| Income Taxes | Note 8—Income Taxes Income tax expense (benefit) based on income before income taxes consisted of the following:
Year Ended December 31,
(in thousands) 2021 2020 2019
Current:
U.S. Federal $ 6 $ 1,406 $ ( 1,697 )
State and local 1,702 24 ( 3,567 )
Foreign 14,812 9,120 11,474
16,520 10,550 6,210
Deferred:
U.S. Federal ( 6,179 ) ( 3,784 ) 1,815
State and local ( 1,380 ) ( 1,021 ) 1,409
Foreign 676 ( 2,507 ) ( 5,590 )
( 6,883 ) ( 7,312 ) ( 2,366 )
$ 9,637 $ 3,238 $ 3,844 Worldwide income (loss) before income taxes consisted of the following:
Year Ended December 31,
(in thousands) 2021 2020 2019
United States $ ( 34,930 ) $ ( 33,790 ) $ ( 13,756 )
Foreign 80,337 51,083 41,025
$ 45,407 $ 17,293 $ 27,269 Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income taxes as a result of the following:
Year Ended December 31,
(in thousands) 2021 2020 2019
Tax at statutory rate $ 9,536 $ 3,632 $ 5,727
State taxes, net of federal tax effect ( 36 ) ( 788 ) ( 1,705 )
Effect of foreign operations and tax incentives ( 4,048 ) ( 6,372 ) ( 5,870 )
Change in valuation allowance ( 336 ) ( 3,029 ) ( 2,283 )
Stock-based compensation ( 69 ) 347 118
GILTI 2,104 1,667 955
Foreign tax refund benefit ( 7,285 ) — —
Losses in foreign jurisdictions for which no benefit has been provided 2,608 5,798 4,379
Change in uncertain tax benefits reserve 8,858 ( 31 ) 200
Other ( 1,695 ) 2,014 2,323
Total income tax expense $ 9,637 $ 3,238 $ 3,844 The U.S. Tax Cuts and Jobs Act (U.S. Tax Reform), which was signed into law on December 22, 2017, significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, adding a global intangible taxation regime and imposing a transition (Transition Tax) tax on deemed repatriated cumulative earnings of foreign subsidiaries. The U.S. Tax Reform reduced the U.S. corporate income tax rate from a maximum of 35 % to a flat 21 % rate, effective January 1, 2018. The Company recorded the effects of the changes in the tax rate in the Company’s deferred tax assets and liabilities as of December 31, 2017. To minimize tax base erosion with a territorial tax system, the U.S. Tax Reform enacted a new global intangible low-taxed income (GILTI) provision that requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiaries tangible assets. The taxable earnings can be offset by a limited deemed paid foreign tax credit with no carrybacks or carryforwards available. The Company is subject to the GILTI provisions. The Company elected to account for the GILTI as a period cost and include the effect in the period in which it is incurred and not include it as a factor in the determination of deferred taxes. The Company incurred a total Transition Tax liability of $ 80.5 million after reduction for net operating loss carryforwards, US tax credit carryforwards, and foreign tax credit carryforwards that were allowed to be utilized against the total tax liability as of December 31, 2017. The Company made an election to pay the net tax liability in installments. The Company has a total Transition Tax liability as of December 31, 2021 of $ 54.7 million. The Company intends to pay this liability over the remaining four year payment period as prescribed by the U.S. Tax Reform and regulatory guidance issued by the IRS. $ 48.3 million of the Transition Tax liability is included in other long term liabilities. Payments for years subsequent to December 31, 2021 are as follows: 2022, $ 6.4 million; 2023, $ 12.1 million; 2024, $ 16.1 million; and 2025, $ 20.1 million. During 2021 and 2020, the Company repatriated $ 35.0 mi llion and $ 25.0 million, respectively, of foreign earnings to the U.S. As of December 31, 2021, the Company has approximately $ 365.2 million in cumulative undistributed foreign earnings of its foreign subsidiaries. These earnings would not be subject to U.S. federal income tax, if distributed to the Company. The Company changed its assertion during 2018 on its foreign subsidiaries earnings that are permanently reinvested. A certain amount of earnings from specific foreign subsidiaries are permanently reinvested, and certain foreign earnings from other specific foreign subsidiaries is considered to be non-permanently reinvested and is available for immediate distribution to the Company. Income taxes have been accrued on the non-permanently reinvested foreign earning s including the 2017 Transition Tax, the U.S. tax on GILTI, and any applicable foreign or local withholding taxes. The Company estimates that it has approximately $ 4.6 million of unrecognized deferred tax liability related to any remaining undistributed permanently reinvested foreign earnings that have not already been subject to the 2017 Transition Tax, the U.S. tax o n GILTI, and any applicable foreign income tax or local withholding taxes on cash distributions. During 2021 , the Company recorded an additional tax benefit of $ 7.3 million with respect to a refund claim of foreign cash taxes of $ 16.5 million that was filed in 2021. $ 9.2 million of the total refund claim was recorded previously in 2018. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31,
(in thousands) 2021 2020
Deferred tax assets:
Carrying value of inventories $ 2,704 $ 3,470
Accrued liabilities and allowances deductible for tax purposes on a cash basis 10,592 13,086
Goodwill 1,320 1,704
Stock-based compensation 3,741 2,559
Operating right-of-use lease liabilities 24,851 20,003
Net operating loss carryforwards 17,417 19,120
Tax credit carryforwards 4,629 3,368
Interest rate swap liabilities 1,133 2,263
Other 5,961 5,025
72,348 70,598
Less: valuation allowance ( 18,702 ) ( 19,038 )
Net deferred tax assets 53,646 51,560
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation ( 4,887 ) ( 7,899 )
Operating right-of-use lease assets ( 24,590 ) ( 19,742 )
Intangible assets, due to differences in amortization ( 11,687 ) ( 14,078 )
Foreign withholding tax ( 4,902 ) ( 6,102 )
Other ( 1,692 ) ( 3,603 )
Gross deferred tax liability ( 47,758 ) ( 51,424 )
Net deferred tax liability $ 5,888 $ 136
The net deferred tax liability is classified as follows:
Long-term asset $ 5,972 $ 4,924
Long-term liability ( 84 ) ( 4,788 )
Total $ 5,888 $ 136 All deferred taxes are classified as non-current on the balance sheet as of December 31, 2021 and 2020. All deferred tax assets and liabilities are offset and presented as a single net noncurrent amount by each tax jurisdiction. The net change in the total valuation allowance for 2021, 2020 and 2019 was a $ 0.3 million decrease, a $ 3.0 million increase and a $ 2.3 million increase, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of December 31, 2021. As of December 31, 2021 , the Company had $ 0.6 million in U.S. Federal operating loss carryforwards which will expire from 2027 to 2036 ; state operating loss carryforwards of approximately $ 8.1 million which will expire from 2023 to 2041 ; foreign operating loss carryforwards of approximately $ 12.0 million with indefinite carryforward periods; and foreign operating loss carryforwards of approximately $ 49.0 million which will expire at varying dates through 2031 . The utilization of these net operating loss carryforwards is limited to the future operations of the Company in the tax jurisdictions in which such carryforwards arose. The Company has state tax credit carryforwards of $ 1.8 million which will expire at varying dates through 2026 . The Company also has U.S. research and development tax credit carryforwards of $ 2.9 million w hich will expire from 2038 through 2041 . The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia, and Thailand that expire at various dates, unless extended or otherwise renegotiated and are subject to certain conditions with which the Company expects to comply. The expiration dates of these tax incentives are as follows: 2023 in China and 2028 in Thailand. The Malaysia tax incentive expired as of March 31, 2021, but the Company has applied for an extension of the Malaysia tax holiday in 2022 which will extend the tax holiday for another five years until 2026 . The net impact of these tax incentives was to lower income tax expense for 2021, 2020, and 2019 by approxima tely $ 7.7 million (approximately $ 0.21 per diluted share), $ 7.4 million (approximately $ 0.20 per diluted share) and $ 5.0 million (approximately $ 0.13 per diluted share), respectively, as follows:
Year Ended December 31,
(in thousands) 2021 2020 2019
China $ 443 $ — $ —
Malaysia $ 1,946 $ 4,945 3,010
Thailand 5,360 2,496 2,025
$ 7,749 $ 7,441 $ 5,035 The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. As of December 31, 2021, the total amount of the reserve for uncertain tax benefits including interest and penalties was $ 9.5 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:
December 31,
(in thousands) 2021 2020 2019
Balance as of January 1 $ 499 $ 513 $ 313
Additions related to current year tax positions 7,424 — 200
Additions related to prior year tax positions 1,575 — —
Decreases related to prior year tax positions ( 138 ) — —
Decreases related to lapse of statutes ( 239 ) ( 14 ) —
Balance as of December 31 $ 9,121 $ 499 $ 513 During 2021, the Company released $ 138.0 thousand of uncertain tax benefits related to prior year tax positions and $ 239.0 thousand of uncertain tax benefits related to lapse of statutes. During 2021, the Company recorded additional uncertain tax benefits related to prior year and current tax positions of $ 1.6 million and $ 7.4 million, respectively. During 2020, the Company released $ 14.0 thousand of uncertain tax benefits related to prior year tax positions. During 2019, the Company recorded $0.2 million of uncertain tax benefits related to prior year tax positions. The reserve is classified as a current or long-term liability in the consolidated balance sheets based on the Company’s expectation of when the items will be settled. The Company records interest expense and penalties accrued in relation to uncertain income tax benefits as a component of current income tax expense. The amount of accrued potential interest on unrecognized tax benefits included in the reserve as of December 31, 2021 is $ 328.0 thousand. The reserve for potential penalties is $ 17.0 thousand. The amount of accrued potential interest or unrecognized tax benefits included in the reserve as of December 31, 2020 is $ 91.0 thousand. The reserve for potential penalties is $ 17.0 thousand. The Company did no t record any interest and penalties during 2020 or 2019. The Company and its subsidiaries in Brazil, China, Ireland, Malaysia, Mexico, Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2012 to 2021. During the course of such income tax examinations, disputes may occur as to matters of fact or law. Also, in most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities. |
