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Income taxes | 12 Months Ended
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Dec. 31, 2023
Income Tax Disclosure [Abstract] |
Income taxes | 20. Income taxes Income (loss) before provision for income taxes consisted of the following:
|  | Year Ended December 31, |
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |
U.S. |  | $ | (154,794 | ) |  | $ | (22,318 | ) |  | $ | (5,987 | )
Non-U.S. |  |  | 6,115 |  |  |  | 4,612 |  |  |  | (7,508 | )
Income (loss) before income taxes |  | $ | (148,679 | ) |  | $ | (17,706 | ) |  | $ | (13,495 | )
The provision for income taxes consists of the following:
|  | Year Ended December 31, |
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |
U.S. |  |  |  |  |  |  |  |  |
Current |  | $ | 17 |  |  | $ | 1,151 |  |  | $ | (607 | )
Deferred |  |  | 1,160 |  |  |  | 67 |  |  |  | 24,292 |
|  |  | 1,177 |  |  |  | 1,218 |  |  |  | 23,685 |
Non-U.S. |  |  |  |  |  |  |  |  |
Current |  |  | 2,120 |  |  |  | 578 |  |  |  | 1,009 |
Deferred |  |  | (581 | ) |  |  | 247 |  |  |  | 190 |
|  |  | 1,539 |  |  |  | 825 |  |  |  | 1,199 |
Income tax expense (benefit) |  | $ | 2,716 |  |  | $ | 2,043 |  |  | $ | 24,884 |
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, 2023, 2022, and 2021, consist of the following:
|  | 2023 |  |  | 2022 |  |  | 2021 |
(U.S. Dollars, in thousands, except percentages) |  | Amount |  |  | Percent |  |  | Amount |  |  | Percent |  |  | Amount |  |  | Percent |
Statutory U.S. federal income tax rate |  | $ | (31,222 | ) |  |  | 21.0 | % |  | $ | (3,718 | ) |  |  | 21.0 | % |  | $ | (2,834 | ) |  |  | 21.0 | %
State taxes, net of U.S. federal benefit |  |  | (3,452 | ) |  |  | 2.3 |  |  |  | (1,312 | ) |  |  | 7.4 |  |  |  | (24 | ) |  |  | 0.2 |
Foreign rate differential, including withholding taxes |  |  | (738 | ) |  |  | 0.5 |  |  |  | 475 |  |  |  | (2.7 | ) |  |  | 480 |  |  |  | (3.6 | )
Valuation allowances, net |  |  | 28,322 |  |  |  | (19.0 | ) |  |  | 7,638 |  |  |  | (43.1 | ) |  |  | 27,819 |  |  |  | (206.1 | )
Foreign income inclusions, net |  |  | 2,333 |  |  |  | (1.6 | ) |  |  | 1,018 |  |  |  | (5.7 | ) |  |  | — |  |  |  | — |
Research credits |  |  | (1,219 | ) |  |  | 0.8 |  |  |  | (750 | ) |  |  | 4.2 |  |  |  | (537 | ) |  |  | 4.0 |
Unrecognized tax benefits, net of settlements |  |  | 71 |  |  |  | — |  |  |  | (599 | ) |  |  | 3.4 |  |  |  | (1,363 | ) |  |  | 10.1 |
Equity compensation |  |  | 4,210 |  |  |  | (2.8 | ) |  |  | 1,441 |  |  |  | (8.1 | ) |  |  | 1,091 |  |  |  | (8.1 | )
Executive compensation |  |  | 3,030 |  |  |  | (2.0 | ) |  |  | 697 |  |  |  | (3.9 | ) |  |  | 456 |  |  |  | (3.4 | )
Contingent consideration |  |  | — |  |  |  | — |  |  |  | (3,316 | ) |  |  | 18.7 |  |  |  | (640 | ) |  |  | 4.7 |
Other, net |  |  | 1,381 |  |  |  | (0.9 | ) |  |  | 469 |  |  |  | (2.6 | ) |  |  | 436 |  |  |  | (3.2 | )
Income tax expense (benefit) /effective rate |  | $ | 2,716 |  |  |  | (1.8 | )% |  | $ | 2,043 |  |  |  | (11.5 | )% |  | $ | 24,884 |  |  |  | (184.4 | )%
The Company paid (received or was refunded) cash relating to taxes totaling $0.9 million, ($0.9) million, and $4.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company’s deferred tax assets and liabilities are as follows:
|  | December 31, |
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |
Intangible assets and goodwill |  | $ | — |  |  | $ | 5,807 |
Inventories and related reserves |  |  | 33,122 |  |  |  | 17,819 |
Deferred revenue and cost of goods sold |  |  | 4,409 |  |  |  | 3,642 |
Other accruals and reserves |  |  | 5,382 |  |  |  | 2,756 |
Accrued compensation |  |  | 14,861 |  |  |  | 8,795 |
Provision for expected credit losses |  |  | 1,821 |  |  |  | 1,253 |
Accrued interest |  |  | 1,227 |  |  |  | — |
Net operating loss and tax credit carryforwards |  |  | 123,210 |  |  |  | 40,676 |
Research and development capitalization |  |  | 15,174 |  |  |  | 4,353 |
Lease liabilities |  |  | 9,632 |  |  |  | 6,440 |
Other, net |  |  | 5,429 |  |  |  | 3,767 |
Total deferred tax assets |  |  | 214,267 |  |  |  | 95,308 |
Valuation allowance |  |  | (200,192 | ) |  |  | (83,797 | )
Deferred tax asset, net of valuation allowance |  | $ | 14,075 |  |  | $ | 11,511 |
Intangible assets and goodwill |  | $ | (1,662 | ) |  | $ | — |
Withholding taxes |  |  | (10 | ) |  |  | (10 | )
Property, plant, and equipment |  |  | (5,737 | ) |  |  | (5,516 | )
Right-of-use lease assets |  |  | (8,755 | ) |  |  | (5,771 | )
Deferred tax liability |  | $ | (16,164 | ) |  | $ | (11,297 | )
Net deferred tax assets (liabilities) |  | $ | (2,089 | ) |  | $ | 214 |
Reported as: |  |  |  |  |  |
Deferred income tax assets (classified within other long-term assets) |  | $ | 2,081 |  |  | $ | 1,470 |
Deferred income tax liabilities (classified within other long-term liabilities) |  |  | (4,170 | ) |  |  | (1,256 | )
Net deferred tax assets (liabilities) |  | $ | (2,089 | ) |  | $ | 214 |
The Company historically presented deferred income tax assets as a separate and discrete line item on its consolidated balance sheet; however, as the significance of the asset has decreased as a result of the recognition of valuation allowances, the Company has reclassified this balance to be included within other long-term assets. Deferred income tax liabilities is included in Other Long Term Liabilities. 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 domestic and certain foreign jurisdictions. The net increase in the valuation allowance of $116.4 million during the year principally relates to the existing valuation allowance against the SeaSpine deferred tax assets at the time of the merger. The remaining activity is related to recognizing a full valuation allowance against the net deferred tax asset within the Company’s U.S. and Italy operations. The Company considered many factors when assessing the likelihood of future realization of these deferred tax assets, including recent cumulative losses experienced by the subsidiary, expectations of future taxable income or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors. That increase was partially offset by a decrease of valuation allowances on net operating loss carryforwards in other 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 increase in 2024 due to further losses in certain jurisdictions, offset by decreases related to the expiration of foreign net operating losses. The Company has federal net operating loss carryforwards of $331.7 million and federal research and development credits of $4.7 million, including amounts from the acquisitions of SeaSpine and Spinal Kinetics. The increase in the current year is primarily related to U.S. Federal net operating loss carryforwards belonging to SeaSpine at the time of the Merger as well as research and development credit carryforwards. These federal carryforwards are subject to limitation under the provisions of Internal Revenue Code Section 382 and will begin to expire in 2026. The Company has state net operating loss carryforwards of approximately $221.4 million, principally related to California, Illinois, Michigan, and New York. Of this amount, $157.9 relates to SeaSpine and $20.6 million relates to Spinal Kinetics. The increase in state net operating loss carryforwards is primarily due to existing losses acquired from SeaSpine. The SeaSpine state losses begin to expire in 2024 and the Spinal Kinetics state losses begin to expire in 2027. These carryforwards are subject to limitation under various provisions implemented by each specific state jurisdiction. Additionally, the Company has net operating loss carryforwards in various foreign jurisdictions of approximately $129.0 million, which mainly relate to the Company’s Netherlands, Brazil, and Canada operations. The majority of the foreign net operating losses do not expire. The Company also has research and development credits in Canada of $0.9 million which begin to expire in 2041. Unremitted foreign earnings were $33.6 million as of December 31, 2023. 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. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings of foreign subsidiaries is not practicable. 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 $3.0 million and $1.7 million for the years ended December 31, 2023, and 2022, respectively. The Company recorded net interest and penalties expense (benefit) on unrecognized tax benefits of $0.2 million, $0.1 million, and $(0.4) million for the years ended December 31, 2023, 2022, and 2021, respectively, and had approximately $1.1 million and $0.9 million accrued for payment of interest and penalties as of December 31, 2023, and 2022, respectively. Approximately $0.4 million would unfavorably 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 $1.2 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, 2023, and 2022, is shown below:
(U.S. Dollars, in thousands) |  | 2023 |  |  | 2022 |
Balance as of January 1, |  | $ | 1,743 |  |  | $ | 3,462 |
Additions for current year tax positions |  |  | 416 |  |  |  | 46 |
Increases for prior year tax positions |  |  | 815 |  |  |  | 16 |
Settlements of prior year tax positions |  |  | — |  |  |  | (144 | )
Expiration of statutes |  |  | — |  |  |  | (1,637 | )
Balance as of December 31, |  | $ | 2,974 |  |  | $ | 1,743 |
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in certain state and foreign jurisdictions, including Italy, as well as other jurisdictions where the Company maintains operations. The statute of limitations with respect to federal and state tax filings is closed for years prior to 2019. The statute of limitations with respect to the major foreign tax filing jurisdictions is closed for years prior to 2018. 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 the resolution of these tax examinations.

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