INCOME TAXES

12 Months Ended

Dec. 31, 2020

INCOME TAXES

INCOME TAXES

12. INCOME TAXES

The components of income before income taxes for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

	2020		2019		2018
Domestic	$	(17,689)	$	(15,661)	$	28,917
Foreign		17,782		21,733		24,825
Total	$	93	$	6,072	$	53,742

The following is a reconciliation from the tax computed at statutory income tax rates to the Company’s income tax expense for the years ended December 31, 2020, 2019, and 2018 (in thousands):

	2020		2019		2018
Tax computed at statutory US federal income tax rates	$	20	$	1,275	$	11,286
Non-controlling interest		(851)		(648)		(1,114)
Foreign tax rate differential		1,866		(1,769)		(2,662)
Over (under) provided in prior periods		(520)		(244)		(4,683)
Nondeductible expenses		1,504		3,781		1,610
Benefit Attributable CARES Act		(3,064)		—		—
Capitalized transactions costs		—		19		62
Change in tax reserves		2,148		3,883		10,657
State Taxes, net of federal benefit		(409)		(429)		1,674
Change in valuation allowance		33		(35)		1,539
Investment Tax Credit		84		(1,215)		—
Refund Claim for Domestic Production Deduction		—		—		235
Tax Cuts and Jobs Act of 2017		—		—		(148)
Capital loss		—		—		15
Deferred income tax revaluation		(10)		(513)		—
Other, net		—		—		399
Total Income Tax Expense	$	801	$	4,105	$	18,870

The components of income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

\
	2020		2019		2018
Current:
United States—Federal	$	504	$	(1,559)	$	24,546
United States—State		3		(336)		4,506
Foreign		7,611		8,192		13,060
Total current income tax expense	$	8,118	$	6,297	$	42,112
Deferred:
United States—Federal	$	(6,527)	$	(1,805)	$	(17,947)
United States—State		(413)		(93)		(2,832)
Foreign		(377)		(294)		(2,463)
Total deferred income tax expense (benefit)	$	(7,317)	$	(2,192)	$	(23,242)
Consolidated:
United States—Federal	$	(6,023)	$	(3,364)	$	6,599
United States—State		(410)		(429)		1,674
Foreign		7,234		7,898		10,597
Total income tax expense (benefit)	$	801	$	4,105	$	18,870

The significant components of deferred tax assets and liabilities are as follows as of December 31, 2020 and 2019 (in thousands):

	2020		2019
Deferred tax assets:
Accounts receivable and inventory allowances	$	1,972	$	1,603
Basis in investments		7,512		6,937
Accrued expenses		4,701		5,923
Deferred revenue		3,141		2,864
Employee benefits		4,363		3,559
Other, net		744		—
Net operating losses		26,582		40,491
Tax Credits		1,997		2,726
Operating lease liability		14,648		15,869
Total deferred tax asset		65,660		79,972
Deferred tax liabilities:
Acquired intangible assets, property and equipment		26,736		30,419
Right-of-use asset		14,594		15,869
Prepaid expense		209		181
Other, net		—		195
Total deferred tax liabilities		41,539		46,664
Valuation allowance		(31,014)		(39,406)
Net deferred tax liabilities	$	(6,893)	$	(6,098)

Deferred tax assets and liabilities are reflected in the accompanying consolidated balance sheets as follows (in thousands):

	2020		2019
Deferred tax assets:
Long term	$	3,782	$	2,582
Total deferred tax asset	$	3,782	$	2,582
Deferred tax liabilities:
Long term	$	(10,675)	$	(8,680)
Total deferred tax liabilities	$	(10,675)	$	(8,680)
Net deferred tax liabilities	$	(6,893)	$	(6,098)

The Company’s effective tax rate for the years ended December 31, 2020 and 2019 was 858.3% and 67.6%, respectively. On March 27, 2020, the U.S. federal government enacted the CARES Act. The CARES Act, among other things, allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The effective tax rate for the year ended December 31, 2020 was primarily impacted by the following items: (i) a $3.1 million net benefit attributable to the remeasurement of domestic losses at a higher tax rate due to carryback provisions as provided by the CARES Act, (ii) a $2.1 million net increase of unrecognized tax positions, (iii) a $1.5 million net increase for permanently non-deductible expenses, (iv) a $21.5 million loss on the sale of Vibrant with no tax benefit, and (v) the mix of income generated among the jurisdictions in which the Company operates along with the exclusion of losses in jurisdictions where the Company cannot benefit from those losses as required by ASC 740-270-30-36(a), primarily in the US Virgin Islands.

The effective tax rate for the year ended December 31, 2019 was primarily impacted by the following items: (i) a $3.9 million net increase of unrecognized tax positions, (ii) a $3.8 million net increase for permanently non-deductible

expenses, (iii) a $1.2 million deferred tax benefit related to an investment tax credit, and (iv) the mix of income generated among the jurisdictions in which we operate along with the exclusion of losses in jurisdictions where we cannot benefit from those losses as required by ASC 740-270-30-36(a), primarily in the US Virgin Islands and India.

As of December 31, 2020, the Company estimated that it had gross federal, state and foreign net operating loss (“NOL”) carryforwards of $1.1 million, $18.9 million and $110.9 million respectively. Of these, $57.3 million will expire between 2031 and 2041 and $73.6 million may be carried forward indefinitely.

The Company assesses available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets. A significant piece of negative evidence evaluated is cumulative losses incurred in certain reporting jurisdictions over the three-year period ended December 31, 2020. Other negative evidence examined includes, but is not limited to, losses expected in early future years, a history of tax benefits expiring unused, uncertainties whose unfavorable resolution would adversely affect future results, and brief carryback, carry forward periods. On the basis of this evaluation, the Company believed it was more likely than not that the benefit from some of these federal, state, and foreign deferred taxes would not be realized.

In recognition of this risk at December 31, 2020 the Company has provided a valuation allowance against certain domestic and foreign deferred tax assets of $31.0 million. The valuation allowance primarily relates to foreign net operating losses, with the remaining amount applicable to other net deferred tax assets which the Company does not expect to be able to realize.

As of December 31, 2020, the Company had an estimated $145.1 million of undistributed earnings attributable to foreign subsidiaries for which no provision for state income taxes or foreign withholding taxes have been made because it is expected that such earnings will be reinvested outside the U.S. indefinitely unless repatriation can be done substantially tax-free. The Company will generally be free of additional U.S. federal tax consequences on distributed foreign subsidiary earnings due to a dividends received deduction implemented as part of the Tax Act for earnings distributed after January 1, 2018. Additionally, due to the one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings, the majority of previously unremitted earnings have already been subjected to U.S. federal income tax. The Company continues to assert indefinite reinvestment on outside basis differences in its non-U.S. subsidiaries, with the exception of the Vibrant entities, which are held for sale as of December 31, 2020. Additionally any determination of the amount of the unrecognized deferred tax liability on outside basis differences is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios and the variation due to multiple potential assumptions relating to the timing of any future repatriation.

The Company had unrecognized tax benefits (including interest and penalty) of $40.8 million as of December 31, 2020, $38.6 million as of December 31, 2019 and $34.7 million as of December 31, 2018. The net increase of the reserve during the year ended December 31, 2020 was attributable to an increase in tax positions for prior periods of $2.1 million, a net increase in tax positions for the current period of $3.0 million and partially offset by a lapse in statute of a prior year position of $2.9 million.

The following shows the activity related to unrecognized tax benefits (not including interest and penalty) during the three years ended December 31, 2020 (in thousands):

Gross unrecognized uncertain tax benefits at December 31, 2017		20,961
Increase in unrecognized tax benefits taken during a prior period		7,293
Increase in unrecognized tax benefits taken during the current period		3,408
Lapse in statute of limitations		(1,430)
Settlements		—
Gross unrecognized uncertain tax benefits at December 31, 2018		30,232
Increase in unrecognized tax benefits taken during a prior period		—
Increase in unrecognized tax benefits taken during the current period		3,383
Lapse in statute of limitations		(933)
Settlements		—
Gross unrecognized uncertain tax benefits at December 31, 2019	$	32,682
Increase in unrecognized tax benefits taken during a prior period		—
Increase in unrecognized tax benefits taken during the current period		2,964
Lapse in statute of limitations		(1,768)
Settlements		—
Gross unrecognized uncertain tax benefits at December 31, 2020	$	33,878

The Company’s accounting policy is to classify interest and penalties related to income tax matters as part of income tax expense. The accrued amounts for interest and penalties are $6.9 million as of December 31, 2020, $5.9 million as of December 31, 2019, and $4.5 million as of December 31, 2018.

All $40.7 million of gross unrecognized uncertain tax benefits (including interest and penalty) would impact the effective tax rate if recognized.

The Company and its subsidiaries file income tax returns in the US and in various, state and local and foreign jurisdictions. The statute of limitations related to the consolidated US federal income tax return is closed for all tax years up to and including 2013. The expiration of the statute of limitations related to the various state and foreign income tax returns that the Company and subsidiaries file varies by jurisdiction.