Income Taxes

12 Months Ended

Jan. 31, 2020

NOTE 9 — INCOME TAXES

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



Year ended January 31:	2020			2019			2018
Current tax expense (benefit):
Federal	$	18,366		$	(9,564	)	$	131,107
State	10,171			5,846			6,515
Foreign	62,314			48,905			49,082
Total current tax expense	90,851			45,187			186,704
Deferred tax expense (benefit):
Federal	19,617			(3,272		)	(1,129		)
State	(451		)	64			363
Foreign	21			(9,274		)	(3,495		)
Total deferred tax expense (benefit)	19,187			(12,482		)	(4,261		)
	$	110,038		$	32,705		$	182,443

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



Year ended January 31:	2020		2019		2018
U.S. statutory rate	21.0	%	21.0	%	33.8	%
State income taxes, net of federal benefit	1.7		2.2		1.1
Net changes in deferred tax valuation allowances	1.4		(0.9	)	1.2
Tax on foreign earnings different than U.S. rate	1.2		(0.6	)	(5.8	)
Impact of Avnet settlement agreement (see Note 5)	—		(4.0	)	—
Nondeductible indemnities	0.1		0.8		0.4
Nondeductible goodwill	—		2.9		—
Reversal of previously accrued income tax reserves	(0.9	)	(2.0	)	(0.7	)
Interest not subject to tax, net	(0.9	)	(0.6	)	(1.3	)
Effect of company-owned life insurance	(0.3	)	0.1		(1.0	)
Global Intangible Low-Taxed Income	0.1		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	(0.7	)	2.1		1.4
	22.7	%	8.8	%	61.0	%

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:	2020		2019		2018
U.S.	$	198,908	$	208,643	$	115,041
Foreign	285,630		164,642		184,043
	$	484,538	$	373,285	$	299,084

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



As of January 31:	2020			2019
Deferred tax liabilities:
Depreciation and amortization	$	102,825		$	96,739
Capitalized marketing program costs	7,564			7,101
Goodwill	34,233			24,867
Deferred costs currently deductible	7,099			7,212
Lease right-of-use assets	49,205			—
Other, net	16,204			12,059
Total deferred tax liabilities	217,130			147,978
Deferred tax assets:
Accrued liabilities	56,234			59,549
Foreign tax credit carryforwards	51,140			50,434
Loss carryforwards	111,078			112,962
Amortizable goodwill	11,092			12,118
Depreciation and amortization	11,700			11,873
Lease liabilities	49,205			—
Disallowed interest expense	15,755			13,676
Acquisition and transaction related costs	4,026			3,570
Other, net	17,786			13,478
	328,016			277,660
Less: valuation allowances	(123,709		)	(118,536		)
Total deferred tax assets	204,307			159,124
Net deferred tax (liability) asset	$	(12,823	)	$	11,146

At January 31, 2020 there were $223.3 million of consolidated cumulative undistributed earnings of foreign subsidiaries. Deferred tax liabilities have not been provided on these undistributed earnings; however, the Company does not expect that the amount would be material to the consolidated financial statements.

In fiscal 2020, the Company adopted an accounting standard which requires the recognition of assets and liabilities arising from lease transactions (see Note 1 - Business and Summary of Significant Accounting Policies for further discussion). Under the new guidance, the Company recorded a deferred tax asset for lease liabilities and an offsetting deferred tax liability for lease right-of-use assets; these deferred tax items had no net effect on the Company’s Consolidated Balance Sheet.

In fiscal 2020 and 2019, the Company recorded an income tax (expense)/benefit of ($6.7) million and $6.0 million, respectively, related to changes in deferred tax valuation allowances. The net change in the deferred tax valuation allowances in fiscal 2020 was an increase of $5.2 million primarily resulting from an increase in certain foreign jurisdictions. 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 valuation allowances at both January 31, 2020 and 2019 primarily relate to carryforwards for foreign net operating losses and foreign tax credits in the United States. The Company’s net operating loss carryforwards totaled $489.4 million and $504.2 million at January 31, 2020 and 2019, respectively. The majority of the net operating losses have an indefinite carryforward period with the remaining portion expiring in fiscal years 2021 through 2036. The Company's foreign tax credit carryforwards in the U.S. totaled $51.1 million and $50.4 million at January 31, 2020 and 2019, respectively. The foreign tax credits have a ten year carryforward period, and the majority are 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, 2020, 2019 and 2018 is as follows (in thousands):



For the year ended January 31:	2020			2019			2018
Gross unrecognized tax benefits at beginning of period	$	25,837		$	72,252		$	18,305
Increases in tax positions for prior years	766			4,671			66,180
Decreases in tax positions for prior years	(3,237		)	(13,787		)	(3,727		)
Increases in tax positions for current year	55			—			164
Expiration of statutes of limitation	(1,432		)	(25,840		)	(6,924		)
Settlements	(849		)	(5,355		)	(3,515		)
Changes due to translation of foreign currencies	(259		)	(6,104		)	1,769
Gross unrecognized tax benefits at end of period	$	20,881		$	25,837		$	72,252

At January 31, 2020, 2019 and 2018, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $18.3 million, $23.1 million and $38.1 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, 2020, 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 $1.2 million, $9.6 million and $6.5 million, respectively. As a result, the Company recorded expenses of $1.2 million, $9.6 million and $6.5 million, during the years ended January 31, 2020, 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, 2020 totaled $5.0 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, 2020, 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, 2020, 2019 and 2018 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 2020, 2019 and 2018, 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 2017. Income tax returns of various foreign jurisdictions for fiscal 2006 and forward are currently under taxing authority examination or remain subject to audit.