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Income taxes | 12 Months Ended
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Dec. 31, 2017
Income taxes [Abstract] |
Income taxes | 12. Income taxes On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities in the United States at December 31, 2017 and recognized a provisional $13.4 million tax benefit in the Company's consolidated statement of income for the year ended December 31, 2017. The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits ("E&P") through the year ended December 31, 2017. The Company had an estimated $95.4 million of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional transition tax of $13.6 million of income tax expense in the Company's consolidated statement of income for the year ended December 31, 2017. The Company expects to pay U.S. federal cash taxes on the deemed mandatory repatriation over eight years. While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018, due to Company's overall foreign loss position. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") 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 Reform Act. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The Company's estimates are provisional based upon utilization of foreign tax credits and validation of E&P. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. Significant components of the provisions for income taxes attributable to operations consist of the following:
|  | Year Ended December 31, |
(in thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Current |  |  |  |  |  |  |  |  |
Federal |  | $ | 29,441 |  |  | $ | 29,244 |  |  | $ | 38,957 |
State |  |  | 2,983 |  |  |  | 2,331 |  |  |  | 2,221 |
International |  |  | 356 |  |  |  | 1,002 |  |  |  | 2,029 |
Total current |  |  | 32,780 |  |  |  | 32,577 |  |  |  | 43,207 |
Deferred |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (6,045 | ) |  |  | 9,979 |  |  |  | (119 | )
State |  |  | (592 | ) |  |  | (272 | ) |  |  | (111 | )
International |  |  | 9,896 |  |  |  | (5,587 | ) |  |  | 1,323 |
Total deferred |  |  | 3,259 |  |  |  | 4,120 |  |  |  | 1,093 |
Total provision for income taxes |  | $ | 36,039 |  |  | $ | 36,697 |  |  | $ | 44,300 |
The Company's net deferred tax asset (liability) consists of the following:
|  | December 31, |
(in thousands) |  | 2017 |  |  | 2016 |
Federal losses carryforward |  | $ | 1,603 |  |  | $ | 4,130 |
State losses carryforward |  |  | 17,234 |  |  |  | 13,682 |
Research and development carryforward |  |  | 3,534 |  |  |  | 3,647 |
Scientific research and experimental development credit carryforward |  |  | 16,493 |  |  |  | 16,594 |
Stock compensation |  |  | 5,344 |  |  |  | 8,389 |
Foreign deferrals |  |  | 34,072 |  |  |  | 58,647 |
Inventory reserves |  |  | 1,607 |  |  |  | 2,273 |
Other |  |  | 3,889 |  |  |  | 5,569 |
Deferred tax asset |  |  | 83,776 |  |  |  | 112,931 |
Fixed assets |  |  | (23,121 | ) |  |  | (30,728 | )
Intangible assets |  |  | (2,229 | ) |  |  | (5,882 | )
Other |  |  | (10,451 | ) |  |  | (16,047 | )
Deferred tax liability |  |  | (35,801 | ) |  |  | (52,657 | )
Valuation allowance |  |  | (45,141 | ) |  |  | (54,178 | )
Net deferred tax asset |  | $ | 2,834 |  |  | $ | 6,096 |
As of December 31, 2017, the Company has a net U.S. deferred tax liability in the amount of $13.1 million and a foreign net deferred tax asset in the amount of $15.9 million. The Company had a net U.S. deferred tax liability in the amount of $18.3 million and a foreign net deferred tax asset in the amount of $24.4 as of December 31, 2016. As of December 31, 2017, the Company currently has approximately $7.6 million ($1.6 million tax effected) in net operating loss carryforwards along with $3.5 million in research and development tax credit carryforwards for U.S. federal tax purposes that will begin to expire in 2027 and 2024, respectively. The U.S. federal tax carryforwards are recorded with no valuation allowance. The Company has $264.1 million ($17.2 million tax effected) in state net operating loss carryforwards, primarily in Maryland, that will begin to expire in 2019. The U.S. state tax loss carryforwards are recorded with a valuation allowance of $193.5 million ($12.6 million tax effected). The Company has approximately $168.7 million ($32.5 million tax effected) in net operating losses from foreign jurisdictions (excluding Canada) that will have an indefinite life unless the foreign entities have a change in the nature or conduct of the business in the three years following a change in ownership. A valuation allowance in respect to these foreign losses has been recorded in the amount of $32.5 million. During the year the Company has utilized approximately $41.8 million ($11.3 million tax effected) in Canadian loss carryforwards. The Company currently has approximately $16.5 million in Manitoba scientific research and experimental development credit carryforwards that will begin to expire in 2025. The use of any of these net operating losses and research and development tax credit carryforwards may be restricted due to future changes in the Company's ownership. The provision for income taxes differs from the amount of taxes determined by applying the U.S. federal statutory rate to income before the provision for income taxes as a result of the following:
|  | Year ended December 31, |
(in thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
US |  | $ | 80,690 |  |  | $ | 63,330 |  |  | $ | 117,385 |
International |  |  | 37,943 |  |  |  | 35,891 |  |  |  | 18,331 |
Earnings before taxes on income |  |  | 118,633 |  |  |  | 99,221 |  |  |  | 135,716 |
Federal tax at statutory rates |  | $ | 41,522 |  |  | $ | 34,738 |  |  | $ | 47,475 |
State taxes, net of federal benefit |  |  | 1,274 |  |  |  | 529 |  |  |  | 852 |
Impact of foreign operations |  |  | (2,168 | ) |  |  | (9,937 | ) |  |  | (1,640 | )
Change in valuation allowance |  |  | 314 |  |  |  | 10,458 |  |  |  | (950 | )
Tax credits |  |  | (1,918 | ) |  |  | (1,572 | ) |  |  | (2,088 | )
Transition tax |  |  | 13,585 |  |  |  | - |  |  |  | - |
Change in U.S. tax rate |  |  | (13,403 | ) |  |  | - |  |  |  | - |
Stock compensation |  |  | (3,978 | ) |  |  | - |  |  |  | - |
Other differences |  |  | (118 | ) |  |  | 1,103 |  |  |  | 733 |
Permanent differences |  |  | 929 |  |  |  | 1,378 |  |  |  | (82 | )
Provision for income taxes |  | $ | 36,039 |  |  | $ | 36,697 |  |  | $ | 44,300 |
The effective annual tax rate for the years ended December 31, 2017, 2016, and 2015 was 30%, 37% and 33%, respectively. The effective annual tax rate of 30% in 2017 differs from statutory rate primarily due to the jurisdictional mix of earnings. Due to the impact of the Tax Reform Act enacted on December 22, 2017, the Company recognized a $13.4 million tax benefit as a result of revaluing the U.S. ending net deferred tax liabilities from 35% to the newly enacted U.S. corporate income tax rate of 21%. The tax benefit was fully offset by tax expense of $13.6 million for the transition tax on the deemed mandatory repatriation of undistributed earnings. The increase in the effective annual tax rate in 2016 was primarily related to tax on the sale, within the Company's consolidated group, of assets from Canadian subsidiaries to U.S. subsidiaries in preparation of the spin-off of Aptevo, and a valuation allowance charge recorded in its continuing operations related to Aptevo deferred tax assets prior to the distribution. The Company determined that upon spin-off, the deferred tax assets of Aptevo would be unrealizable. The Company recognizes interest in interest expense and recognizes potential penalties related to unrecognized tax benefits in selling, general and administrative expense. Of the total unrecognized tax benefits recorded at December 31, 2017 and 2016, $0.8 million and $0.5 million, respectively, is classified as a current liability and $1.2 million and $1.3 million, respectively, is classified as a non-current liability on the balance sheet. The table below presents the gross unrecognized tax benefits activity for 2017, 2016 and 2015:
(in thousands) |  |  |
Gross unrecognized tax benefits at December 31, 2014 |  | $ | 1,248 |
Increases for tax positions for prior years |  |  | 150 |
Decreases for tax positions for prior years |  |  | - |
Increases for tax positions for current year |  |  | 59 |
Settlements |  |  | - |
Lapse of statute of limitations |  |  | - |
Gross unrecognized tax benefits at December 31, 2015 |  |  | 1,457 |
Increases for tax positions for prior years |  |  | 5 |
Decreases for tax positions for prior years |  |  | - |
Increases for tax positions for current year |  |  | 299 |
Settlements |  |  | - |
Lapse of statute of limitations |  |  | - |
Gross unrecognized tax benefits at December 31, 2016 |  |  | 1,761 |
Increases for tax positions for prior years |  |  | - |
Decreases for tax positions for prior years |  |  | - |
Increases for tax positions for current year |  |  | 531 |
Settlements |  |  | (318 | )
Lapse of statute of limitations |  |  | - |
Gross unrecognized tax benefits at December 31, 2017 |  | $ | 1,974 |
When resolved, substantially all of these reserves would impact the effective tax rate. The Company's federal and state income tax returns for the tax years 2013 to 2016 remain open to examination. The Company's tax returns in the United Kingdom remain open to examination for the tax years 2008 to 2016, and tax returns in Germany remain open indefinitely. The Company's tax returns for Canada remains open to examination for the tax years 2010 to 2016. As of December 31, 2017, the Company's Canadian 2016 Scientific Research and Experimental Development Claim is under audit. As of December 31, 2017, the Company's 2011 and 2012 federal income tax returns that were under audit are now resolved and closed.

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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