Income Taxes

12 Months Ended

Dec. 31, 2018

On December 22, 2017, the Tax Reform Act was signed, which includes a broad range of tax reform proposals affecting businesses, including corporate tax rates, business deductions, and international tax provisions. Many of these provisions significantly differ from current U.S. tax law, resulting in financial reporting implications. Some of the changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the option to claim accelerated depreciation deductions, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings as of December 31, 2017.

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions: the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. Effective the first quarter of 2018, the Company has elected to treat any GILTI inclusions as a period cost.

The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company is not subject to this tax and therefore has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2018.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued by the SEC to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. During the year ended December 31, 2017, the Company recorded provisional amounts for $2.8 million of deferred tax benefit recorded in connection with the re-measurement of deferred tax assets and liabilities and $3.8 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings. As of December 31, 2018, we have completed our accounting for the tax effects of the Tax Reform Act. Subsequent adjustments to these amounts resulted in additional tax benefits recorded during 2018 of approximately $0.7 million and $0.6 million, respectively. Management will continue to monitor any changes in tax law.

The provision for income taxes from operations consisted of the following:



	Years Ended December 31,
(in thousands)	2018		2017			2016
Current
Federal	$	27,410	$	36,077		$	39,649
State	9,515		6,357			7,053
Foreign	4,605		3,068			3,333
Deferred
Federal	3,179		6,093			260
State	263		544			13
Foreign	523		(338		)	(1,142		)
	$	45,495	$	51,801		$	49,166

Income and loss from operations before income taxes for the years ended December 31, 2018, 2017, and 2016, respectively, consisted of the following:



	Years Ended December 31,
(in thousands)	2018		2017		2016
Domestic	$	169,109	$	132,105	$	131,827
Foreign	3,019		12,313		7,073
	$	172,128	$	144,418	$	138,900

At December 31, 2018, the Company had $37.0 million of pre-tax loss carryforwards in various foreign taxing jurisdictions, of which $0.9 million will begin to expire between 2019 and 2025. The remaining tax losses can be carried forward indefinitely.

At December 31, 2018, and 2017, the Company had deferred tax valuation allowances of $13.3 million and $11.1 million, respectively. The valuation allowance increased $2.1 million and $4.2 million for the years ended December 31, 2018 and 2017, respectively. The increase in 2018 valuation allowances was primarily a result of increases in foreign losses in jurisdictions where the Company has recorded a full valuation allowance. The increase in 2017 valuation allowances was primarily due to the Company's remaining foreign tax credits carryforward in the U.S. As of December 31, 2018, the Company believes it is more likely than not that these foreign tax credits will expire unrealized under the Tax Reform Act.

The Company has not historically recorded federal income taxes on the undistributed earnings of its foreign subsidiaries because such earnings are reinvested and, in the Company’s opinion, will continue to be reinvested indefinitely. The Tax Reform Act provided for a one-time transition tax on the mandatory deemed repatriation of foreign earnings through the year ended December 31, 2017, and as a result, the Company recorded a net $3.2 million tax liability based on undistributed foreign earnings of approximately $23.9 million. As a result of the implications of the 2017 Tax Reform Act and in satisfying Management’s 2020 Plan, the Company announced one-time distributions from select foreign jurisdictions to the U.S. during 2018. The Company repatriated approximately $63.0 million between the third and fourth quarter and recorded taxes of approximately $1.0 million which is primarily comprised of withholding taxes and state income taxes. The Company intends to limit any possible future distributions to earnings previously taxed in the U.S. As a result, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries. Determination of the related amount of unrecognized deferred U.S. income taxes is not practicable because of the complexities associated with this hypothetical calculation.

Reconciliations between the statutory federal income tax rates and the Company’s effective income tax rates as a percentage of income before income taxes for its operations were as follows:



	Years Ended December 31,
(in thousands)	2018		2017		2016
Federal tax rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	4.5	%	3.2	%	3.4	%
Tax benefit of domestic manufacturing deduction	—	%	(2.0	)%	(2.5	)%
Mandatory deemed repatriation of foreign earnings	—	%	2.7	%	—	%
Change in U.S. tax rate applied to deferred taxes	—	%	(1.9	)%	—	%
Change in valuation allowance	1.3	%	1.3	%	(0.1	)%
True-up of prior year tax returns to tax provision	(1.2	)%	(0.5	)%	(0.2	)%
Difference between United States statutory and foreign local tax rates	0.5	%	(0.8	)%	(0.3	)%
Change in uncertain tax position	(0.1	)%	—	%	(0.2	)%
Other	0.4	%	(1.1	)%	0.3	%
Effective income tax rate	26.4	%	35.9	%	35.4	%

The decrease in the Company’s effective tax rate is primarily driven by the reduced U.S. federal income tax rate in 2018.

The tax effects of the significant temporary differences that constitute the deferred tax assets and liabilities at December 31, 2018 and 2017, respectively, were as follows:



	December 31,
(in thousands)	2018			2017
Deferred asset taxes
State tax	$	919		$	1,390
Workers’ compensation	785			822
Health claims	445			487
Vacation liability	370			1,008
Allowance for doubtful accounts	171			104
Inventories	5,659			5,385
Sales incentive and advertising allowances	799			709
Stock-based compensation	3,074			2,967
Unrealized foreign exchange gain or loss	440			291
Foreign tax credit carryforwards	5,043			4,453
Uncertain tax positions’ unrecognized tax benefits	39			31
Foreign tax loss carry forward	8,091			6,892
Other	1,813			1,291
	$	27,648		$	25,830
Less valuation allowances	(13,254		)	(11,114		)
Total deferred asset taxes	$	14,394		$	14,716

Deferred tax liabilities
Depreciation	$	(9,189	)	$	(7,050	)
Goodwill and other intangibles amortization	(13,027		)	(11,331		)
Tax effect on cumulative translation adjustment	(497		)	(487		)
Total deferred tax liabilities	(22,713		)	(18,868		)

Total Deferred tax asset/(liability)	$	(8,319	)	$	(4,152	)

A reconciliation of the beginning and ending amounts of unrecognized tax benefits in 2018, 2017 and 2016, respectively, was as follows, including foreign translation amounts:



Reconciliation of Unrecognized Tax Benefits	2018			2017			2016
Balance at January 1	$	1,895		$	1,119		$	1,107
Additions based on tax positions related to prior years	—			660			204
Reductions based on tax positions related to prior years	(171		)	(1		)	—
Additions for tax positions of the current year	100			319			155
Lapse of statute of limitations	(67		)	(202		)	(347		)
Balance at December 31	$	1,757		$	1,895		$	1,119

Tax positions of $0.1, $0.0, and $0.0 million are included in the balance of unrecognized tax benefits at December 31, 2018, 2017, and 2016, respectively, which if recognized, would reduce the effective tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense, which is a continuation of the Company’s historical accounting policy. During the year ended December 31, 2018 and 2017, accrued interest increased by $5 thousand and $0.2 million, respectively, and during the years ended 2016, accrued interest decreased by $61 thousand. The Company had accrued $0.4 million for each of the fiscal years ended 2018 and 2017 and $0.2 million for the year ended 2016, for the potential payment of interest, before income tax benefits.

At December 31, 2018, the Company remained subject to United States federal income tax examinations for the tax years 2015 through 2018. In addition, the Company remained subject to state, local and foreign income tax examinations primarily for the tax years 2013 through 2018.