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Income Taxes

12 Months Ended

Dec. 31, 2018

11. INCOME TAXES

US Tax Reform

The “Tax Cuts and Jobs Act” (TCJA) was enacted on December 22, 2017 and it significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes a reduction in the U.S. federal tax rate from 35% to 21%, allows for the expensing of capital expenditures, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, creates new taxes on certain foreign sourced earnings and puts into effect the migration from a “worldwide” system of taxation to a territorial system.

The Company recognized the income tax effects of the “Tax Cuts and Jobs Act” (TCJA) in its audited consolidated financial statements on our 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides Securities and Exchange Commission staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. The guidance also provides for a measurement period of up to one year from the enactment date for the Company to complete the accounting for the U.S. tax law changes. As such, the Company’s 2017 financial results reflected the provisional estimate of the income tax effects of the TCJA.

The Company completed its analysis of the TCJA in 2018 and adjusted the 2017 provisional estimates to the final amounts. A summary of the provisional and final amounts is included below:

•

Transition tax on unrepatriated foreign earnings: The Company originally estimated a transition tax expense of $0.6 million and the final transition tax liability is $0.7 million. The adjustment unfavorably impacted the effective tax rate by approximately 0.1%.

•

Reduction of U.S. Federal Corporate Tax Rate: The Company originally estimated a provisional tax benefit of $3.4 million related to the revaluation of deferred tax assets and liabilities. The deferred tax assets/liabilities as of December 31, 2017 were adjusted to match the balances per the 2017 U.S. corporate income tax return. The revised deferred balance was then adjusted from a 35% tax rate to a 21% tax rate. This resulted in a final tax benefit of approximately $3.6 million. The adjustment favorably impacted the effective tax rate by approximately 0.2%.

•

Indefinite reinvestment assertion: Prior to the passage of the TCJA, the Company asserted that all of the undistributed foreign earnings of its foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Beginning in 2018, the TCJA provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, companies must still apply the guidance of ASC 740-30-25-18 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. The Company has accrued the Transition Tax on the deemed repatriated earnings that were previously indefinitely reinvested. The Company has not recorded deferred foreign withholding taxes on approximately $21.1 million of pre-2018 earnings which are considered permanently reinvested.

•

Global intangible low taxed income (GILTI): The TCJA creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. The Company has made an accounting policy election to treat GILTI taxes as a current period expense.

The Company files income tax returns for U.S. federal and various U.S. states, as well as various foreign jurisdictions. The liabilities for unrecognized tax benefits are carried in Other long-term liabilities on the consolidated balance sheets because the payment of cash is not anticipated within one year of the balance sheet date.

The components of income before income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2019		2018		2017
Domestic	$	117,326	$	88,014	$	52,986
Foreign jurisdictions		7,506		5,937		3,959
Income before income taxes	$	124,832	$	93,951	$	56,945

Income tax provision consisted of the following (in thousands):

	Current		Deferred			Total
Year ended December 31, 2019
U.S. Federal	$	10,577	$	8,922		$	19,499
U.S. state and local		1,761		987			2,748
Foreign jurisdictions		2,023		119			2,142
	$	14,361	$	10,028		$	24,389

Year ended December 31, 2018
U.S. Federal	$	13,372	$	4,172		$	17,544
U.S. state and local		1,912		(116	)		1,796
Foreign jurisdictions		1,408		18			1,426
	$	16,692	$	4,074		$	20,766

Year ended December 31, 2017
U.S. Federal	$	10,953	$	3,466		$	14,419
U.S. state and local		2,032		51			2,083
Foreign jurisdictions		1,576		(255	)		1,321
	$	14,561	$	3,262		$	17,823

The difference between the statutory rate for federal income tax and the effective income tax rate was as follows (in thousands):



	Year Ended December 31,
	2019					2018					2017
Income tax expense calculated at the federal statutory rate	$	26,215		21.0	%	$	19,730		21.0	%	$	19,931		35.0	%
Effect of:
State and local taxes, net of federal benefit		2,021		1.6			1,978		2.1			1,606		2.8
Tax on foreign earnings, net of tax credits and deductions		593		0.4			172		0.2			(69	)	(0.1	)
Tax reform adjustment		-		-			(195	)	(0.2	)		(3,418	)	(6.0	)
Write off of Deferred Tax Assets		-		-			509		0.6			-		-
Deferred credit		(802	)	(0.6	)		(802	)	(0.9	)		(1,053	)	(1.9	)
Permanent items:
Stock-based awards		(3,011	)	(2.4	)		(651	)	(0.7	)		(179	)	(0.3	)
Tax reform		-		-			126		0.1			574		1.0
Deduction for FDII		(2,283	)	(1.8	)		-		-			-		-
Other		964		0.8			687		0.7			483		0.9
State/Local tax credits		(793	)	(0.6	)		(1,253	)	(1.3	)		(1,187	)	(2.1	)
Foreign tax credits		-		-			(727	)	(0.8	)		-		-
Change in liability for uncertain tax positions		1,325		1.0			1,102		1.2			1,141		2.0
Other		160		0.1			90		0.1			(6	)	(0.0	)
	$	24,389		19.5	%	$	20,766		22.1	%	$	17,823		31.3	%

Components of the Company’s net deferred tax asset (liability) included in the consolidated balance sheets consisted of the following at December 31 (in thousands):


	2019			2018
Deferred tax assets:
Accrued liabilities	$	12,229		$	18,670
Depreciation and amortization		1,121			872
Foreign operating loss carryforward		447			248
U.S. state and local tax credits and carryforward		184			223
Other		96			41
Valuation allowance		(755	)		(169	)
Total deferred tax assets		13,322			19,885

Deferred tax liabilities:
Depreciation and amortization		(21,787	)		(18,803	)
Prepaid expenses		(808	)		(550	)
Advanced billings		(3,147	)		-
Other		(53	)		(258	)
Total deferred tax liabilities		(25,795	)		(19,611	)
Net deferred tax asset	$	(12,473	)	$	274

U.S. state and local tax credits noted above will expire in 2024 if not utilized.

The Company has foreign operating loss carryforwards for which a deferred tax asset of $0.4 million has been established. The Company has a valuation allowance of $0.4 million against this deferred tax asset based upon its assessment that it is more likely than not that this amount will not be realized. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the respective tax jurisdictions. Approximately 28% of the foreign net operating loss carryforwards can be utilized over an indefinite period whereas the remainder will expire at various times from 2020 to 2029 if not utilized.

In May 2017, the Company acquired Nephrogenex which included deferred tax assets of $22.2 million, consisting of tax effected net operating losses in the amount of $13.5 million, tax effected capitalized research and development expenses of $8.5 million and tax effected federal tax credits of $0.2 million, and deferred tax liabilities of $0.1 million. In 2018, the Company disposed of approximately $7.4 million in deferred tax assets and reduced the deferred credit by approximately $6.9 million (net increase in tax expense of approximately $0.5 million) as a result of an IRC Section 382 ownership shift that occurred as a result of Cinven’s sales of the Company’s securities. The ownership shift resulted in a limitation in the ability to utilize the acquired tax attributes and resulted in the described asset write-off and reduction of the deferred credit.

Annual activity related to the Company’s valuation allowance is as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Beginning Balance	$	169		$	2,394		$	987
Additions charged to expense		375			-			-
Additions due to asset acquisition		265			-			2,033
Reductions from utilization, reassessments and expirations		(54	)		(2,225	)		3
Remeasurement due to effect of tax reform		-			-			(629	)
Ending Balance	$	755		$	169		$	2,394

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Beginning Balance	$	8,525		$	6,890		$	5,698
Increases in tax positions for prior years		-			-			5
Decreases in tax positions for prior years		(888	)		(579	)		-
Increases in tax positions for current year		2,081			2,214			1,187
Lapse in statute of limitations		-			-			-
Ending Balance	$	9,718		$	8,525		$	6,890

Interest and penalties associated with uncertain tax positions are recognized as components of Income tax provision in the consolidated statements of operations. There was no material change to tax-related interest and penalties during the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019 and 2018, respectively, the Company has a liability for interest and penalties of $1.4 million and $1.0 million that is associated with related tax liabilities of $8.2 million and $7.2 million for uncertain tax positions.

The Company operates in various foreign, state and local jurisdictions. The number of tax years for which the statute of limitations remains open for foreign, state and local jurisdictions varies by jurisdiction and is approximately four years (2015 through 2019). For federal tax purposes, the Company’s open tax years are 2016 through 2019.