Income Taxes

New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted on December 22, 2017. The Tax Act made broad and complex changes to the United States tax code including, but not limited to, reducing the United States federal corporate tax rate and requiring a one-time transition tax on undistributed earnings of foreign subsidiaries. FASB Accounting Standards Codification 740, "Accounting for Income Taxes," requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018.

Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118, which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

In connection with the Company's initial analysis of the impact of the Tax Act, the Company recorded a discrete net tax expense of $94.4 million for the period ended December 31, 2017. This amount consists of a net expense of $66.5 million for the transition tax and a net expense of $12.8 million for the remeasurement of the Company's net deferred tax assets using the reduced United States tax rate. In addition, we also recorded a discrete net tax expense of $15.1 million for state income and foreign taxes estimated to be due upon distribution of approximately $1.0 billion of previously undistributed foreign earnings no longer permanently reinvested as of December 31, 2017.

For the items above, the Company was able to make reasonable estimates of the impact of the Tax Act and has recorded provisional amounts. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, foreign tax credit calculations, and state tax conformity to federal tax changes.

Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income, a limitation of net operating losses generated after fiscal year 2018 to 80 percent of taxable income, an incremental tax (base erosion anti-abuse tax or "BEAT") on excessive amounts paid to foreign related parties, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or "GILTI"). The Company is still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.


Note 14.	Income Taxes - (Continued)

Pre-tax earnings by significant geographical locations are as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
United States	$	143,924	$	124,500	$	146,940
Foreign	135,141		151,457		158,506
	$	279,065	$	275,957	$	305,446

The provisions for income taxes are as follows (in thousands):



	Year Ended December 31,
	2017			2016		2015
Current tax expense:
Federal	$	112,673		$	36,771	$	35,029
State	5,035			5,785		6,074
Foreign	19,689			64,109		19,884
	137,397			106,665		60,987
Deferred tax expense (benefit):
Federal	34,857			1,404		10,752
State	473			267		1,052
Foreign	(885		)	995		(9,031		)
	34,445			2,666		2,773
Total income tax provision	$	171,842		$	109,331	$	63,760

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events and basis differences that have been recognized in the Company’s financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amount and the tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse.

Net deferred tax assets (liabilities) were classified on the balance sheet as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets, non-current	21,001			45,243
Deferred tax liabilities, non-current	(12,496		)	(2,331		)
Net deferred tax assets	$	8,505		$	42,912


Note 14.	Income Taxes - (Continued)

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Accrued liabilities and allowances	$	20,425		$	28,909
Tax credit and loss carry-forwards	30,979			25,522
Stock-based compensation	11,715			17,204
Inventory basis differences	8,555			11,337
Deferred revenue	2,732			4,758
Other assets	2,527			917
Gross deferred tax assets	76,933			88,647
Valuation allowance	(3,392		)	(2,924		)
Total deferred tax assets, net	73,541			85,723
Deferred tax liabilities:
Intangible assets	(29,117		)	(33,564		)
Property and equipment	(16,499		)	(7,212		)
Unremitted earnings of foreign subsidiaries	(15,100		)	—
Other liabilities	(4,320		)	(2,035		)
Total deferred tax liabilities	(65,036		)	(42,811		)
Net deferred tax assets	$	8,505		$	42,912

The provision for income taxes differs from the amount of tax determined by applying the applicable United States statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended December 31,
	2017		2016		2015
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
(Decrease) increase in rates resulting from:
Foreign rate differential	(10.7	)	(11.3	)	(7.8	)
Foreign, federal and state income tax credits	(2.0	)	(1.2	)	(2.1	)
State taxes	1.8		2.3		2.4
European Union state aid recovery	0.1		14.4		—
Valuation allowance release	—		—		(6.4	)
Tax rate change on deferred items	5.1		—		—
United States transition tax	23.8		—		—
Unremitted earnings of foreign subsidiaries	5.4		—		—
Other	3.1		0.4		(0.2	)
Effective tax rate	61.6	%	39.6	%	20.9	%

The Company's effective tax rate in 2017 is higher than the United States federal tax rate of 35 percent mainly due to the Company's estimate of the impact of the Tax Act. Unrecognized tax benefits for intercompany pricing increased in various jurisdictions in 2017, but this was partially offset by excess tax benefits for stock compensation and the mix of lower foreign tax rates. The foreign tax rate differential in 2016 is mainly due to the impact of amortization and lower statutory rates. The European Union state aid recovery in 2016 relates to the European Commission’s decision regarding the three-year agreement in Belgium, discussed below. The Company's foreign tax rate differential in 2015 is primarily the result of a three-year agreement in Belgium, which expired on July 31, 2015, as well as the impact of lower statutory rates.


Note 14.	Income Taxes - (Continued)

At December 31, 2017, the Company had United States tax net operating loss carry-forwards totaling approximately $3.9 million which expire between 2019 and 2031 and are subject to annual limitation under Section 382 of the Internal Revenue Code. In addition, the Company has various state net operating loss carry-forwards totaling approximately $0.9 million which expire between 2023 and 2036. Finally, the Company has various foreign net operating loss carry-forwards totaling approximately $111.1 million, a portion of which expire between 2018 and 2036, and a portion of which have an indefinite carry-forward period.

The tax benefits described above are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. To the extent that management assesses the realization of such assets to not be more likely than not, a valuation allowance is required to be recorded. As of December 31, 2017, the Company has determined that a valuation allowance against its deferred tax assets of $3.4 million is required, primarily related to certain foreign deductions carried forward and acquired net operating losses. A review of all available positive and negative evidence is considered, including past and future performance, the market environment in which the Company operates, utilization of tax attributes in the past, length of carry-back and carry-forward periods, and evaluation of potential tax planning strategies, when evaluating the realizability of deferred tax assets. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The following table summarizes the activity related to unrecognized tax benefits, including amounts accrued for potential interest and penalties (in thousands):



	Year Ended December 31,
	2017			2016			2015
Balance, beginning of year	$	51,851		$	14,967		$	15,401
Increases related to current year tax positions	17,264			40,840			1,446
Increases related to prior year tax positions	5,781			1,066			299
Increases (decreases) related to prior year tax positions	(759		)	(610		)	(724		)
Lapse of statute of limitations	(1,260		)	(4,070		)	(1,455		)
Settlements	(986		)	(342		)	—
Change due to currency translation	5,384			—			—
Balance, end of year	$	77,275		$	51,851		$	14,967

The unrecognized tax benefits at December 31, 2017 relate to the United States, Belgium, United Kingdom and various other foreign jurisdictions, all of which would affect the Company’s effective tax rate if recognized.

On January 11, 2016, the European Commission announced a decision concluding that certain rules under Belgian tax legislation are deemed to be incompatible with European Union regulations on state aid. As a result of this decision, the European Commission has directed the Belgian Government to recover past taxes from certain entities, reflective of disallowed state aid, which impacts one of the Company’s international subsidiaries. The Belgian Government announced they have appealed this decision and filed action for an annulment in the General Court of the European Union, and in July 2016 the Company filed a separate appeal with the General Court of the European Union. In accordance with FASB ASC Topic 740, “Income Taxes,” the Company recorded discrete tax expense of $39.6 million during 2016 related to this matter and on January 10, 2017, received tax assessments from the Belgium government for a similar amount, which the Company has classified as current taxes payable on the Consolidated Balance Sheet as of December 31, 2017. The Company has filed a complaint against the Belgian tax assessments, and the result of this complaint, the appeal with the General Court of the European Union, new information received from the Belgian Government, or other future events may cause the income tax provision associated with the decision to be entirely or partially reversed.

The Company classifies interest and penalties related to unrecognized tax benefits in the income tax provision. As of December 31, 2017, the Company had $7.0 million of accrued interest and penalties related to unrecognized tax benefits that are recorded as current and non-current accrued income taxes on the Consolidated Balance Sheet.


Note 14.	Income Taxes - (Continued)

The Company files United States federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company currently has the following tax years open to examination by major taxing jurisdictions:



	Tax Years:
United States Federal	2014 - 2016
State of California	2013 - 2016
State of Massachusetts	2014 - 2016
State of Oregon	2014 - 2016
Sweden	2012 - 2016
United Kingdom	2013 - 2016
Belgium	2011 - 2016