NOTE 17. INCOME TAXES

The following table provides details of income taxes for the three and nine months ended December 31, 2017 and 2016 (in thousands, except percentages):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2017			2016			2017			2016
Income from continuing operations before income tax provision	$	9,455		$	10,788		$	29,435		$	39,524
Income tax provision	$	5,229		$	3,929		$	12,278		$	14,288
Effective tax rate		55	%		36	%		42	%		36	%

The Company’s effective tax rate during the three and nine months ended December 31, 2017 was impacted by the Tax Act. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. As a result, the Company made an additional provision for income tax resulting from the enactment of the Tax Act during the three and nine months ended December 31, 2017.

The Tax Act includes significant changes to the U.S. income tax system. The Tax Act, among other changes, reduces the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018, eliminates the federal benefit for qualified production activities, expands the deduction limitation for executive compensation, creates a territorial system which will generally allow companies to repatriate future foreign earnings without incurring additional U.S. income taxes, subjects foreign earnings on which U.S. income tax is currently deferred to a one time transition tax, creates a “minimum tax” on certain intangible foreign earnings and creates an incentive for U.S. companies to sell goods and services abroad. The decrease in the U.S. federal corporate tax rate from 35% to 21% results in a blended statutory tax rate of 31.5% for the fiscal year ending March 31, 2018.

The dollar increase in the income tax provision during the three months ended December 31, 2017, as compared to the same period last year, was attributable to a one-time non-cash charge of $2.9 million due to a reduction in deferred tax assets as a result of the reduction of the federal tax rate from 35% to 21% effective January 1, 2018, partially offset by the reduction of the U.S. federal rate from 35% to a blended statutory tax rate of 31.5%.

The dollar decrease in the income tax provision during the nine months ended December 31, 2017, as compared to the same period last year, was attributable to lower pre-tax income and the reduction of the U.S. federal rate from 35% to a blended statutory tax rate of 31.5%, partially offset by a one-time non-cash charge of $2.9 million due to a reduction in deferred tax assets as a result of the reduction of the federal tax rate from 35% to 21% effective January 1, 2018.

The increase in the effective tax rate during the three and nine months ended December 31, 2017, as compared to the same period last year, was primarily attributable to an additional provision for income tax resulting from the enactment of the Tax Act during the three and nine months ended December 31, 2017, as described above. The increase in the effective tax rate was partially offset by the reduction of the U.S. federal rate from 35% to a blended statutory tax rate of 31.5% and the recognition of excess tax benefits as a discrete item in the three and nine months ended December 31, 2017 pursuant to ASU 2016-09, which we adopted effective the first quarter of fiscal 2018. The adoption of ASU 2016-09 is discussed further in Note 2, “Summary of Significant Accounting Policies.”

As of December 31, 2017, the Company had not fully completed its accounting for the tax effects of the enactment of the Tax Act. The Company’s provision for income taxes during the three and nine months ended December 31, 2017 is based on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company estimates it will incur no transition tax and has recorded a one-time non-cash charge of $2.9 million due to an estimated reduction in deferred tax assets as a result of the reduction of the federal rate from 35% to 21%. The computation of the transition tax could be impacted by further interpretations from the U.S. and state governments and regulatory organizations. The reduction of the deferred tax assets may be impacted by changes in the timing for the reversal of existing deferred tax assets and liabilities.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations which applies after the fiscal year ending March 31, 2018. Because of the complexity of the new provisions, we are continuing to evaluate how the provisions will be accounted for under GAAP wherein companies are allowed to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which they are subject to the rules or (ii) account for GILTI in our measurement of deferred taxes. Prior to the reporting period in which the Tax Act was enacted, our policy was to reinvest earnings of their foreign subsidiaries unless such earnings are subject to U.S. taxation. As of March 31, 2017, there were no earnings that have not been subject to U.S. taxation. We do not have sufficient information available to finalize our analysis of the impact of the Tax Act on our repatriation policy, and therefore, the policy has not changed as of December 31, 2017. We expect to finalize our analysis during the fourth quarter ending March 31, 2018 which may include a change in our repatriation policy.

We did not have any unrecognized tax benefits as of December 31, 2017 and March 31, 2017. During the three and nine months ended December 31, 2017 and 2016, we did not recognize any interest or penalties related to unrecognized tax benefits.

We are subject to income taxes in the United States and various foreign jurisdictions. Accordingly, we are subject to a variety of examinations by taxing authorities in these locations. In the third quarter of fiscal 2017, the state of California commenced an examination of our tax returns for fiscal years 2014 and 2015, which was completed in the second quarter of fiscal 2018 and there have not been any proposed assessments as a result of this examination. Our foreign subsidiary income tax returns for fiscal 2013 through 2015 are subject to examination by German tax authorities. The German tax examination commenced in the third quarter of fiscal 2018. As of December 31, 2017, there had been no proposed assessments by such authorities in Germany and we are unable to estimate the range of possible outcomes at this time.