Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes

 

(13)

INCOME TAXES

The provisions for income tax expense (benefit) were as follows (in thousands):

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

110,448

 

 

$

45,258

 

 

$

45,095

 

Deferred

 

 

3,768

 

 

 

(3,961

)

 

 

2,774

 

Total federal

 

 

114,216

 

 

 

41,297

 

 

 

47,869

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

2,747

 

 

 

3,406

 

 

 

2,506

 

Deferred

 

 

(3,356

)

 

 

(49

)

 

 

1,798

 

Total state

 

 

(609

)

 

 

3,357

 

 

 

4,304

 

Foreign:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

40,147

 

 

 

31,046

 

 

 

21,204

 

Deferred

 

 

(4,598

)

 

 

(1,575

)

 

 

(927

)

Total foreign

 

 

35,549

 

 

 

29,471

 

 

 

20,277

 

Total income taxes (benefit)

 

$

149,156

 

 

$

74,125

 

 

$

72,450

 

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected the Company’s financial results for the year ended December 31, 2017, including, but not limited to: (1) requiring a one-time Transition Tax (payable over eight years) on certain unrepatriated earnings of foreign subsidiaries; (2) a future reduction of the U.S. federal corporate tax rate from 35% to 21% that reduces the current value of the Company’s deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”); and (3) bonus depreciation that allows for full expensing of qualified property place in service after September 27, 2017. In addition, the Tax Act establishes new tax laws that will affect the Company’s financial results for the year ending December 31, 2018, including, but not limited to: (1) a reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (3) a new provision designed to tax global intangible low-taxed income (“GILTI”); (4) limitations on the deductibility of certain executive compensation; and (5) limitations on the use of Federal Tax Credit (“FTC’s”) to reduce the U.S. income tax liability.

 

The SEC staff issued Staff Accounting Bulletin 118, (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

 

In connection with its initial analysis of the impact of the Tax Act, the Company recorded a provisional one-time net tax expense of $99.9 million for the year-ended December 31, 2017. This net tax expense primarily consists of the $1.9 million net tax impact to the Company’s DTA’s from the corporate rate reduction and a net expense for the Transition Tax of $98.0 million. For various reasons that are discussed more fully below, the Company has not completed the accounting for the income tax effects of certain elements of the Tax Act. If the Company were able to make reasonable estimates of the effects of elements for which the analysis is not yet complete, the Company recorded provisional adjustments.

 

The Company’s accounting for the following elements of the Tax Act is provisional.  However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded the following provisional adjustments:

 

Transition Tax: The Transition Tax is a one-time tax on previously untaxed current and accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax liability of $98.0 million. However, during the measurement period the Company will continue to gather additional information to more precisely compute the amount of the Transition Tax.

 

Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate from 35% to 21%, effective January 1, 2018. As a result, the Company recorded a provisional decrease in value of its net DTAs of $1.9 million, with a corresponding net adjustment to deferred income tax expense of $1.9 million for the year ended December 31, 2017. While the Company was able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the Company’s calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.

Cost recovery: While the Company has completed most of the computations necessary and is in the process of completing a final inventory of its 2017 expenditures that qualify for immediate expensing, the Company recorded a decrease in its current income tax payable of approximately $5.9 million based on the Company’s provisional estimates related to the additional federal expense allowed as a result of the Tax Act. In addition, the Company recorded a corresponding increase in its DTLs of approximately $3.5 million, which is less than the $5.9 million liability amount due to the reduction in the corporate tax rate from 35% to 21%, effective January 1, 2018. The $2.4 million net benefit from the reduction in the future tax rate is included in the $1.9 million decrease in value of the net DTAs discussed above.

The Company’s provision for income tax expense (benefit) and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the non-U.S. jurisdictions in which the Company has operations, the applicable statutory rates are generally significantly lower than in the U.S., ranging from 0% to 34%. The Company’s provision for income tax expense (benefit) was calculated using the applicable statutory rate for each jurisdiction applied to the Company’s pre-tax earnings (loss) in each jurisdiction, while the Company’s effective tax rate is calculated by dividing income tax expense (benefit) by earnings before income taxes.

The Company’s earnings (loss) before income taxes and income tax expense (benefit) for 2017, 2016 and 2015 are as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Income tax jurisdiction

 

Earnings (loss)

before income

taxes

 

 

Income tax

expense

 

 

Earnings (loss)

before income

taxes

 

 

Income tax

expense

 

 

Earnings (loss)

before income

taxes

 

 

Income tax

expense

 

United States (1)

 

$

25,628

 

 

$

113,607

 

 

$

105,589

 

 

$

44,654

 

 

$

136,726

 

 

$

52,173

 

Peoples Republic of China (“China”)

 

 

95,668

 

 

 

12,971

 

 

 

72,584

 

 

 

11,720

 

 

 

49,027

 

 

 

11,084

 

Jersey (2)

 

 

198,048

 

 

 

 

 

 

146,880

 

 

 

 

 

 

123,721

 

 

 

 

Non-benefited loss operations (3)

 

 

(17,350

)

 

 

3,306

 

 

 

(16,189

)

 

 

12

 

 

 

(16,719

)

 

 

164

 

Other jurisdictions (4)

 

 

82,266

 

 

 

19,272

 

 

 

50,620

 

 

 

17,739

 

 

 

40,742

 

 

 

9,029

 

Earnings before income taxes

 

$

384,260

 

 

$

149,156

 

 

$

359,484

 

 

$

74,125

 

 

$

333,497

 

 

$

72,450

 

Effective tax rate (5)

 

 

 

 

 

 

38.8

%

 

 

 

 

 

 

20.6

%

 

 

 

 

 

 

21.7

%

 

(1)

United States income tax expense for 2017 includes a provisional one-time $99.9 million tax expense related to the enactment of the United States Tax Cuts & Jobs Act on December 22, 2017.

(2)       Jersey does not assess income tax on corporate net earnings.

(3)

Consists of entities in the following tax jurisdictions where no tax benefit is recognized in the period being reported because of the provision of offsetting valuation allowances: Brazil, India, Israel, Japan, Macau, Panama and South Korea.

(4)

Consists of entities in the following tax jurisdictions, each of which comprises not more than 5% of consolidated earnings (loss) before taxes in the period being reported: Albania, Austria, Belgium, Bosnia & Herzegovina, Canada, Chile, Colombia, Costa Rica, France, Germany, Hong Kong, Hungary, India, Italy, Kosovo, Macedonia, Malaysia, Montenegro, Netherlands, Panama, Peru, Poland, Portugal, Romania, Serbia, Singapore, Spain, Switzerland, Thailand, Vietnam, and the United Kingdom.

(5)

The effective tax rate is calculated by dividing income tax expense by earnings before income taxes.

 

For 2017, the effective tax rate was lower than the U.S. federal and state combined statutory rate of approximately 39%, primarily because of earnings from foreign operations in jurisdictions imposing either lower tax rates on corporate earnings or no corporate income tax. During 2017, as reflected in the table above, earnings (loss) before income taxes in the U.S. were $25.6 million, with income tax expense of $113.6 million, which is an average rate of 443%. The U.S. tax expense includes a provisional one-time tax expense of $99.9 million related to the enactment of the U.S. Tax Cuts & Jobs Act on December 22, 2017. Earnings (loss) before income taxes in non-U.S. jurisdictions were $358.6 million, with an aggregate income tax expense of $35.5 million, which is an average rate of 9.9%. Combined, this results in consolidated earnings before income taxes for the year of $384.3 million, and consolidated income tax expense for the period of $149.2 million, resulting in an effective tax rate of 38.8%.  For 2017, of the $358.6 million in earnings before income tax earned outside the U.S., $198.0 million was earned in Jersey, which does not impose a tax on corporate earnings.  In Jersey, earnings before income taxes increased by $51.1 million, or 35%, to $198.0 million in 2017 from $146.9 million in 2016. This increase was primarily attributable to the Company experiencing an increase of $435.6 million in net sales in the “Other international” geographic area for 2017 (see Note 18 – Segment and Geographic Reporting), which resulted in a significant increase in earnings before income taxes in Jersey from royalties and commissions under the terms of inter-subsidiary agreements. Due to the scalability of our operations, increases in net sales in the “Other international” geographic area from 2016 to 2017 resulted in a disproportionately greater increase in earnings before income taxes in Jersey.  In addition, there were foreign losses of $17.4 million for which no tax benefit was recognized during the year ended December 31, 2017 because of the provision of offsetting valuation allowances, but in which $3.3 million in nonrefundable withholding and other taxes were paid. Individually, none of the other foreign jurisdictions included in “Other jurisdictions” in the table above had earnings greater than 5% of the Company’s consolidated earnings (loss) before taxes in any of the years shown. Unremitted earnings of non-U.S. subsidiaries for which no tax has been provided are expected to be reinvested outside of the U.S. indefinitely. Such earnings could become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.

As of December 31, 2017, the Company had approximately $736.4 million in cash and cash equivalents, of which $391.6 million, or 53.2%, was held outside the U.S. Of the $391.6 million held by the Company’s non-U.S. subsidiaries, approximately $227.5 million is available for repatriation to the U.S. without incurring U.S. income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in the Company’s consolidated financial statements as of December 31, 2017.

The Company’s cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet the Company’s liquidity needs in the U.S. for the next twelve months and the Company does not expect to repatriate any of the funds presently designated as indefinitely reinvested outside the U.S. However, in anticipation of the needs of the Company’s share repurchase program and the need to provide payment of the Company’s provisional Transition Tax liability, the Company plans to begin the repatriation of certain funds held outside the U.S. for which tax has been fully provided as of December 31, 2017. Because of the need for cash for operating capital and continued overseas expansion, the Company also does not foresee the need for any of its foreign subsidiaries to distribute funds up to an intermediate foreign parent company in any form of taxable dividend. Under current applicable tax laws, if the Company chooses to repatriate some or all of the funds the Company has designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to U.S. income taxes but may be subject to applicable non‑U.S. income and withholding taxes. As of December 31, 2017, U.S. income taxes have been provided but non-U.S. income taxes have not been provided on cumulative total earnings of $178.8 million. As of December 31, 2016, U.S. and non-U.S. income taxes have not been provided on cumulative total earnings of $699.6 million.

Income taxes differ from the statutory tax rates as applied to earnings before income taxes as follows (in thousands):

 

 

 

2017

 

 

2016

 

 

2015

 

Expected income tax expense

 

$

134,491

 

 

$

125,819

 

 

$

116,724

 

State income tax, net of federal benefit

 

 

297

 

 

 

2,335

 

 

 

2,011

 

Rate differential on foreign income

 

 

(95,565

)

 

 

(58,508

)

 

 

(44,541

)

Change in unrecognized tax benefits

 

 

1,449

 

 

 

135

 

 

 

(2,233

)

Non-deductible expenses

 

 

4,451

 

 

 

2,330

 

 

 

(350

)

Excess tax benefit on share based compensation

 

 

(2,571

)

 

 

 

 

 

 

U.S. tax rate change

 

 

1,923

 

 

 

 

 

 

 

U.S. transition tax

 

 

98,015

 

 

 

 

 

 

 

Other

 

 

(1,120

)

 

 

575

 

 

 

285

 

Change in valuation allowance

 

 

7,786

 

 

 

1,439

 

 

 

554

 

Total provision (benefit) for income taxes

 

$

149,156

 

 

$

74,125

 

 

$

72,450

 

Effective tax rate

 

 

38.8

%

 

 

20.6

%

 

 

21.7

%

 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below (in thousands):

 

 

 

2017

 

 

2016

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Inventory adjustments

 

$

5,375

 

 

$

6,985

 

Accrued expenses

 

 

33,984

 

 

 

29,094

 

Allowances for bad debts and chargebacks

 

 

3,470

 

 

 

4,837

 

Loss carryforwards

 

 

24,308

 

 

 

20,891

 

Business credit carryforward

 

 

6,562

 

 

 

5,031

 

Share-based compensation

 

 

4,154

 

 

 

5,993

 

Valuation allowance

 

 

(27,313

)

 

 

(19,527

)

Total deferred tax assets

 

 

50,540

 

 

 

53,304

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

5,709

 

 

 

8,422

 

Depreciation on property, plant and equipment

 

 

15,069

 

 

 

19,251

 

Total deferred tax liabilities

 

 

20,778

 

 

 

27,673

 

Net deferred tax assets

 

$

29,762

 

 

$

25,631

 

The $7.8 million increase in the valuation allowance primarily relates to current year net operating losses in certain foreign non-benefited loss jurisdictions as discussed above. The Company believes it is more likely than not that the results of future operations in the remaining jurisdictions will generate sufficient taxable income to realize its net deferred tax assets.

State tax credit and net operating loss carry-forward amounts remaining as of December 31, 2017 were $6.6 million and $31.3 million, respectively. State tax credit and net operating loss carry-forward amounts remaining as of December 31, 2016 were $5.0 million and $31.7 million, respectively. These tax credit and net operating loss carry-forward amounts do not begin to expire until 2032 and 2025, respectively. As of December 31, 2017 and 2016, no valuation allowance against the related deferred tax asset have been recorded for these credit and loss and credit carry-forwards as it is believed the carry-forwards will be fully utilized in reducing future taxable income.

As of December 31, 2017 and 2016, the Company had combined foreign net operating loss carry-forwards available to reduce future taxable income of approximately $94.9 million and $69.4 million, respectively. Some of these net operating losses expire beginning in 2018; however others can be carried forward indefinitely. As of December 31, 2017 and 2016, valuation allowances of $21.4 million and $16.7 million, respectively, had been recorded against the related deferred tax assets for those loss carry-forwards that are not more likely than not to be fully utilized in reducing future taxable income.

The balance of unrecognized tax benefits included in prepaid expenses in the consolidated balance sheets increased by $0.8 million during the year. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

 

2017

 

 

2016

 

Beginning balance

 

$

6,608

 

 

$

6,143

 

Additions for current year tax positions

 

 

1,154

 

 

 

1,069

 

Additions for prior year tax positions

 

 

 

 

 

138

 

Reductions for prior year tax positions

 

 

(26

)

 

 

 

Settlement of uncertain tax positions

 

 

 

 

 

(616

)

Reductions related to lapse of statute of limitations

 

 

(355

)

 

 

(126

)

Ending balance

 

$

7,381

 

 

$

6,608

 

 

If recognized, $1.6 million of unrecognized tax benefits would be recorded as a reduction in income tax expense.

Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense and totaled $0.5 million, $0.4 million, and $0.6 million for the years ended December 31, 2017, 2016, and 2015, respectively. Accrued interest and penalties were $1.5 million and $1.1 million as of December 31, 2017 and 2016, respectively.

The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to its assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate.

As of December 31, 2017, the Company’s tax filings are generally subject to examination in the U.S. and most foreign jurisdictions for years ending on or after December 31, 2013, and in several Asian and European tax jurisdictions for years ending on or after December 31, 2007. During the year, the Company reduced the balance of 2017 and prior year unrecognized tax benefits by $0.4 million as a result of expiring statutes. It is reasonably possible that certain domestic and foreign statutes will expire during the next twelve months which would reduce the balance of 2017 and prior year unrecognized tax benefits by $0.5 million.

The Company is currently under examination by a number of states and certain foreign jurisdictions. During the year ended December 31, 2017, there was no reduction in the balance of 2017 and prior year unrecognized tax benefits due to settlements of examinations. It is reasonably possible that certain federal, state and foreign examinations could be settled during the next twelve months which would reduce the balance of 2017 and prior year unrecognized tax benefits by $0.9 million.