Income Taxes

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 will elect to treat any potential GILTI inclusions as a period cost as we are not projecting any material impact from GILTI inclusions and any deferred taxes related to any inclusion would be immaterial.

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 does not expect it will be 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, 2017.

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. In accordance with SAB 118, the Company has 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. The Company considers these amounts to be reasonable estimates at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical data as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.

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



	Years Ended December 31,
(in thousands)	2017			2016			2015
Current
Federal	$	36,077		$	39,649		$	29,684
State	6,357			7,053			5,001
Foreign	3,068			3,333			3,568
Deferred
Federal	6,093			260			2,390
State	544			13			753
Foreign	(338		)	(1,142		)	(605		)
	$	51,801		$	49,166		$	40,791

Income and loss from operations before income taxes for the years ended December 31, 2017, 2016, and 2015, respectively, consisted of the following:



	Years Ended December 31,
(in thousands)	2017		2016		2015
Domestic	$	132,105	$	131,827	$	106,381
Foreign	12,313		7,073		2,298
	$	144,418	$	138,900	$	108,679

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company re-measured its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $2.8 million tax benefit for the year ended December 31, 2017.

At December 31, 2017, the Company had $32.1 million of pre-tax loss carryforwards in various foreign taxing jurisdictions, of which $1.1 million will begin to expire between 2019 and 2024. The remaining tax losses can be carried forward indefinitely.

At December 31, 2017, and 2016, the Company had deferred tax valuation allowances of $11.1 million and $6.9 million, respectively. The valuation allowance increased $4.2 million and decreased $0.7 million for the years ended December 31, 2017 and 2016, respectively. The increase in the valuation allowance in 2017 was primarily due to the Company’s remaining foreign tax credits carryforward in the U.S. The Company concluded 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. The Company has recorded a net $3.8 million tax liability based on undistributed foreign earnings of approximately $73.3 million, payable over eight years. 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)	2017		2016		2015
Federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	3.2	%	3.4	%	3.3	%
Tax benefit of domestic manufacturing deduction	(2.0	)%	(2.5	)%	(2.3	)%
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	%	(0.1	)%	1.3	%
Difference between United States statutory and foreign local tax rates	(0.8	)%	(0.3	)%	0.2	%
Change in uncertain tax position	—	%	(0.2	)%	0.3	%
Other	(1.6	)%	0.1	%	(0.3	)%
Effective income tax rate	35.9	%	35.4	%	37.5	%

The tax effects of the significant temporary differences that constitute the deferred tax assets and liabilities at December 31, 2017 and 2016, respectively, were as follows:



	December 31,
(in thousands)	2017			2016
Deferred asset taxes
State tax	$	1,390		$	2,518
Workers’ compensation	822			1,381
Health claims	487			755
Vacation liability	1,008			1,485
Allowance for doubtful accounts	104			123
Inventories	5,385			6,833
Sales incentive and advertising allowances	709			1,126
Acquisition costs	—			528
Unrealized foreign exchange gain or loss	291			678
Stock-based compensation	2,967			5,550
Foreign tax credit carryforwards	4,453			1,288
Uncertain tax positions’ unrecognized tax benefits	31			104
Foreign tax loss carry forward	6,892			6,841
Other	1,291			1,259
	$	25,830		$	30,469
Less valuation allowances	(11,114		)	(6,868		)
	14,716			23,601

Deferred tax liabilities
Depreciation	$	(7,050	)	$	(6,138	)
Goodwill and other intangibles amortization	(11,331		)	(14,126		)
Tax effect on cumulative translation adjustment	(487		)	(667		)
Other	—			(744		)
	(18,868		)	(21,675		)

Total Deferred tax	$	(4,152	)	$	1,926

A reconciliation of the beginning and ending amounts of unrecognized tax benefits in 2017, 2016 and 2015, respectively, was as follows, including foreign translation amounts:



Reconciliation of Unrecognized Tax Benefits	2017			2016			2015
Balance at January 1	$	1,119		$	1,107		$	1,307
Additions based on tax positions related to prior years	660			204			310
Reductions based on tax positions related to prior years	(1		)	—			(514		)
Additions for tax positions of the current year	319			155			191
Lapse of statute of limitations	(202		)	(347		)	(187		)
Balance at December 31	$	1,895		$	1,119		$	1,107

Tax positions of $0, $0, and $0.2 million are included in the balance of unrecognized tax benefits at December 31, 2017, 2016, and 2015, 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, 2017, accrued interest increased by $0.2 million and during the years ended 2016 and 2015, accrued interest decreased by $61 thousand and $30 thousand, respectively. The Company had accrued $0.4 million for each of the fiscal year ended 2017, and $0.2 million for the years ended 2016 and 2015, for the potential payment of interest, before income tax benefits.

At December 31, 2017, the Company remained subject to United States federal income tax examinations for the tax years 2014 through 2017. In addition, the Company remained subject to state, local and foreign income tax examinations primarily for the tax years 2012 through 2017.