Income Taxes

Income tax expense was $3.7 million and $9.5 million during the three months ended March 31, 2019 and 2018, respectively. The decrease in income tax expense for the three months ended March 31, 2019 as compared to the corresponding period in 2018 was primarily due to the recording of a tax benefit of approximately $9.1 million related to a tax accounting method change for revenue reporting approved by the Internal Revenue Service (“IRS”) during the three months ended March 31, 2019.

The effective tax rates for the respective periods are shown below:



	Three Months Ended March 31,
	2019		2018
Federal provision	21.0	%	21.0	%
State provision	2.5	%	1.4	%
Change in valuation allowance	1.9	%	14.2	%
Foreign income taxed at different rates⁽¹⁾	(0.9	)%	(7.2	)%
Change in tax accounting method⁽²⁾	(17.1	)%	—	%
Other	(0.5	)%	(0.9	)%
Effective rate	6.9	%	28.5	%

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(1)	Relates primarily to lower tax rates attributable to international operations.


(2)	During the first quarter of 2019, the Company received IRS approval for a tax accounting method change related to revenue reporting. The revised tax accounting method more closely aligns with the Company’s book accounting method for revenue reporting.

In accordance with the authoritative guidance for income taxes, each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective income tax rate. The estimated annual effective tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected amounts for the year. Since the Company operates in foreign countries with varying tax rates, the magnitude of the impact of the results the international operations has on the Company’s quarterly effective tax rate is dependent on the level of income or loss from the international operations in the period.

The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026 and a 50% tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the three months ended March 31, 2019 and 2018, was immaterial.

The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $19.9 million at March 31, 2019. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $13.0 million as of March 31, 2019. There were no material changes in gross unrecognized tax benefits from December 31, 2018.

Of the $167.1 million of cash and cash equivalents as of March 31, 2019, $127.5 million was held outside of the United States. Following the enactment of the Tax Reform Act and the associated transition tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax. However, repatriation of cash could subject the Company to non-U.S. jurisdictional taxes on distributions. The Company maintains non-U.S. funds in its foreign operations to (1) provide adequate working capital, (2) satisfy various regulatory requirements, and (3) take advantage of business expansion opportunities as they arise. The non-U.S. jurisdictional taxes applicable to foreign earnings are not readily determinable or practicable. The Company continues to evaluate the impact of the Tax Reform Act on its election to indefinitely reinvest certain of its non-U.S. earnings. As of March 31, 2019, management believes that it has sufficient liquidity to satisfy its cash needs, including its cash needs in the United States.