Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.10.0.1
INCOME TAXES
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
 
As of December 31, 2017 we recorded provisional amounts in our financial statements to estimate the impact of the 2017 Tax Reform Act. Changes to the 2017 provisional amounts recorded in the December 31, 2018 financial statements were not material to the 2018 financial results. Our financial statements were based on enacted law and related guidance received as of December 31, 2018. The U.S. Treasury has recently issued final regulations providing additional guidance on various provisions of the Tax Reform Act and it is expected that additional regulations and guidance will be forthcoming. We will continue to evaluate the impact, if any, of new regulations and guidance and will recognize any resulting impact in the period such guidance is received.

As a result of the Tax Reform Act, distributions of profits from foreign affiliates are not expected to result in material incremental U.S. tax impacts in the future. However, due to tax treaties between the U.S. and many of the jurisdictions in which we operate, some profit distributions may be subject to withholding taxes. Furthermore, new provisions of the Tax Reform Act such as GILTI (global intangible low-taxed income), FDII (foreign-derived intangible income), deduction limitations on interest expense and executive compensation, as well as other tax reform changes may impact our future taxes.

We have elected the period cost method (costs are treated as a current period expense when incurred) under U.S. GAAP as it relates to GILTI income inclusions in U.S. taxable income. Each reporting period we analyze our indefinite reinvestment assertions with respect to undistributed foreign earnings. As of December 31, 2018, we continue to assert that we do not intend to reinvest undistributed foreign earnings indefinitely in our foreign subsidiaries.

Income (loss) from continuing operations before provision (benefit) for income taxes are taxed under the following jurisdictions (dollar amounts in thousands):
Year Ended December 31,
 
2018
 
2017
 
2016
Domestic
 
$
(10,069
)
 
$
(2,211
)
 
$
6,420

Foreign
 
13,269

 
5,433

 
2,846

Total
 
$
3,200

 
$
3,222

 
$
9,266


 
Components of the provision (benefit) for income taxes from continuing operations for each of the three years in the period ended December 31, 2018 are as follows (dollar amounts in thousands):
Year Ended December 31,
 
2018
 
2017
 
2016
Current:
 
 

 
 

 
 

Federal
 
$
(1,823
)
 
$
(1,240
)
 
$
1,987

State
 
(70
)
 
(23
)
 
498

Foreign
 
6,371

 
4,168

 
5,345

Subtotal
 
4,478

 
2,905

 
7,830

Deferred:
 
 

 
 

 
 

Federal
 
605

 
13,654

 
496

State
 
296

 
(248
)
 
(14
)
Foreign
 
(977
)
 
728

 
279

Subtotal
 
(76
)
 
14,134

 
761

Total provision for income taxes
 
$
4,402

 
$
17,039

 
$
8,591


 
The provision (benefit) for income taxes, as a percentage of income from continuing operations before provision (benefit) for income taxes, differs from the statutory U.S. federal income tax rate due to the following:
Year Ended December 31,
 
2018
 
2017
 
2016
Statutory U.S. federal income tax rate
 
21.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of U.S. federal income tax benefit
 
5.5

 
(5.5
)
 
3.4

U.S. tax impact of foreign operations
 
102.5

 
1.0

 
(53.4
)
Valuation allowance change
 
(13.9
)
 
405.3

 
77.6

Unrecognized tax benefits
 
(58.7
)
 
(91.1
)
 
4.7

Domestic manufacturing deduction
 

 

 
(2.8
)
Permanent foreign items
 
28.6

 
53.7

 
26.8

Withholding tax on royalties
 
20.0

 

 

Re-measurement of deferred tax assets/liabilities
 

 
117.6

 

Stock Compensation
 
12.7

 

 

Tax Return to Provision Differences
 
11.7

 

 

Elimination of provision on intercompany transactions
 
4.4

 
4.6

 
0.1

Other
 
3.8

 
8.2

 
1.3

Effective income tax rate
 
137.6
 %
 
528.8
 %
 
92.7
 %

 
Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated.
 
Adjustments relating to the U.S. impact of foreign operations increased the effective tax rate by 102.5 percentage points in 2018, increased the effective tax rate by 1.0 percentage points in 2017, and decreased the effective tax rate by 53.4 percentage points in 2016. The components of this calculation were:
Components of U.S. tax impact of foreign operations
 
2018
 
2017
 
2016
Dividends received from foreign subsidiaries
 
 %
 
65.7
 %
 
65.9
 %
Foreign tax credits
 
(17.6
)
 
(4.1
)
 
(91.8
)
Foreign tax rate differentials
 
37.3

 
(60.6
)
 
(27.1
)
Foreign withholding taxes
 
27.7

 

 

Transfer pricing adjustment
 
12.1

 

 

Impact of GILTI
 
43.0

 

 

Unremitted earnings
 

 

 
0.2

Other adjustments
 

 

 
(0.6
)
Total
 
102.5
 %
 
1.0
 %
 
(53.4
)%


The significant components of the deferred tax assets (liabilities) are as follows (dollar amounts in thousands):
As of December 31,
 
2018
 
2017
Inventory
 
$
1,252

 
$
2,268

Accrued liabilities
 
4,130

 
2,190

Deferred compensation
 
307

 
481

Equity-based compensation
 
2,359

 
3,091

Intangibles assets
 
151

 
142

Bad debts
 
114

 
95

Net operating losses
 
7,730

 
13,755

Foreign tax and withholding credits
 
13,300

 
14,572

Non-income tax accruals
 

 
41

Health insurance accruals
 
145

 
125

Other deferred tax assets
 
2,438

 
1,869

Capital loss carryforward
 

 
82

Valuation allowance
 
(20,256
)
 
(24,024
)
Total deferred tax assets
 
11,670

 
14,687

Other deferred tax liabilities
 
(2,009
)
 
(1,255
)
Accelerated depreciation
 
(2,161
)
 
(5,919
)
Total deferred tax liabilities
 
(4,170
)
 
(7,174
)
Total deferred taxes, net
 
$
7,500

 
$
7,513


 
The components of deferred tax assets (liabilities), net are as follows (dollar amounts in thousands):
As of December 31,
 
2018
 
2017
Net deferred tax assets
 
$
9,056

 
$
8,283

Net deferred tax liabilities
 
(1,556
)
 
(770
)
Total deferred taxes, net
 
$
7,500

 
$
7,513


 
Net deferred tax liabilities are included in other liabilities in the consolidated balance sheets.
 
We have provided a valuation allowance of $20.3 million and $24.0 million as of December 31, 2018 and 2017, respectively, for certain deferred tax assets, including foreign net operating losses, for which we cannot conclude it is more likely than not that they will be realized. We reviewed our tax positions and decreased the valuation allowance by approximately $3.8 million in 2018 primarily due to a domestic decrease of $1.3 million and a foreign decrease of $2.5 million. For financial reporting purposes, the release of these valuation allowances would reduce income tax expenses in the year released. At December 31, 2018, we had approximately $13.3 million of foreign tax and withholding credits. Of the $13.3 million credits, $12.9 million are foreign tax credits, most of which expire in 2024 and all of which are fully offset by a valuation allowance.
 
At December 31, 2018, foreign subsidiaries had unused operating loss carryovers for tax purposes of approximately $7.7 million. The net operating losses will expire at various dates from 2019 through 2028, with the exception of those in some foreign jurisdictions where there is no expiration. The foreign net operating losses have a full valuation allowance recorded against them.
 
We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. We believe we have appropriately provided for income taxes for all years. Several factors drive the calculation of our tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) the issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to our reserves, which would impact our reported financial results.
 
Our U.S. federal income tax returns for 2015 through 2017 are open to examination for federal tax purposes. We have several foreign tax jurisdictions that have open tax years from 2011 through 2019.

The total outstanding balance for liabilities related to unrecognized tax benefits at December 31, 2018 and 2017 was $2.2 million and $4.6 million, respectively, all of which would favorably impact the effective tax rate if recognized. Included in these amounts is approximately $0.2 million and $1.7 million, respectively, of combined interest and penalties. We decreased interest and penalties approximately $0.2 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively. We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision.
 
During the years ended December 31, 2018, 2017 and 2016, we added approximately $0.2 million, $0.9 million and $1.4 million, respectively, to our liability for unrecognized tax benefits. Included in these amounts are approximately $0.1 million, $0.1 million and $0.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, related to interest expense and penalties. In addition, we recorded a benefit related to the lapse of applicable statute of limitations of approximately $2.1 million, $2.3 million and $2.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, all of which favorably impacted our effective tax rate.
 
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits, excluding interest and penalties, is as follows for the years (dollar amounts in thousands):
Year Ended December 31,
 
2018
 
2017
 
2016
Unrecognized tax benefits, opening balance
 
$
2,956

 
$
4,908

 
$
5,825

Settlement of liability reclassified as income tax payable
 

 

 

Payments on liability
 

 

 

Tax positions taken in a prior period
 
 

 
 

 
 

Gross increases
 

 

 

Gross decreases
 
(467
)
 
(705
)
 

Tax positions taken in the current period
 
 

 
 

 
 

Gross increases
 
92

 
716

 
1,182

Gross decreases
 

 

 

Lapse of applicable statute of limitations
 
(591
)
 
(1,970
)
 
(2,121
)
Currency translation adjustments
 
(24
)
 
7

 
22

Unrecognized tax benefits, ending balance
 
$
1,966

 
$
2,956

 
$
4,908


 
We anticipate that liabilities related to unrecognized tax benefits will increase approximately $0 to $0.1 million within the next twelve months due to additional transactions related to commissions and transfer pricing.
 
We believe that it is reasonably possible that unrecognized tax benefits may change by $0 to $0.1 million within the next twelve months due to the expiration of statutes of limitations in various jurisdictions.
 
Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such determination.