INCOME TAXES (Notes)

12 Months Ended

Dec. 31, 2019

On December 22, 2017, the tax act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly known as the Tax Cuts and Jobs Act (the “TCJA”), was signed into law. The TCJA changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries.

At December 31, 2017, we recorded a reduction of $129.4 million to our U.S. net deferred tax assets as a result of the rate reduction from 35% to 21%. Our deferred tax attributes are generally subject to a full valuation allowance in the U.S. and thus, this adjustment to the attributes did not impact the tax provision.

As part of U.S. international tax reform, the TCJA imposes a transition tax on certain accumulated foreign earnings aggregated across all non-U.S. subsidiaries, net of foreign deficits. We were in an aggregate net foreign deficit position for U.S. tax purposes, and therefore not liable for the transition tax. Additionally, TCJA repealed the alternative minimum tax (“AMT”) and made existing AMT credit carryovers refundable. Accordingly, at December 31, 2017, we recorded a deferred tax benefit and income tax receivable for our existing AMT credit in the amount of $0.8 million.

The global intangible low-taxed income (“GILTI”) provisions of the TCJA impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Under U.S. GAAP, we can make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of our deferred taxes (the “deferred method”). During the year ended December 31, 2018 we made a policy election to record tax effects of GILTI as an expense under the period cost method.

Income from before income taxes and the components of the income tax provision consisted of the following for the years ended December 31, 2019, 2018, and 2017 (in thousands):



	Year Ended December 31,
	2019			2018			2017
Income (loss) from operations before income taxes:
United States	$	4,311		$	(1,940	)	$	(4,811	)
Foreign	(1,786		)	(7,463		)	(8,611		)
Total income (loss) from operations before income taxes	$	2,525		$	(9,403	)	$	(13,422	)
Provision for (Benefit from) income taxes:
Current tax expense (benefit):
Federal	$	(4	)	$	(1	)	$	(4	)
State	58			59			59
Foreign benefit of net operating losses	(462		)	(206		)	(66		)
Other foreign	1,632			1,372			1,774
Total current tax expense	1,224			1,224			1,763
Deferred tax (benefit) expense:
Federal	—			—			(821		)
Other foreign	(6,300		)	47			(809		)
Total deferred tax (benefit) expense	(6,300		)	47			(1,630		)
Total provision for (benefit from) income taxes	$	(5,076	)	$	1,271		$	133

Net deferred tax assets (liabilities) consisted of the following at December 31, 2019 and 2018 (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Tax credit and net operating loss carryforwards	$	267,049		$	283,473
Allowances for bad debts	69			32
Difference in accounting for:
Revenues	2,651			3,666
Costs and expenses	19,400			17,033
Inventories	2,282			3,744
Acquired intangible assets	187			555
Long-term lease liabilities	7,605			—
Gross deferred tax assets	299,243			308,503
Valuation allowance	(281,568		)	(304,070		)
Deferred tax assets after valuation allowance	17,675			4,433
Deferred tax liabilities:
Difference in accounting for:
Revenues	(1,052		)	—
Costs and expenses	(1,527		)	(1,454		)
Acquired intangible assets	—			(709		)
Basis difference convertible notes	(326		)	(1,112		)
Right of use asset	(7,291		)	—
Gross deferred tax liabilities	(10,196		)	(3,275		)
Net deferred tax assets	$	7,479		$	1,158
Recorded as:
Long-term deferred tax assets, net	7,479			1,158
Long-term deferred tax liabilities, net	—			—
Net deferred tax assets	$	7,479		$	1,158

Deferred tax assets and liabilities reflect the net tax effects of the tax credits and net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The ultimate realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions. We have determined that our Irish subsidiary has reached a level of sustained profitability sufficient enough to release a significant portion of the valuation allowance on its net operating loss carryforward. Accordingly, we reversed a $6.0 million valuation allowance against the Irish subsidiary’s net operating loss carryforward deferred tax asset. Additionally, during the year ended December 31, 2019 we completed a legal entity reorganization that reduced the number of our German subsidiaries. This reorganization allowed us to reverse a valuation allowance on the net operating loss carryforward deferred tax asset of one of the surviving German entities resulting in an increase to the deferred tax asset, net of a provision for related uncertain tax position, of $1.5 million. Management believes the remaining deferred tax assets, based largely on the history of U.S. tax losses, warrant a valuation allowance based on the weight of available negative evidence.

As noted above under Recently Adopted Accounting Pronouncements, on January 1, 2019 we adopted ASC 842 Leases which resulted in the recognition of our leases on the balance sheet by recording right-of use assets and short and long-term lease liabilities. These new lease assets and liabilities generally have no tax basis, accordingly we have established a related deferred tax asset for the lease liability and a deferred tax liability for the right of use asset.

For U.S. federal and state income tax purposes at December 31, 2019, we had tax credit carryforwards of $49.9 million, which will expire between 2020 and 2039, and net operating loss carryforwards of $760.8 million, the majority of which will expire between 2020 and 2037.

The federal net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the Internal Revenue Code. We completed an assessment at October 31, 2019 regarding whether there may have been a Section 382 ownership change and concluded that it is more likely than not that none of our net operating loss and tax credit amounts are subject to any Section 382 limitation.

Additionally, we have foreign net operating loss carryforwards of $105.2 million and capital loss carryforwards of $1.6 million, each with an indefinite carryforward period and tax credit carryforwards of $6.2 million that begin to expire in 2030. We have determined there is uncertainty regarding the realization of a portion of these assets and have recorded a valuation allowance against $56.0 million of net operating losses, $1.6 million of capital losses and $6.1 million of tax credits at December 31, 2019.

Our assessment of the valuation allowance on the U.S. and foreign deferred tax assets could change in the future based on our levels of pre-tax income and other tax related adjustments. Reversal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of reversal.

The following table sets forth a reconciliation of our income tax provision (benefit) to the statutory U.S. federal tax amount for the years ended December 31, 2019, 2018, and 2017:



	Year Ended December 31,
	2019			2018			2017
Statutory tax	$	530		$	(1,975	)	$	(4,698	)
Tax credits expired / (generated)	815			1,277			(1,646		)
Foreign operations	921			1,854			3,113
Change in uncertain tax positions	11,185			58			800
Non-deductible expenses and other	2,474			301			1,109
Change in valuation allowance	(21,001		)	(244		)	1,455
(Benefit from) provision for income taxes	$	(5,076	)	$	1,271		$	133

As noted above, the TCJA included a reduction of the corporate income tax rate from 35% to 21% for years beginning after 2017. Accordingly, the amount reflected above for statutory tax is computed at a 21% rate for the years ended December 31, 2019 and December 31, 2018 and a 35% rate for the year ended December 31, 2017.

Our tax credits decreased in 2019 and 2018 driven by expiring U.S. research and development tax credits exceeding current year tax credits generated. Changes in the jurisdictional mix of our foreign profitability drives the change in the taxes on foreign operations. The 2019 increase in our uncertain tax positions relates to our German net operating loss carryforward. As noted above, the deferred tax asset recorded for the net operating loss carryforward is recorded net of this uncertain tax position. The 2019 increase in our non-deductible expenses was primarily driven by compensation deduction limitations under Internal Revenue Code section 162(m). The 2019 decrease in our valuation allowance was primarily driven by reversal of valuation allowances on our foreign net operating loss carryforwards. We have determined that our Irish subsidiary has reached a level of sustained profitability sufficient enough to release a significant portion of the valuation allowance on its net operating loss carryforward. Accordingly, we recorded a $6.0 million benefit related to a valuation allowance against the Irish subsidiary net operating loss carryforward deferred tax asset. Additionally, the reorganization of our German subsidiaries allowed us to reverse a valuation allowance on the net operating loss carryforward deferred tax asset of one of the surviving German entities. We recorded a gross benefit of $12.6 million for this release and correspondingly recorded an $11.1 million charge for a related uncertain tax position resulting in a net benefit of $1.5 million.

As a result of TCJA and the current U.S. taxation of deemed repatriated earnings, the additional taxes that might be payable upon repatriation of foreign earnings are not significant. However, we do not have any current plans to repatriate these earnings because the underlying cash will be used to fund the ongoing operations of the foreign subsidiaries.

A tax position must be more likely than not to be sustained before being recognized in the financial statements. It also requires the accrual of interest and penalties as applicable on unrecognized tax positions. At December 31, 2017 and 2018, our unrecognized tax benefits and related accrued interest and penalties related to an audit issue at our subsidiary in Israel in the amount of $1.8 million, of which $1.8 million would affect our income tax provision and effective tax rate if recognized. We increased the value of this position to $1.9 million at December 31, 2019. Additionally, during 2019 we had an increase in our unrecognized tax positions of $11.1 million related to our German subsidiary net operating loss carryforward; this increase relates to the German subsidiary’s legal entity reorganization mentioned above. The total increases to the value of our unrecognized tax benefits during 2019, including the impacts of any foreign currency revaluations, were $11.2 million.

The following table sets forth a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018, and 2017 (in thousands):



Unrecognized tax benefits at January 1, 2017	$	1,041
Increases for tax positions taken during a prior period	800
Unrecognized tax benefits at December 31, 2017	1,841
Decreases for tax positions taken during a prior period	(78		)
Unrecognized tax benefits at December 31, 2018	1,763
Increases for tax positions taken during a prior period	11,248
Unrecognized tax benefits at December 31, 2019	$	13,011

We recognize interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties related to uncertain tax positions at December 31, 2019 and 2018 were $0.4 million and $0.3 million, respectively.

The tax years 2010 and forward remain open to examination by taxing authorities in the jurisdictions in which we operate. The most significant operating jurisdictions include: the United States, Ireland, the Netherlands, Germany, Israel, Japan, and the United Kingdom.