Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES

Income (loss) before income tax (benefit) expense consists of the following:



	Years ended December 31,
	2018			2017		2016
Domestic	$	(1,723	)	$	2,468	$	(1,527	)
Foreign	6,281			3,359		14,153
Income before income taxes	$	4,558		$	5,827	$	12,626

The components of the income tax (benefit) expense for income taxes are as follows:



	Years ended December 31,
	2018			2017			2016
Current:
Federal	$	(1,694	)	$	18,951		$	409
State	120			507			40
Foreign	1,394			2,072			3,482
Current income tax (benefit) expense	(180		)	21,530			3,931
Deferred:
Federal	(486		)	1,038			(2,357		)
State	(153		)	(580		)	(229		)
Foreign	447			(1,645		)	174
Deferred income tax benefit	(192		)	(1,187		)	(2,412		)
Income tax (benefit) expense	$	(372	)	$	20,343		$	1,519

Reconciliations of the income tax expense at the U.S. federal statutory income tax rate compared to our actual income tax (benefit) expense are summarized below:



	Years ended December 31,
	2018			2017			2016
Tax expense at statutory rate	$	956		$	1,981		$	4,427
State income taxes, net of federal benefit	(195		)	81			(50		)
Foreign tax rate difference	(1,003		)	(2,057		)	(1,939		)
Research and development credit	(919		)	(1,037		)	(917		)
Change in valuation allowance	464			678			162
Equity based compensation	(198		)	33			(255		)
Manufacturing credit	—			(191		)	(61		)
Permanent impact of non-deductible cost	1,120			766			412
Provision to return adjustments	345			777			(61		)
Impact of Tax Cuts and Jobs Act of 2017	(1,000		)	19,355			—
Other	58			(43		)	(199		)
Income tax (benefit) expense	$	(372	)	$	20,343		$	1,519

The components of our net deferred income tax asset and liabilities are as follows:



	As of December 31,
	2018			2017
Net deferred income tax asset - Non-current
Warranty cost	$	533		$	695
Inventory reserve	1,559			419
Unearned service revenue	6,684			5,364
Employee stock options	4,222			4,366
Tax Credits	485			1,785
Loss carryforwards	7,038			8,782
Other, net	759			1,479
Total deferred tax assets	21,280			22,890
Valuation Allowance	(1,924		)	(1,631		)
Total deferred tax assets net of valuation allowance	19,356			21,259
Net deferred income tax liability - Non-current
Bad debt reserve	(116		)	(2		)
Depreciation	(2,996		)	(3,675		)
Goodwill	(1,612		)	(1,574		)
Intangible assets	(649		)	(1,097		)
Total deferred tax liabilities	(5,373		)	(6,348		)
Net deferred tax assets	$	13,983		$	14,911

On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Reform”), resulting in significant modifications to existing law. Under the U.S. Tax Reform, changes include lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory tax on accumulated earnings in foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to United States taxation. The statutory corporate tax rate reduction is effective for tax years beginning on or after January 1, 2018. In accordance with the U.S. Tax Reform, we recorded a provisional amount of $19.4 million of additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The portion of this $19.4 million provisional amount that related to the transition tax on the mandatory deemed repatriation of foreign earnings was $17.4 million based on our best estimate and guidance available at that time. The portion of the $19.4 million that related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $2.0 million at that time. Securities and Exchange Commission Staff Accounting Bulletin 118 (“SAB 118”) was issued and provided additional clarification regarding the application of FASB ASC Topic 740 if a company did not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. December 22, 2018 marked the end of the measurement period for SAB 118. As additional guidance was released during the SAB 118 remeasurement period, we completed our transition tax analysis, which resulted in an income tax benefit of $1.0 million and a $1.8 million decrease of our deferred tax assets recorded in the fourth quarter of 2018 related to adjustments to the transition tax on mandatory deemed repatriation of foreign earnings.

Our domestic entities had deferred income tax assets in the amount of $7.2 million and $7.7 million as of December 31, 2018 and December 31, 2017, respectively. At December 31, 2018 and 2017, our foreign subsidiaries had deferred tax assets primarily relating to net operating losses of $6.5 million and $7.9 million, respectively, some of which expire in the next 1 to 9 years and others which can be carried forward indefinitely. The valuation allowance for deferred tax assets as of December 31, 2018 and 2017 was $1.9 million and $1.6 million, respectively. The net change in the total valuation allowance for each of the years ended December 31, 2018, 2017 and 2016 was a $0.3 million, a $0.7 million and a $0.1 million increase, respectively.

The valuation allowance as of December 31, 2018 and 2017 was primarily related to foreign net operating loss carryforwards that, in the judgment of management, were not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment.

Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. We review our tax contingencies on a regular basis and make appropriate accruals as necessary.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The table below summarizes the open tax years and ongoing tax examinations in major jurisdictions as of December 31, 2018:



Jurisdiction	Open Years	Examination in Process
United States - Federal Income Tax	2015-2018	N/A
United States - various states	2014-2018	N/A
Germany	2014-2018	N/A
Switzerland	2018	N/A
Singapore	2014-2018	N/A

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not material. We do not currently anticipate that the total amount of unrecognized tax benefits will result in material changes to our financial position. We are subject to income taxes at the federal, state and foreign country level. Our tax returns are subject to examination at the U.S. federal level from 2015 forward and at the state level are subject to a three to four year statute of limitations depending on the state.