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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The components of income before income taxes were as follows:
| Year ended December 31,
(in thousands) | 2019 |  | 2018 |  | 2017
Domestic operations | $ | 70,632 |  |  | $ | 54,003 |  |  | $ | 61,158 |
Foreign operations | 94,533 |  |  | 96,301 |  |  | 90,518 |
Income before income taxes | $ | 165,165 |  |  | $ | 150,304 |  |  | $ | 151,676 |
Income tax expense/ (benefit) was as follows:
| Year ended December 31,
(in thousands) | 2019 |  | 2018 |  | 2017
Current expense (benefit) |  |  |  |  |
United States | $ | 1,121 |  |  | $ | 1,795 |  |  | $ | (906 | )
Foreign | 31,005 |  |  | 29,896 |  |  | 28,109 |
Current income tax expense | 32,126 |  |  | 31,691 |  |  | 27,203 |
Deferred expense (benefit) |  |  |  |  |
United States | 9,539 |  |  | 16,222 |  |  | 21,189 |
Foreign | (1,065 | ) |  | (681 | ) |  | 83 |
Deferred income tax expense | 8,474 |  |  | 15,541 |  |  | 21,272 |
Total income tax expense | $ | 40,600 |  |  | $ | 47,232 |  |  | $ | 48,475 |
The following table represents a reconciliation of income taxes computed at the federal statutory income tax rate of 21% for 2019, 21% for 2018, and 35% for 2017 to income tax expense as reported:
| Year ended December 31,
(in thousands) | 2019 |  | 2018 |  | 2017
Income tax expense computed at federal statutory income tax rate | $ | 34,685 |  |  | $ | 31,564 |  |  | $ | 53,086 |
Foreign taxes, net of credits | 714 |  |  | 13,316 |  |  | (16,840 | )
Impact of the 2017 Tax Act | — |  |  | 10,801 |  |  | 12,619 |
Net adjustments for uncertain tax positions | 799 |  |  | 771 |  |  | 508 |
State and local taxes | 1,832 |  |  | 2,349 |  |  | 1,313 |
Equity appreciation rights | — |  |  | — |  |  | (765 | )
Nondeductible expenses | 1,179 |  |  | 962 |  |  | 1,407 |
Valuation allowance | 2,882 |  |  | (10,038 | ) |  | 90 |
Tax credits | (607 | ) |  | (2,800 | ) |  | (3,240 | )
Miscellaneous other, net | (884 | ) |  | 307 |  |  | 297 |
Income tax expense as reported | $ | 40,600 |  |  | $ | 47,232 |  |  | $ | 48,475 |
Effective income tax rate | 24.6 | % |  | 31.4 | % |  | 32.0 | %
The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax (“Transition Tax”) on accumulated earnings of foreign subsidiaries as of 2017, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. In accordance with the 2017 Tax Act, the Company recorded a provisional tax expense of approximately $7.8 million in the fourth quarter of 2017, the period in which the legislation was enacted. This amount was primarily comprised of the remeasurement of federal net deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35% of approximately $4.0 million, the Transition Tax on the accumulated earnings of foreign subsidiaries of the Company of approximately $8.6 million, offset by the release of the deferred tax liability previously recorded on unremitted earnings of $4.8 million. Additionally, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued 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 2017 Tax Act. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, the Company has completed its analysis, based upon currently available legislative updates, proposed regulations, and other administrative guidance issued related to the 2017 Tax Act, which resulted in an additional tax expense in the fourth quarter of 2018 of $10.3 million and a total tax expense of $13.9 million for the year ended December 31, 2018. The Company has determined that its undistributed earnings for most of its foreign subsidiaries are not permanently reinvested. The Company has provided for withholding taxes on all unremitted earnings, as required. The components of net deferred tax assets (liabilities) were as follows:
| December 31,
(in thousands) | 2019 |  | 2018
Deferred tax assets |  |  |
Compensation and benefits | $ | 13,208 |  |  | $ | 14,036 |
Share-based compensation | 2,682 |  |  | 7,446 |
Pension and other postretirement benefits | 24,260 |  |  | 22,285 |
Inventories | 15,379 |  |  | 11,505 |
R&D capitalization | 12,925 |  |  | 6,449 |
Lease liability | 9,669 |  |  | — |
Partnership investment | 223 |  |  | 110 |
Transaction costs | 1,365 |  |  | 1,580 |
Nondeductible accruals and reserves | 6,907 |  |  | 7,248 |
Miscellaneous | 2,802 |  |  | 2,379 |
Net operating loss and other tax carryforwards | 74,586 |  |  | 80,671 |
Gross deferred tax assets | 164,006 |  |  | 153,709 |
Valuation allowance | (18,424 | ) |  | (15,542 | )
Total deferred tax assets | 145,582 |  |  | 138,167 |
Deferred tax liabilities |  |  |
Property, plant and equipment | (6,687 | ) |  | (8,057 | )
Identifiable intangible assets | (62,349 | ) |  | (54,681 | )
Right-of-use assets | (9,407 | ) |  | — |
Foreign exchange derivative instruments | (154 | ) |  | (1,176 | )
Miscellaneous | (1,281 | ) |  | (860 | )
Total deferred tax liabilities | (79,878 | ) |  | (64,774 | )
Net deferred tax asset | $ | 65,704 |  |  | $ | 73,393 |
Under U.S. tax law and regulations, certain changes in the ownership of the Company’s shares can limit the annual utilization of tax attributes (tax loss and tax credit carryforwards) that were generated prior to such ownership changes. The annual limitation could affect the realizability of the Company’s deferred tax assets recorded in the financial statement for its tax credit carryforwards because the carryforward periods have a finite duration. The 2016 initial public offering, and associated share transfers, resulted in significant changes in the composition of the ownership of the Company’s shares. Based on its analysis of the change of ownership tax rules in conjunction with the estimated amount and source of its future earnings and related tax profile, the Company believes its existing U.S. tax attributes will be utilized prior to their expiration, with the exception of certain tax attributes for which the Company has established a valuation allowance. As of December 31, 2019 and 2018, the Company had state net operating loss (“NOL”) carryforwards of $141.3 million and $158.9 million, respectively. These NOL carryforwards expire between 2020 and 2037. As of December 31, 2019 and 2018, the Company had foreign tax credit carryforwards of $55.0 million and $59.4 million, respectively. These foreign tax credits will begin to expire in 2022. As of December 31, 2019 and 2018, the Company had U.S. general business credit carryforwards of $16.9 million and $14.3 million, respectively. These credits will begin to expire in 2031. As of December 31, 2019 and 2018, the Company had state research tax credits of $8.2 million and $10.3 million, respectively. These credits will begin to expire in 2030. Changes in the valuation allowance for deferred tax assets were as follows:
| Year ended December 31,
(in thousands) | 2019 |  | 2018 |  | 2017
Valuation allowance at beginning of year | $ | 15,542 |  |  | $ | 25,579 |  |  | $ | 21,726 |
Increases (decreases) recorded to income tax provision | 2,882 |  |  | (10,037 | ) |  | 3,853 |
Valuation allowance at end of year | $ | 18,424 |  |  | $ | 15,542 |  |  | $ | 25,579 |
The Company evaluates the realizability of its deferred tax assets based upon the weight of available positive and negative evidence. In assessing the realizability of these assets, the Company considered numerous factors including historical profitability, the character and estimated future taxable income, prudent and feasible tax planning strategies, and the industry in which it operates. The Company’s conclusion was primarily driven by cumulative income in the U.S. tax jurisdiction and projections of future income driven by the sustained profitability. The change in the valuation allowance of $2.9 million is principally due to excess U.S. foreign tax credits arising from our Japan branch operations and generated state tax attributes that we expect to expire unutilized, partially offset by the release of the Company’s previously recoded valuation allowance in Hong Kong. In 2018, the change in the valuation allowance was comprised of an $18.4 million release of its previously recorded valuation allowance against state deferred tax assets, partially offset by an increase of $0.4 million related to state tax attributes, and an increase of $8.0 million related to excess U.S. foreign tax credits arising from its Japan branch operations. During 2018, the Company early adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220)” ("ASU 2018-02") under the aggregate portfolio approach. ASU 2018-02 allows for reclassification of stranded tax effects on items resulting from the 2018 Tax Act from AOCI to retained earnings. Certain tax effects become stranded in AOCI when deferred tax balances originally recorded at the historical income tax rate are adjusted in income from continuing operations based on a lower newly enacted income tax rate. As a result of the adoption, we reclassified the stranded income tax effects resulting from the 2017 Tax Act, decreasing accumulated other comprehensive loss by $4.1 million with a corresponding increase to retained earnings. The reclassification was primarily comprised of amounts relating to available-for-sale securities, pension, postretirement benefit plan obligations and currency translation matters. The Company's unrecognized tax benefits represent tax positions for which reserves have been established. The following table represents a reconciliation of the activity related to the unrecognized tax benefits, excluding accrued interest and penalties:
(in thousands) | 2019 |  | 2018 |  | 2017
Unrecognized tax benefits at beginning of year | $ | 11,646 |  |  | $ | 11,049 |  |  | $ | 11,347 |
Gross additions - current year tax positions | 787 |  |  | 801 |  |  | 1,159 |
Gross additions - acquired tax positions | 659 |  |  | — |  |  | — |
Gross reductions - prior year tax positions | (248 | ) |  | (91 | ) |  | (348 | )
Gross reductions - Acquired tax positions settled with tax authorities | (461 | ) |  | (113 | ) |  | (1,241 | )
Impact of change in foreign exchange rates | (16 | ) |  | — |  |  | 132 |
Unrecognized tax benefits at end of year | $ | 12,367 |  |  | $ | 11,646 |  |  | $ | 11,049 |
As of December 31, 2019, 2018 and 2017, the unrecognized tax benefits of $12.4 million, $11.6 million and $11.0 million, respectively, would affect the Company's future effective tax rate if recognized. The Company does not anticipate a material change in unrecognized tax benefits within the next 12 months. As of December 31, 2019, 2018 and 2017, the Company had unrecognized tax benefits included in the amounts above of $5.0 million, $5.0 million and $4.9 million, respectively, related to periods prior to the Company's acquisition of Acushnet Company and as such, are indemnified by Beam. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of income. As of December 31, 2019, 2018 and 2017, the Company recognized a liability of $3.9 million, $3.3 million and $2.7 million, respectively for interest and penalties, of which $3.4 million, $3.0 million and $2.7 million is indemnified by Beam. Prior to the Company's acquisition of Acushnet Company, Acushnet Company or its subsidiaries filed certain combined tax returns with Beam. Those and other subsidiaries' income tax returns are periodically examined by various tax authorities. Beam is responsible for managing United States tax audits related to periods prior to July 29, 2011. Acushnet Company is obligated to support these audits and is responsible for managing all non-U.S. audits. The Company and certain subsidiaries have tax years that remain open and are subject to examination by tax authorities in the following major taxing jurisdictions: United States for years after July 29, 2011, Canada for years after 2014, Japan for years after 2014, Korea for years after 2016, and the United Kingdom for years after 2016. The Company files income tax returns on a combined, unitary, or stand-alone basis in multiple state and local jurisdictions, which generally have statute of limitations from three to four years. Various states and local income tax returns are currently in the process of examination. These examinations are unlikely to result in any significant changes to the amounts of unrecognized tax benefits on the consolidated balance sheet as of December 31, 2019. The Company's income tax expense includes tax expense of $0.5 million, $0.3 million and $0.2 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to the tax obligations indemnified by Beam. There is an offsetting amount included in other expense, net for the related adjustment to the Beam indemnification asset, resulting in no effect on net income.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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