NOTE 9 — INCOME TAXES

Significant components of the provision for income taxes are as follows (in thousands):



Year ended January 31:	2019			2018			2017
Current tax (benefit) expense:
Federal	$	(9,564	)	$	131,107		$	37,724
State	5,846			6,515			4,030
Foreign	48,905			49,082			30,914
Total current tax expense	45,187			186,704			72,668
Deferred tax (benefit) expense:
Federal	(3,272		)	(1,129		)	(8,380		)
State	64			363			(799		)
Foreign	(9,274		)	(3,495		)	(1,823		)
Total deferred tax benefit	(12,482		)	(4,261		)	(11,002		)
	$	32,705		$	182,443		$	61,666

The reconciliation of the U.S. federal statutory tax rate to the effective tax rate is as follows:



Year ended January 31:	2019		2018		2017
U.S. statutory rate	21.0	%	33.8	%	35.0	%
State income taxes, net of federal benefit	2.2		1.1		0.8
Net changes in deferred tax valuation allowances	(0.9	)	1.2		(3.4	)
Tax on foreign earnings different than U.S. rate	(0.6	)	(5.8	)	(9.9	)
Impact of Avnet settlement agreement (see Note 5)	(4.0	)	—		—
Nondeductible indemnities	0.8		0.4		—
Nondeductible goodwill	2.9		—		—
Reversal of previously accrued income tax reserves	(2.0	)	(0.7	)	0.5
Interest not subject to tax, net	(0.6	)	(1.3	)	2.1
Effect of company-owned life insurance	0.1		(1.0	)	(0.7	)
Global Intangible Low-Taxed Income	1.0		—		—
U.S. Tax Reform transition tax	(13.2	)	33.8		—
U.S. Tax Reform impact of rate change on deferred taxes	—		(1.9	)	—
Other, net	2.1		1.4		(0.4	)
	8.8	%	61.0	%	24.0	%

U.S. Tax Reform

On December 22, 2017, the U.S. federal government enacted the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) which significantly revised U.S. corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. Due to the complexities involved in accounting for U.S. Tax Reform, the SEC issued Staff Accounting Bulletin ("SAB") 118 which requires that the Company include in its financial statements the reasonable estimate of the impact of U.S. Tax Reform on earnings to the extent such reasonable estimate has been determined. SAB 118 allowed the Company to report provisional amounts within a measurement period up to one year due to the complexities inherent in adopting the changes. Accordingly, in fiscal 2018, the Company recorded income tax expenses of $95.4 million, which represented the Company’s reasonable estimate of the impact of the enactment of U.S. Tax Reform. The amounts recorded include income tax expenses of $101.1 million for the transition tax and a net income tax benefit of $5.7 million related to the remeasurement of net deferred tax liabilities as a result of the change in the U.S. federal corporate income tax rate. During fiscal 2019, the Company finalized its analysis of the impact of the enactment of U.S. Tax Reform and decreased its estimate of the one-time transition tax by $49.2 million, primarily due to further analysis of earnings and profits of the Company’s foreign subsidiaries and the utilization of foreign tax credits.

Additionally, U.S. Tax Reform subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The Company has made the accounting policy election to treat taxes due on the GILTI as a current period expense.

The components of pretax income are as follows (in thousands):



Year ended January 31:	2019		2018		2017
U.S.	$	208,643	$	115,041	$	92,067
Foreign	164,642		184,043		164,694
	$	373,285	$	299,084	$	256,761

The significant components of the Company’s deferred tax liabilities and assets are as follows (in thousands):



As of January 31:	2019			2018
Deferred tax liabilities:
Depreciation and amortization	$	96,739		$	106,560
Capitalized marketing program costs	7,101			6,104
Goodwill	24,867			16,496
Deferred costs currently deductible	7,212			7,558
Other, net	12,059			12,540
Total deferred tax liabilities	147,978			149,258
Deferred tax assets:
Accrued liabilities	59,549			54,970
Foreign tax credit carryforwards	50,434			—
Loss carryforwards	112,962			127,881
Amortizable goodwill	12,118			1,377
Depreciation and amortization	11,873			13,997
Disallowed interest expense	13,676			11,057
Acquisition and transaction related costs	3,570			3,823
Other, net	13,478			14,527
	277,660			227,632
Less: valuation allowances	(118,536		)	(80,714		)
Total deferred tax assets	159,124			146,918
Net deferred tax asset (liability)	$	11,146		$	(2,340	)

There are no material consolidated undistributed earnings of foreign subsidiaries for which no deferred taxes have been recorded.

In fiscal 2019 and 2018, the Company recorded an income tax benefit/(expense) of $6.0 million and $(1.2) million, respectively, related to changes in deferred tax valuation allowances. The net change in the deferred tax valuation allowances in fiscal 2019 was an increase of $37.8 million primarily resulting from an increase in the United States for foreign tax credits as a result of U.S. Tax Reform, partially offset by the release of valuation allowances in certain foreign jurisidictions. The net change in the deferred tax valuation allowances in fiscal 2018 was an increase of $33.9 million primarily resulting from deferred tax valuation allowances recorded in various jurisdictions related to the acquisition of TS.

The valuation allowances at both January 31, 2019 and 2018 primarily relate to foreign net operating loss carryforwards. The Company’s net operating loss carryforwards totaled $504.2 million and $576.8 million at January 31, 2019 and 2018, respectively. The majority of the net operating losses have an indefinite carryforward period with the remaining portion expiring in fiscal years 2019 through 2034. The Company's foreign tax credit carryforwards in the U.S. totaled $50.4 million and $0 at January 31, 2019 and 2018, respectively. The foreign tax credits have a ten year carryforward period, and the majority is set to expire in fiscal year 2028. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets. To the extent that the Company generates consistent taxable income within those operations with valuation allowances, the Company may reduce the valuation allowances, thereby reducing income tax expense and increasing net income in the period the determination is made.

The estimates and assumptions used by the Company in computing the income taxes reflected in the Company’s consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when such returns are finalized or the related adjustments are identified.

A reconciliation of the beginning and ending balances of the total amount of gross unrecognized tax benefits, excluding accrued interest and penalties, for the years ended January 31, 2019, 2018 and 2017 is as follows (in thousands):



For the year ended January 31:	2019			2018			2017
Gross unrecognized tax benefits at beginning of period	$	72,252		$	18,305		$	12,989
Increases in tax positions for prior years	4,671			66,180			5,443
Decreases in tax positions for prior years	(13,787		)	(3,727		)	(118		)
Increases in tax positions for current year	—			164			1,022
Expiration of statutes of limitation	(25,840		)	(6,924		)	(292		)
Settlements	(5,355		)	(3,515		)	(370		)
Changes due to translation of foreign currencies	(6,104		)	1,769			(369		)
Gross unrecognized tax benefits at end of period	$	25,837		$	72,252		$	18,305

At January 31, 2019, 2018 and 2017, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $23.1 million, $38.1 million and $12.5 million, respectively. In connection with the acquisition of TS, pursuant to the interest purchase agreement, the Company and Avnet agreed to indemnify each other in relation to certain tax matters. As a result, the Company has recorded certain indemnification assets for expected amounts to be received from Avnet related to liabilities recorded for unrecognized tax benefits. The Company has also recorded certain indemnification liabilities for expected amounts to be paid to Avnet. During the years ended January 31, 2019 and 2018, due to the resolution of certain pre-acquisition tax matters and the expiration of certain statutes of limitation, the Company recorded benefits in income tax expense of $9.6 million and $6.5 million, respectively. As a result, the Company recorded expenses of $9.6 million and $6.5 million, during the years ended January 31, 2019 and 2018, respectively, which are included in “selling, general and administrative expenses” in the Consolidated Statement of Income, related to changes in the corresponding indemnification assets and liabilities recorded. The net impact of these items had no impact on the Company's net income.

Unrecognized tax benefits that have a reasonable possibility of significantly decreasing within the 12 months following January 31, 2019 totaled $3.7 million, all of which would impact the effective tax rate if recognized, primarily related to the foreign taxation of certain transactions. Consistent with prior periods, the Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company’s accrued interest at January 31, 2019, would not have a material impact on the effective tax rate if reversed. The provision for income taxes for each of the fiscal years ended January 31, 2019, 2018 and 2017 includes interest expense on unrecognized income tax benefits for current and prior years which is not significant to the Company’s Consolidated Statement of Income. The change in the balance of accrued interest for fiscal 2019, 2018 and 2017, includes the current year end accrual, an interest benefit resulting from the expiration of statutes of limitation, and the translation adjustments on foreign currencies.

The Company conducts business primarily in the Americas, Europe and Asia-Pacific, and as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign tax jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Company is no longer subject to examinations by the Internal Revenue Service for years before fiscal 2016. Income tax returns of various foreign jurisdictions for fiscal 2006 and forward are currently under taxing authority examination or remain subject to audit.