Income Taxes

12 Months Ended

Dec. 31, 2020

The components of income (loss) before income taxes consist of the following:


Year ended December 31,	2020		2019
Income (loss) before income taxes:
U.S.	$	80,632	$	(32,953)
Foreign	29,276		4,234
Income (loss) before income taxes	$	109,908	$	(28,719)

The income tax provision (benefit) consists of the following:


Year ended December 31,	2020		2019
Current tax provision (benefit):
Federal	$	(4,430)	$	2,501
State	6,527		197
Foreign	4,172		8,569
Total current tax provision	6,269		11,267
Deferred tax provision (benefit):
Federal	16,512		(6,150)
State	(1,132)		(1,575)
Foreign	185		(9,677)
Total deferred tax provision (benefit)	15,565		(17,402)
Total income tax provision (benefit)	$	21,834	$	(6,135)

A reconciliation of the federal statutory rate to our effective income tax rate is shown below:


Year ended December 31,	2020		2019
Federal statutory rate	21.0	%	21.0	%
Increases (decreases) in the rate resulting from:
Net capital loss on Divestiture	(24.8)	%	—	%
Tax reform	(11.4)	%	—	%
Unrecognized tax benefits	5.0	%	(5.0)	%
State income taxes, net of federal income tax impact	3.2	%	6.6	%
Research and development credit	(2.9)	%	9.8	%
Foreign income taxes	0.7	%	(3.7)	%
Valuation allowance	27.1	%	(1.4)	%
Restricted stock vestings	1.0	%	(6.7)	%
Other	1.0	%	0.8	%
Effective income tax rate	19.9	%	21.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:


December 31,	2020		2019
Deferred tax assets:
Employee benefit plans	$	28,546	$	26,401
Accrued liabilities not currently deductible	23,872		24,441
Finance charges	1,928		2,678
Lease liabilities	43,342		42,077
Allowance for losses on accounts receivable	3,629		4,157
Net operating loss carryforwards	4,924		8,394
Capital loss carryover	27,624		—
Outside basis difference	—		12,408
Interest limitation	1,502		12,905
Derivatives	7,920		5,057
Other	5,733		10,611
Total deferred tax assets	149,020		149,129
Less: valuation allowances	(31,709)		(14,282)
Net deferred tax assets	117,311		134,847
Deferred tax liabilities:
Merchandise inventories	42,509		42,872
Goodwill	1,603		296
Property and equipment	34,005		32,689
Right-of-use assets	39,514		39,043
Computer software	7,447		9,032
Insurance	1,108		1,082
Intangible assets	27,349		35,451
Withholding tax liabilities	7,451		6,965
Other	344		697
Total deferred tax liabilities	161,330		168,127
Net deferred tax liability	$	(44,019)	$	(33,280)

The valuation allowances relate to deferred tax assets for U.S. federal and state capital loss carryforwards and net operating loss carryforwards in various state jurisdictions. The U.S. capital loss carryforward, which has a full valuation allowance, has an expiration date of five years. The capital loss and net operating loss carryforwards in various state jurisdictions have various expiration dates ranging from five years to an unlimited carryforward period. Based on management’s judgment using available evidence about historical and expected future taxable earnings, management believes it is more likely than not that we will realize the benefit of the existing deferred tax assets, net of valuation allowances, at December 31, 2020.

Cash payments for income taxes, including interest, for 2020 and 2019 were $15.4 million and $18.1 million. Cash tax refunds received for 2020 and 2019 were $32.8 million and $24.3 million.

A summary of the changes in the liability for unrecognized tax benefits from the beginning to the end of the reporting period is as follows:


	2020		2019
Unrecognized tax benefits at January 1,	$	11,520	$	9,568
Increases for positions taken during current period	1,488		394
Increases for positions taken during prior periods	9,073		1,629
Lapse of statute of limitations	(1,311)		(71)
Unrecognized tax benefits at December 31,	20,770		11,520

Included in the liability for unrecognized tax benefits at December 31, 2020 and 2019, were $2.7 million and $3.1 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the

timing of such deductibility. These tax positions are temporary differences which do not impact the annual effective tax rate under deferred tax accounting. Any change in the deductibility period of these tax positions would impact the timing of cash payments to taxing jurisdictions. Unrecognized tax benefits of $18.0 million and $8.4 million at December 31, 2020 and 2019 would impact our effective tax rate if recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest at December 31, 2020 and 2019 was $2.6 million and $1.3 million. The amounts recognized in interest expense for the years ended December 31, 2020 and 2019 were $1.3 million and $0.7 million. There were no penalties accrued at December 31, 2020 and 2019 or recognized in 2020 and 2019.

On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the Internal Revenue Services (IRS) regarding our 2015 and 2016 Consolidated Income Tax Returns. Within the NOPA, the IRS has asserted that our taxable income for 2015 and 2016 should be higher based on their assessment of the appropriate amount of taxable income that we should report in the United States in connection with our sourcing of products by our foreign subsidiaries for sale in the United States by our domestic subsidiaries. Our amount of taxable income in the United States is based on our transfer pricing methodology, which has been consistently applied through the current date. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that we have adequately reserved for this matter and that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on its assertions, the additional tax, interest, and any potential penalties could have a material adverse impact on our financial position, results of operations or cash flows.

We file income tax returns in the U.S. federal and various state and foreign jurisdictions. Our U.S. federal income tax returns for the years 2015, 2016, 2017, 2018 and 2019 are subject to examination. Our income tax returns for U.S. state and local jurisdictions are generally open for the years 2017 through 2019; however, certain returns may be subject to examination for differing periods. The former owners are contractually obligated to indemnify us for all income tax liabilities incurred by Byram entities prior to its acquisition on August 1, 2017, and for all income tax liabilities incurred by the Halyard foreign entities located in Thailand, Mexico, and Honduras prior to its acquisition on April 30, 2018.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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