10. Income Taxes

Effective Tax Rate

The income tax provision for interim periods is comprised of an estimated annual effective income tax rate applied to current year ordinary income and tax associated with discrete items. These discrete items generally relate to excess stock compensation deductions, changes in tax laws, adjustments to uncertain tax positions and changes of estimated tax to the actual liability determined upon filing tax returns. To determine the annual effective tax rate, management is required to make estimates of annual pretax income in each domestic and foreign jurisdiction in which the Company conducts business. Entities that have historical pre-tax losses and current year estimated pre-tax losses that are not projected to generate a future benefit are excluded from the estimated annual effective income tax rate.

On December 22, 2017, the Tax Cut and Jobs Act (“Tax Act”) was signed into law. The Tax Act significantly revises the U.S. corporate income tax system with changes that are effective in 2017 and 2018. Changes in tax rates and tax laws and their impact on deferred taxes are accounted for in the period of legislative enactment. In March 2018, the FASB issued Accounting Standards Update (ASU) 2018-05, which codified guidance provided in SEC Staff Accounting Bulletin 118. ASU 2018-05 allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from the enactment date. ASU 2018-05 applies to measuring the impact of tax laws effecting the period of enactment, such as the change in the corporate income tax rate to 21 percent and the one-time transition tax, but does not apply to changes as part of the Tax Act that were not effective until 2018, such as U.S. taxation of certain global intangible low-taxed income (“GILTI”).

The Tax Act imposed a one-time transition tax on unrepatriated earnings of foreign subsidiaries through December 31, 2017 that have not previously been subject to federal tax. The Company estimated this one-time transition tax and recorded a provisional charge to income tax expense of $13.1 million in 2017. This amount has been further reduced by domestic losses and other tax credits resulting in an estimated cash payment of approximately $4.7 million that the Company expects to elect to pay in installments over the next eight years. The Company has not yet completed its calculation of the total post-1986 unrepatriated earnings for its foreign subsidiaries and this calculation will not be finalized until the Company’s 2017 federal income tax return is filed. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets, which is a defined term under the Tax Act and other provisions that remain subject to interpretation. The Company continues its analysis of the effects of the Tax Act and will continue to gather additional information related to these provisional amounts. Such additional analysis includes collecting and refining necessary data and interpreting additional guidance issued by the tax authorities and other standard-setting bodies.

In April 2018, the IRS released additional guidance which caused the Company to revise its prior estimate of its 2017 U.S. tax provision. As a result, $4.8 million of tax expense was recorded in the three months ended June 30, 2018. Although this change results in an additional charge, due to the availability of net operating losses, no additional cash tax payments are expected.

If the IRS releases additional guidance regarding the one-time transition tax, the ultimate impact of the Tax Act may differ from the current estimates, possibly materially, due to changes in interpretations and assumptions that the Company has made, future guidance that may be issued, and actions that the Company may take as a result.

The Tax Act introduces a new provision for U.S. taxation of GILTI that imposes a minimum tax on earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. This GILTI provision is effective for 2018. The Company has elected to treat the effect of this GILTI provision as a period expense in the year incurred and has included an estimate of the impact in its estimated annual effective income tax rate. The Company will continue to analyze this GILTI provision and it is possible that the Company’s current estimate of the impact of this GILTI provision may materially change.

The Tax Act introduces other new provisions that are effective for 2018 and changes how certain provisions are calculated beginning in 2018. Other than the GILTI provision, the Company does not expect that any of these new provisions or changes will have a material impact to the Company’s tax expense.

The estimated annual effective income tax rate, excluding discrete items discussed above, was 32.3 percent and 24.6 percent for the six months ended June 30, 2018 and 2017, respectively. The estimated annual effective income tax rate differs from the U.S. federal statutory tax rate due to:

	Six Months Ended June 30,			Six Months Ended June 30,
	2018			2017
Federal income tax rate		21.0	%		35.0	%
State income taxes, net of federal tax benefit		0.3			2.1
Foreign earnings taxed at different rates		4.3			(15.7	)
GILTI inclusion (net of foreign tax credits)		10.2			0.0
Valuation allowance adjustments		(7.8	)		0.0
Interest expense deduction limitation		2.0			0.0
Nondeductible expenses		1.8			2.1
Change in tax contingency reserves		0.1			0.3
Other		0.4			0.8
Estimated annual effective income tax rate		32.3	%		24.6	%

The estimated annual effective income tax rate includes the benefit of a valuation allowance adjustment for one of the Company’s Chinese entities. Management determined that sufficient positive evidence exists to support that this entity’s net operating losses are more likely than not to be realized.

Income taxes as a percentage of pretax income were 93.0 percent for the three months ended June 30, 2018. This is higher than the estimated annual effective income tax rate due to discrete items. Discrete items included in income taxes for the three months ended June 30, 2018 were a net cost of $5.0 million, which is primarily due to the previously-described $4.8 million tax expense to reflect a change in the estimate of the Company’s 2017 U.S. tax provision.

Income taxes as a percentage of pretax income were 24.0 percent for the three months ended June 30, 2017. This is lower than the estimated annual effective income tax rate principally because the estimated annual effective income tax rate is applied to pre-tax earnings excluding the results of the Company’s Chinese entities that were not expected to generate a future tax benefit. Discrete items included in income taxes for the three months ended June 30, 2017 were not material.

Income taxes as a percentage of pretax income were 39.4 percent for the six months ended June 30, 2018. This is higher than the estimated annual effective income tax rate due to discrete items. Discrete items included in income taxes for the six months ended June 30, 2018 were a net cost of $2.9 million. This primarily includes the previously-described $4.8 million tax expense to reflect a change in the estimate of the Company’s 2017 U.S. tax provision and is offset by $2.3 million of excess tax benefits for stock-based compensation.

Income taxes as a percentage of pretax income were 22.9 percent for the six months ended June 30, 2017. This is lower than the estimated annual effective income tax rate due to discrete items, but also because the estimated annual effective income tax rate is applied to pre-tax earnings excluding the results of the Company’s Chinese entities that were not expected to generate a future tax benefit. Discrete items included in income taxes for the six months ended June 30, 2017 were a net benefit of $0.3 million, which includes excess tax benefits for stock-based compensation of $0.9 million offset by additional accruals for uncertain tax positions of $0.6 million.

During the year, management regularly updates estimates of pre-tax income and income tax expense based on changes in pre-tax income projections by taxable jurisdiction, repatriation of foreign earnings, uncertain tax positions and other tax matters. To the extent that actual results vary from these estimates, the actual annual effective income tax rate at the end of the year could be materially different from the estimated annual effective income tax rate for the six months ended June 30, 2018.

Uncertain Tax Positions

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, individual U.S. state jurisdictions and non-U.S. jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2014.

Unrecognized tax benefits totaled $8.8 million and $8.7 million as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was approximately $4.5 million and $4.4 million, respectively. The Company recognizes interest expense and any related penalties from uncertain tax positions in income tax expense. As of June 30, 2018 and December 31, 2017, the Company had accrued approximately $4.2 million and $3.6 million for interest and penalties, respectively.

The Company believes that it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next twelve months by approximately $4 million due to the expirations of certain foreign and state statutes of limitations and potential audit resolutions. The Company does not anticipate significant increases to the amount of unrecognized tax benefits within the next twelve months.