INCOME TAXES

Income from continuing operations before taxes consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
United States	$	(8,600	)	$	59,872		$	80,714
Foreign	30,974			(8,589		)	4,450
	$	22,374		$	51,283		$	85,164

The (benefit) provision for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	492		$	2,774		$	21,123
State	1,865			2,263			2,347
Foreign	9,136			3,170			1,118
	11,493			8,207			24,588
Deferred:
Federal	$	(9,118	)	$	(20,878	)	$	(2,045	)
State	(3,072		)	(4,619		)	(767		)
Foreign	(5,722		)	(71		)	304
	(17,912		)	(25,568		)	(2,508		)
	$	(6,419	)	$	(17,361	)	$	22,080

We have accrued for tax contingencies for potential tax assessments, and in 2018 we recognized a $4.3 million net increase, most of which related to various federal and state tax reserves.

On December 22, 2017, the Tax Act was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S. corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the toll charge or transition tax.

Pursuant to the SEC Staff Accounting Bulletin ("SAB") No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), a company selects between one of three scenarios to reflect the impact of the Tax Act in its financial statements within a measurement period. Those scenarios are (i) a final estimate which effectively closes the measurement period; (ii) a reasonable estimate leaving the measurement period open for future revisions; and (iii) no estimate as the law is still being analyzed in which case a company continues to apply its accounting on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. SAB 118 allows for the reporting provisional amounts for certain income tax effects in scenario (ii) and (iii). The measurement period begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. As of December 31, 2018, our accounting for the Tax Act is complete.

The toll charge on undistributed foreign earnings and profits (the “Transition Tax”) is a tax on certain untaxed accumulated and current earnings and profits ("E&P") of our foreign subsidiaries. We were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax expense of $2.0 million for the year ended December 31, 2017. On the basis of revised E&P computations that were completed during the reporting period, we recognized an additional measurement-period adjustment of $0.6 million to the Transition Tax obligation, with a corresponding adjustment of $0.6 million to income tax expense.

The revaluation of deferred taxes is an adjustment to future tax obligations as a result of the reduction of the corporate tax rate from 35% to 21%. We were able to reasonably estimate the effect of the revaluation of deferred taxes and recorded a provisional tax expense of $1.1 million for the year ended December 31, 2017. The computation of timing differences was completed during the reporting period. We recognized an additional measurement-period adjustment of $0.2 million, with a corresponding adjustment of $0.2 million to income tax expense.

We continue to evaluate various international provisions included in the Tax Act due to the lack of final Treasury Regulations and ongoing guidance. These provisions include, but are not limited to, the anti-base-erosion and anti-abuse tax regime (BEAT), the global intangible low-taxed income (GILTI) provisions, the foreign derived intangible income (FDII) provisions, and the changes to the deductibility of interest. These provisions were effective for us beginning on January 1, 2018, and may materially impact our effective tax rate in future years. We elected to treat the GILTI as period costs when incurred, and for the year ended December 31, 2018, we recorded an income tax expense of $2.4 million for GILTI.

A reconciliation of the provision for income taxes at the statutory rate to our effective tax rate is as follows (dollars in thousands):



	Year Ended December 31,
	2018					2017					2016
	Amount			Percent		Amount			Percent		Amount			Percent
Federal tax at the expected statutory rate	$	4,699		21.0	%	$	17,950		35.0	%	$	29,807		35.0	%
State income tax, net of federal effect	927			4.1	%	(403		)	(0.8	)%	1,795			2.1	%
Tax credits	(4,961		)	(22.2	)%	(2,783		)	(5.4	)%	(1,014		)	(1.2	)%
Global intangible low-taxed income	2,363			10.6	%	—			—	%	—			—	%
Foreign income tax differential	(2,944		)	(13.2	)%	3,481			6.8	%	(135		)	(0.1	)%
Stock based compensation	(11,040		)	(49.3	)%	(18,958		)	(37.0	)%	(7,720		)	(9.1	)%
Impact of the Tax Act	826			3.7	%	3,076			6.0	%	—			—	%
IP installment sale	3,252			14.5	%	3,367			6.6	%	—			—	%
Bargain purchase gain	—			—	%	(24,811		)	(48.4	)%	—			—	%
Section 162(m)	456			2.0	%	595			1.2	%	1,133			1.3	%
Other	3			0.1	%	1,125			2.2	%	(1,786		)	(2.1	)%
	$	(6,419	)	(28.7	)%	$	(17,361	)	(33.8	)%	$	22,080		25.9	%

Tax credits in 2018, 2017 and 2016 consist principally of research and developmental tax credits.

The tax effect of the gain on bargain purchase is treated as a discrete item part of purchase accounting and is not a component of the income tax provision.

The components of our deferred income tax assets (liabilities) are as follows (in thousands):



	December 31,
	2018			2017
Deferred tax asset:
Accruals/other	11,291			956
Contingent consideration	12,451			7,412
Net operating loss carryforwards	12,686			—
Acquired future tax deductions	10,722			10,580
Stock-based compensation	10,775			8,633
Foreign currency translation adjustments	3,108			3,425
Tax credits	14,470			11,220
Inventory reserves	5,674			10,658
Allowance for doubtful accounts	830			636
Valuation allowance	(5,436		)	(7,385		)
	$	76,571		$	46,135
Deferred tax liability:
State income taxes	$	2,639		$	1,640
Foreign	612			202
Depreciation and amortization	35,387			21,005
	$	38,638		$	22,847

Deferred tax asset, net	$	37,933		$	23,288

Tax Holidays and Carryforwards

Net operating loss ("NOL") carryforwards consist of: (a) federal NOL carryforwards of $68.9 million which will expire at various dates from 2020 to indefinite carryforward periods, (b) state NOL carryforwards of $20.2 million which will expire at various dates from 2028 to indifinite carryforward periods, and (c) foreign NOL carryforwards of $21.4 million which will expire at various dates from 2019 to indefinite carryforward periods. Under Section 382 of the Internal Revenue Code, certain ownership changes limit the utilization of the NOL carryforwards, and the amount of federal NOL carryforwards recorded is the net federal benefit available.

Other carryforwards include research and development (“R&D”), federal and state tax credit carryforwards of $7.4 million and $13.6 million, respectively.

A substantial portion of our manufacturing operations in Costa Rica operate under various tax holidays and tax incentive programs which will expire in whole or in part in 2027. Certain of the holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentives was an increase to our net earnings by $8.8 million or $0.41 per diluted share in 2018.

Foreign currency translation adjustments, and related tax effects, are an element of “other comprehensive income” and are not included in net income other than the revaluation of the associated deferred tax asset due to the Tax Act.

As of December 31, 2018, we have estimated $20.8 million of undistributed foreign earnings and profits. We have not provided deferred tax liabilities for foreign withholding taxes and certain state income taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States.

Upon the distribution of foreign earnings and profits, certain foreign countries impose withholding taxes. If the foreign earnings and profits were distributed, we would need to accrue an additional income tax liability. However, we may also be allowed a credit against our U.S. tax liability for substantially all the taxes paid in foreign jurisdictions.

We are subject to taxation in the United States and various states and foreign jurisdictions. Our United States federal income tax returns for tax years 2015 and forward are subject to examination by the Internal Revenue Service. Our principal state income tax returns for tax years 2013 and forward are subject to examination by the state tax authorities. The total gross amount of unrecognized tax benefits as of December 31, 2018 was $10.8 million which, if recognized, would impact the effective tax rate. We believe that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. As of December 31, 2018, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that is reasonably possible within the next twelve months. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. We have not accrued any penalties or interest as of December 31, 2018 or December 31, 2017.

The following table summarizes our cumulative gross unrecognized tax benefits (in thousands):



	Year Ended December 31,
	2018			2017			2016
Beginning balance	$	6,527		$	2,000		$	1,772
Increases to prior year tax positions	—			77			77
Increases due to acquisitions	—			640			—
Increases to current year tax positions	4,536			3,992			345
Decreases to prior year tax positions	(146		)	(12		)	(46		)
Decrease related to lapse of statute of limitations	(93		)	(170		)	(148		)
Ending balance	$	10,824		$	6,527		$	2,000