisional mandatory deemed repatriation tax.

The net change in the total valuation allowance for 2017, 2016 and 2015 was a decrease of $0.2 million, $1.2 million and $19.5 million, respectively. 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, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of December 31, 2017. During 2015, the Company evaluated the recoverability of its deferred tax assets using the criteria described above and concluded that the Company’s projected future taxable income in the U.S. is sufficient to utilize additional net operating loss carryforwards and other deferred tax assets. As a result, during 2015, the Company reduced its valuation allowance by $19.6 million.

As of December 31, 2017, the Company had $32.4 million in U.S. Federal operating loss carryforwards which will expire from 2025 to 2036; state operating loss carryforwards of approximately $77.5 million which will expire from 2018 to 2031; foreign operating loss carryforwards of approximately $24.6 million with indefinite carryforward periods; and foreign operating loss carryforwards of approximately $25.7 million which will expire at varying dates through 2027. The utilization of these net operating loss carryforwards is limited to the future operations of the Company in the tax jurisdictions in which such carryforwards arose. The Company has state tax credit carryforwards of $2.0 million which will expire at varying dates through 2036.

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2018 in China, 2021 in Malaysia and 2028 in Thailand, and are subject to certain conditions with which the Company expects to comply. The net impact of these tax incentives was to lower income tax expense for 2017, 2016, and 2015 by approximately $7.2 million (approximately $0.15 per diluted share), $6.7 million (approximately $0.13 per diluted share) and $13.7 million (approximately $0.26 per diluted share), respectively, as follows:

			Year Ended December 31,
(in thousands)			2017		2016		2015
	China	$	1,398	$	1,302	$	5,347
	Malaysia		4,295		2,346		2,075
	Thailand		1,545		3,068		6,271
		$	7,238	$	6,716	$	13,693

The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. As of December 31, 2017, the total amount of the reserve for uncertain tax benefits including interest and penalties was $0.8 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:

				December 31,
(in thousands)				2017		2016		2015
	Balance as of January 1		$	7,791	$	13,114	$	14,756
	Additions related to current year tax positions			220		—		—
	Decreases as a result of a lapse of applicable statute of
		limitations in current year		—		(5,079)		(1,653)
	Additions related to prior year tax positions			894		89		800
	Decreases related to prior year tax positions			(8,197)		(333)		(789)
	Balance as of December 31		$	708	$	7,791	$	13,114

During 2017, the Company released $0.9 million of uncertain tax benefits related to the liquidation of a foreign subsidiary company. Also during 2017, the Company received a denial of its appeal to the local tax authorities related to an examination for a subsidiary in Thailand for the years 2004 to 2005. Consequently, the Company recorded $0.9 million of additional accruals for uncertain tax benefits. The Company decided not to challenge this decision, therefore, the $7.3 million reserve for uncertain tax benefits was written off. This decrease in the unrecognized tax benefit reserve did not impact the Company’s effective tax rate. The decrease in the reserve during 2016 of $5.1 million was a result of the expiration of the statute of limitations for a foreign subsidiary that was liquidated in 2011 and closed its operations in 2005. The decrease in the reserve during 2015 of $1.7 million was the result of the expiration of the statute of limitations for a dormant foreign subsidiary in Thailand.

The reserve is classified as a current or long-term liability in the consolidated balance sheet based on the Company’s expectation of when the items will be settled. The Company records interest expense and penalties accrued in relation to uncertain income tax benefits as a component of current income tax expense. The amount of accrued potential interest on unrecognized tax benefits included in the reserve as of December 31, 2017 is $0.1 million. There was no reserve for potential penalties. The decrease in the reserve relating to interest and penalties on unrecognized tax benefits from $3.3 million in 2015 to $0.1 million in 2016 results from the corresponding reduction for the Thailand subsidiary discussed above. The total amount of interest and penalties included in income tax expense was $0.1 million during 2015. The Company did not incur any interest and penalties in 2017 or 2016.

The Company and its subsidiaries in Brazil, China, Ireland, Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2011 to 2017.

The Company is currently under examination by the U.S. Internal Revenue Service for 2014. In addition, Secure Communication Systems, Inc. and its subsidiaries (the Secure Group), companies that the Company acquired on November 11, 2015, are under a U.S. income tax audit for calendar years 2013, 2014 and through November 11, 2015. Since this audit is for the period of time prior to the acquisition of the Secure Group by the Company, any resulting tax liabilities are the responsibility of the seller. The Company does not expect to incur any income tax costs with respect to this audit. During the course of such examinations, disputes may occur as to matters of fact or law. Also, in most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.