Income Taxes

12 Months Ended

Dec. 31, 2019

8. Income Taxes

Income Tax Expense

Income (loss) before income taxes consists of the following (in thousands):


	2019		2018		2017
Domestic	$	6,369	$	4,560	$	5,086
Foreign		(4,725)		(10,951)		(1,525)
Income (loss) before income taxes	$	1,644	$	(6,391)	$	3,561

Income tax expense (benefit) consists of the following (in thousands):


	2019		2018		2017
Current:
Federal	$	48	$	402	$	521
State		80		246		110
Foreign		2,041		2,009		460
		2,169		2,657		1,091
Deferred:
Federal		(850)		(2,188)		(714)
State		(131)		(154)		70
Foreign		(1,264)		(3,866)		(590)
		(2,245)		(6,208)		(1,234)
Income tax benefit	$	(76)	$	(3,551)	$	(143)

Our income tax benefit in 2019, 2018, and 2017 included our federal, state, and foreign tax obligations. Our effective income tax rate was a tax benefit of 5%, 56%, and 4% for the years ended December 31, 2019, 2018, and 2017, respectively. Our income tax rate for the year ended December 31, 2019 was primary affected by excess tax benefits on stock compensation, the research and development tax credit, and releases of uncertain tax position liabilities. These tax benefits were partially offset by nondeductible executive compensation, intercompany interest expense disallowance, and nondeductible meals and entertainment expenses. Our income tax rate for the year ended December 31, 2018 was primarily affected by excess tax benefits on stock compensation, the research and development tax credit and non-includable income related to the On-X settlement which increased our benefit. These tax benefits were offset by changes in valuation allowances on future tax benefits, and nondeductible meals and entertainment expenses. Our income tax rate for the year ended December 31, 2017 was primarily affected by excess tax benefits on stock compensation and the research and development tax credit, offset by nondeductible transaction costs related to the JOTEC Acquisition and nondeductible meals and entertainment expenses.

The income tax benefit amounts differ from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for the years ended December 31, 2019 and 2018 and 34% for the year ended December 31, 2017 to pretax income as a result of the following (in thousands):


	2019		2018		2017
Tax expense (benefit) at statutory rate	$	345	$	(1,340)	$	1,211
Increase (reduction) in income taxes resulting from:
Nondeductible executive compensation		778		320		145
Foreign income taxes		425		(250)		364
Foreign deferred items		365		--		--
Net operating losses		355		--		--
Foreign interest disallowance		292		--		--
Nondeductible entertainment expenses		201		206		258
Valuation allowance change		153		719		54
Prior year provision to return adjustments		43		--		--
State income taxes, net of federal benefit		(108)		(8)		212
Impact of Tax Cuts and Jobs Act		(155)		(238)		(255)
Unrealized income on investments		(203)		(337)		(163)
Net change in uncertain tax positions		(360)		(154)		(67)
Research and development credit		(400)		(557)		(525)
Equity compensation		(1,921)		(2,081)		(2,664)
Nondeductible transaction costs		--		--		1,676
Federal tax rate differential		--		--		(100)
Foreign tax credit		--		--		(133)
Domestic production activities deduction		--		--		(174)
Other		114		169		18
Total income tax benefit	$	(76)	$	(3,551)	$	(143)

Tax Cuts and Jobs Act of 2017

On December 22, 2017 the United States enacted tax reform legislation known as the H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Tax Act”), resulting in significant modifications to existing law. As of December 31, 2017 we remeasured

certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally from 35% to 21%), which resulted in a nominal provisional amount for 2017. Upon further analysis of certain aspects of the Tax Act and refinement of our calculations during the year ended December 31, 2018, we made immaterial adjustments to our provisional estimate in accordance with SEC Staff Accounting Bulletin 118, which are included as a component of income tax expense from continuing operations.

We elected to account for the global intangible low-taxed income (“GILTI”) tax in the period in which it is incurred, and therefore, have not provided any deferred tax impacts of GILTI in its consolidated financial statements for the years ended December 31, 2019 and 2018. For the years ending December 31, 2019 and 2018 our GILTI inclusion was nominal.

The Tax Act also created a new provision, foreign derived intangible income (“FDII”), whereby certain sales made from the U.S. to overseas markets are taxed at a lower U.S. rate. We are favorably impacted by the new FDII provision and as of December 31, 2019 and 2018 our FDII deduction was $737,000 and $525,000, respectively.

We are also affected by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income. For the year ending December 31, 2019 and 2018 our interest deduction was limited to $10.5 million and $6.6 million, respectively. The excess interest not deducted in 2019 and 2018 of $2.4 million and $17.7 million, respectively, can be carried forward indefinitely for use in future years.

Deferred Taxes

We generate deferred tax assets primarily as a result of net operating losses, excess interest carryforward, accrued compensation, stock compensation, and capital leases. Our deferred tax liabilities are primarily made up of intangible assets acquired in previous years.

The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 are as follows (in thousands):


	2019		2018
Deferred tax assets:
Loss carryforwards	$	7,030	$	8,266
Finance and operating leases		7,497		1,824
Excess interest carryforward		4,544		4,786
Stock compensation		2,153		2,138
Accrued expenses		1,890		2,723
Deferred compensation		1,107		778
Property		1,147		--
Credit carryforwards		710		939
UNICAP		425		404
Inventory and deferred preservation costs write-downs		299		289
Tax benefit of tax reserves		52		217
Other		1,659		310
Less valuation allowance		(3,218)		(3,372)
Total deferred tax assets		25,295		19,302

	2019		2018
Deferred tax liabilities:
Intangible assets		(35,555)		(38,414)
Finance and operating leases		(7,048)		--
Debt costs		(1,917)		(2,331)
Property		(28)		(1,060)
Prepaid items		(494)		(477)
Other		(616)		(176)
Total deferred tax liabilities		(45,658)		(42,458)

Total net deferred tax liabilities	$	(20,363)	$	(23,156)

As of December 31, 2019 we maintained a total of $3.2 million in valuation allowances against deferred tax assets, related primarily to state and foreign net operating loss carryforwards, and a net deferred tax liability of $20.4 million. As of December 31, 2018 we maintained a total of $3.4 million in valuation allowances against deferred tax assets, related primarily to state and foreign net operating loss carryforwards, and a net deferred tax liability of $23.2 million.

As of December 31, 2019 we had approximately $2.7 million tax-effected federal net operating loss carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that we anticipate fully utilizing before expiration, $2.8 million of tax-effected state net operating loss carryforwards, that will begin to expire in 2022, approximately $1.6 million of foreign net operating loss carryforwards that will begin to expire in 2024, $631,000 in research and development tax credit carryforwards that begin to expire in 2026, and $128,000 in credits from the state of Texas that expire in 2027.

Reinvestment of Unremitted Earnings

We intend to reinvest substantially all of the unremitted earnings of our non-U.S. subsidiaries to fund working capital, strategic investments, and debt repayment and postpone their remittance indefinitely. Accordingly, no provision for state and local taxes or foreign withholding taxes was recorded on these unremitted earnings in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company is permanently reinvested with respect to the outside basis differences in its non-U.S. subsidiaries with the exception of one of its German subsidiaries. The Company has recorded approximately $35,000 of a deferred tax liability for the tax effects of this outside basis difference in its Consolidated Statements of Operations and Comprehensive (Loss) Income.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of our uncertain tax position liability, excluding interest and penalties, is as follows (in thousands):


	2019		2018		2017
Beginning balance	$	3,889	$	4,328	$	3,390
Increases related to current year tax positions		691		368		143
Decreases due to the lapsing of statutes of limitations		(880)		(467)		(254)
Decreases related to prior year tax positions		(154)		--		(106)
(Decreases) increases for foreign exchange differences		(22)		16		--
(Decreases) increases related to prior year tax positions		(1)		249		1,155
Decreases related to settlements		--		(605)		--
Ending balance	$	3,523	$	3,889	$	4,328

A reconciliation of the beginning and ending balances of our liability for interest and penalties on uncertain tax positions is as follows (in thousands):


	2019		2018		2017
Beginning balance	$	402	$	315	$	208
Accrual of interest and penalties		227		161		169
Decreases related to prior year tax positions		(195)		(74)		(62)
Ending balance	$	434	$	402	$	315

As of December 31, 2019 our uncertain tax liability of $4.0 million, including interest and penalties, was recorded as a reduction to deferred tax assets of $300,000, and a non-current liability of $3.7 million on our Consolidated Balance Sheets, all of which, except for the portion related to interest and penalties, is expected to impact our tax rate when recognized. The uncertain tax position decrease related to prior year tax positions is primarily due to the lapse of the statute of limitations in various jurisdictions. As of December 31, 2018 our total uncertain tax liability, including interest and penalties of $4.3 million, was recorded as a reduction to deferred tax assets of $286,000 and as a non-current liability of $4.0 million on our Consolidated Balance Sheets.

We believe it is reasonably possible that approximately $1.0 million of our uncertain tax liability will be recognized in 2020 due to the lapsing of various federal and state and foreign statutes of limitations, of which substantially all would affect the tax rate.

Other

Our tax years 2016 and forward generally remain open to examination by the major taxing jurisdictions to which we are subject. However, certain returns from years prior to 2016, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.