INCOME TAXES

6 Months Ended

Jun. 30, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income tax expense for the three months ended June 30, 2019, was $75.4 million, or 19.2% of income before taxes, compared with $41.0 million, or 13.9% of income before taxes, for the three months ended June 30, 2018. Income tax expense for the six months ended June 30, 2019, was $51.1 million, or 7.6% of income before taxes, compared with $43.6 million, or 7.4% of income before taxes, for the six months ended June 30, 2018.

The effective tax rates for the three and six months ended June 30, 2019, and 2018, differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits associated with employee equity plans, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and federal research and development (“R&D”) credit benefit, partially offset by state income taxes (net of federal benefit) and U.S. tax on foreign earnings.

As of June 30, 2019, the Company had a total of gross unrecognized tax benefits of $87.8 million compared with $78.8 million as of December 31, 2018. If recognized, the gross unrecognized tax benefits would reduce the effective tax rate in the period of recognition.

In the third quarter of 2015, the Company recorded a $29.3 million tax benefit due to a U.S. Tax Court opinion (the “2015 Opinion”) issued in July 2015 involving an independent third party related to intercompany charges for share-based compensation. Based on the findings of the U.S. Tax Court, the Company was required to, and did, refund to its foreign subsidiaries the share-based compensation element of certain intercompany charges made in prior periods. Starting from 2015, share-based compensation has been excluded from intercompany charges. In June 2019, the Ninth Circuit Court of Appeals reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Since the Ninth Circuit Opinion potentially is subject to further judicial review, the Company continues to treat its share-based compensation expense in accordance with the 2015 Opinion and continues to recognize the related tax benefits in its financial statements based upon its evaluation of the position in light of the present facts. In the event of a final opinion which reverses the 2015 Opinion, there may be an adverse impact to the Company’s income tax expense and effective tax rate.

The Company files federal, state, and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2015 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.