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Income taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income taxes |
19. | Income taxes
Income (loss) from continuing operations before provision for income taxes consisted of the following:
|  | Year Ended December 31, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2017 |
U.S. |  | $ | (24,890 | ) |  | $ | 28,642 |  |  | $ | 27,774 |
Non-U.S. |  |  | (2,159 | ) |  |  | (5,757 | ) |  |  | 8,617 |
Income (loss) before income taxes |  | $ | (27,049 | ) |  | $ | 22,885 |  |  | $ | 36,391 |
The provision for income taxes on continuing operations consists of the following:
|  | Year Ended December 31, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |  |  | 2017 |
U.S. |  |  |  |  |  |  |  |  |  |  |  |
Current |  | $ | (1,911 | ) |  | $ | 9,480 |  |  | $ | 3,620 |
Deferred |  |  | 2,008 |  |  |  | (3,430 | ) |  |  | 20,222 |
|  |  | 97 |  |  |  | 6,050 |  |  |  | 23,842 |
Non-U.S. |  |  |  |  |  |  |  |  |  |  |  |
Current |  |  | 1,931 |  |  |  | 2,255 |  |  |  | 4,062 |
Deferred |  |  | (615 | ) |  |  | 769 |  |  |  | 1,196 |
|  |  | 1,316 |  |  |  | 3,024 |  |  |  | 5,258 |
Income tax expense |  | $ | 1,413 |  |  | $ | 9,074 |  |  | $ | 29,100 |
The differences between the income tax provision at the U.S. federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2019, 2018, and 2017 consist of the following:
|  | 2019 |  |  | 2018 |  |  | 20171 |
(U.S. Dollars, in thousands, except percentages) |  | Amount |  |  | Percent |  |  | Amount |  |  | Percent |  |  | Amount |  |  | Percent |
Statutory U.S. federal income tax rate |  | $ | (5,680 | ) |  |  | 21.0 | % |  | $ | 4,806 |  |  |  | 21.0 | % |  | $ | 12,737 |  |  |  | 35.0 | %
State taxes, net of U.S. federal benefit |  |  | 1,043 |  |  |  | (3.9 | ) |  |  | 1,038 |  |  |  | 4.5 |  |  |  | 1,598 |  |  |  | 4.4 |
Foreign rate differential, including withholding taxes |  |  | 131 |  |  |  | (0.5 | ) |  |  | 784 |  |  |  | 3.4 |  |  |  | (3,849 | ) |  |  | (10.6 | )
Valuation allowances, net |  |  | (165 | ) |  |  | 0.6 |  |  |  | 4,116 |  |  |  | 18.0 |  |  |  | 3,548 |  |  |  | 9.7 |
Research credits |  |  | (829 | ) |  |  | 3.1 |  |  |  | (710 | ) |  |  | (3.1 | ) |  |  | (397 | ) |  |  | (1.1 | )
Italian subsidiary intangible asset |  |  | — |  |  |  | — |  |  |  | (230 | ) |  |  | (1.0 | ) |  |  | (381 | ) |  |  | (1.0 | )
Domestic manufacturing deduction |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (818 | ) |  |  | (2.2 | )
Unrecognized tax benefits, net of settlements |  |  | (2,745 | ) |  |  | 10.1 |  |  |  | 81 |  |  |  | 0.4 |  |  |  | 6,002 |  |  |  | 16.5 |
Impact of the Tax Act |  |  | — |  |  |  | — |  |  |  | (560 | ) |  |  | (2.4 | ) |  |  | 8,347 |  |  |  | 22.9 |
Equity compensation |  |  | 626 |  |  |  | (2.3 | ) |  |  | (1,646 | ) |  |  | (7.2 | ) |  |  | 272 |  |  |  | 0.7 |
Executive compensation |  |  | 1,504 |  |  |  | (5.6 | ) |  |  | 606 |  |  |  | 2.6 |  |  |  | 123 |  |  |  | 0.3 |
Contingent consideration |  |  | 5,678 |  |  |  | (21.0 | ) |  |  | 528 |  |  |  | 2.3 |  |  |  | — |  |  |  | — |
Other, net |  |  | 1,850 |  |  |  | (6.7 | ) |  |  | 261 |  |  |  | 1.2 |  |  |  | 1,918 |  |  |  | 5.4 |
Income tax expense/effective rate |  | $ | 1,413 |  |  |  | (5.2 | )% |  | $ | 9,074 |  |  |  | 39.7 | % |  | $ | 29,100 |  |  |  | 80.0 | %
1 The rate reconciliation for 2017 is based on the U.S. federal income tax rate, rather than the Company’s country of domicile rate at that time. The Company believes, given the large proportion of taxable income earned in the U.S., this presentation is more meaningful. Certain items within the tables of this footnote have been recast for previous years to conform to current year presentation. On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. corporate rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company calculated its best estimate of the impact of the Tax Act in the 2017 income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. As a result, the Company recorded $8.3 million of additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount 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 $8.6 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was zero. The Company also recorded a benefit of $0.3 million related to an income tax liability recorded in 2016 related to repatriation of earnings from our subsidiary in Puerto Rico. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we determined that the $8.6 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the zero transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. A m ore detailed analysis of the Company’s deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments was completed in 2018, which resulted in an additional benefit of $0.6 million in the first quarter of 2018 and minimal adjustments in the fourth quarter of 2018. As of December 31, 2018, the Company has completed its accounting for the tax effects of enactment of the Tax Act. The Company paid cash relating to taxes totaling $8.1 million, $15.6 million, and $3.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. The Company’s deferred tax assets and liabilities are as follows:
|  | December 31, |
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |
Intangible assets and goodwill |  | $ | 1,390 |  |  | $ | 1,682 |
Inventories and related reserves |  |  | 13,216 |  |  |  | 12,151 |
Deferred revenue and cost of goods sold |  |  | 4,652 |  |  |  | 4,652 |
Other accruals and reserves |  |  | 4,337 |  |  |  | 2,799 |
Accrued compensation |  |  | 9,221 |  |  |  | 8,317 |
Allowance for doubtful accounts |  |  | 971 |  |  |  | 2,346 |
Net operating loss and tax credit carryforwards |  |  | 44,230 |  |  |  | 52,664 |
Lease liabilities |  |  | 6,268 |  |  |  | — |
Other, net |  |  | 1,567 |  |  |  | 2,200 |
|  |  | 85,852 |  |  |  | 86,811 |
Valuation allowance |  |  | (38,741 | ) |  |  | (49,014 | )
Deferred tax asset |  | $ | 47,111 |  |  | $ | 37,797 |
Withholding taxes |  |  | (40 | ) |  |  | — |
Property, plant and equipment |  |  | (5,881 | ) |  |  | (4,569 | )
Right-of-use lease assets |  |  | (6,073 | ) |  |  | — |
Deferred tax liability |  |  | (11,994 | ) |  |  | (4,569 | )
Net deferred tax assets |  | $ | 35,117 |  |  | $ | 33,228 |
The Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and income tax basis of assets and liabilities, and for operating losses and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which those items are expected to be realized. Tax law and rate changes are recorded in the period such changes are enacted. The Company establishes a valuation allowance when it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. The valuation allowance is primarily attributable to net operating loss carryforwards and temporary differences in certain foreign jurisdictions. The net decrease in the valuation allowance of $10.3 million during the year principally relates to the decrease of valuation allowances on net operating loss carryforwards in foreign jurisdictions due to expiration, statutory rate changes, and changes regarding the realizability of net deferred tax assets. It is reasonably possible that the valuation allowance will decrease in 2020 related to expiration of foreign net operating losses. The Company has federal net operating loss carryforwards of $25.5 million and research and development credits of $1.6 million as a result of the acquisition of Spinal Kinetics. These carryforwards are subject to limitation under the provisions of Section 382 and will begin to expire in 2026. The Company has state net operating loss carryforwards of approximately $35.5 million, of which $22.0 million relates to Spinal Kinetics and begins to expire in 2020. Additionally, the Company has net operating loss carryforwards in various foreign jurisdictions of approximately $145.3 million that begin to expire in 2020, the majority of which relate to the Company’s Netherlands and Brazil operations. Prior to the Domestication, as an entity incorporated in Curaçao, “foreign earnings” referred to both U.S. and non-U.S. earnings. As a result of the Domestication, only income sourced outside of the U.S. is considered unremitted foreign earnings. Unremitted foreign earnings decreased from $50.4 million at December 31, 2018 to $49.2 million at December 31, 2019. The decrease is due to the impact of currency translation. As a result of the 2017 Tax Act, current year earnings have been deemed to be repatriated. Those foreign subsidiary earnings that are subject to U.S. taxation as a component of Global Intangible Low Taxed Income (GILTI) under the Tax Act are included as a component of current tax expense. The Company’s investment in foreign subsidiaries continues to be indefinite in nature; however, the Company may periodically repatriate a portion of these earnings to the extent that it does not incur significant additional tax liability. The Company records a benefit for uncertain tax positions when the weight of available evidence indicates that it is more likely than not, based on an evaluation of the technical merits, that the tax position will be sustained on audit. The tax benefit is measured as the largest amount that is more than 50% likely to be realized upon settlement. The Company re-evaluates income tax positions periodically to consider changes in facts or circumstances such as changes in or interpretations of tax law, effectively settled issues under audit, and new audit activity. The Company includes interest and any applicable penalties related to income tax issues as part of income tax expense in its consolidated financial statements. The Company’s unrecognized tax benefit was $16.9 million and $21.4 million for the years ended December 31, 2019 and 2018, respectively. The Company recorded net interest and penalties expense (benefit) on unrecognized tax benefits of $(0.1) million, $1.4 million, and $2.3 million for the years ended December 31, 2019, 2018, and 2017, respectively, and had approximately $6.6 million and $6.7 million accrued for payment of interest and penalties as of December 31, 2019 and 2018, respectively. The entire amount of unrecognized tax benefits, including interest, would favorably impact the Company’s effective tax rate if recognized. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits, exclusive of interest and penalties, related to the resolution of federal, state and foreign matters could be reduced by $13.0 million to $13.5 million as audits close and statutes expire. A reconciliation of the gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2019, 2018, and 2017 follows:
(U.S. Dollars, in thousands) |  | 2019 |  |  | 2018 |
Balance as of January 1, |  | $ | 21,351 |  |  | $ | 23,676 |
Additions for current year tax positions |  |  | 309 |  |  |  | 170 |
Increases for prior year tax positions |  |  | 1,711 |  |  |  | 1,653 |
Settlements of prior year tax positions |  |  | (1,183 | ) |  |  | (1,499 | )
Expiration of statutes |  |  | (5,284 | ) |  |  | (2,649 | )
Balance as of December 31, |  | $ | 16,904 |  |  | $ | 21,351 |
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in certain state and foreign jurisdictions, including Italy and the United Kingdom. The statute of limitations with respect to federal and state tax filings is closed for years prior to 2014. The statute of limitations with respect to the major foreign tax filing jurisdictions is closed for years prior to 2015. During the third quarter of 2015, the Internal Revenue Service commenced an examination of the Company’s federal income tax return for 2012. The Company concluded this examination in the first quarter of 2018 with no material impact to the financial statements. In October 2016, the Company was notified of an examination of its federal income tax return for 2013 and in December 2017, the examination for 2013 was concluded with no change. In November 2017, the Company was notified of an examination of its federal income tax return for 2015. In February 2019, the Company reached an agreement and concluded this examination. As a result, the Company recognized a benefit of approximately $1.8 million during 2019. The Company cannot reasonably determine if any state and local or foreign examinations, will have a material impact on its financial statements and cannot predict the timing regarding resolution of these tax examinations.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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