Income Taxes

9 Months Ended

Sep. 30, 2018

INCOME TAXES

The effective tax rates for the three months ended September 30, 2018 and 2017 were 21.4% and 28.0%, respectively. For the nine months ended September 30, 2018 and 2017, the effective tax rates were 24.2% and 27.0%, respectively. The reduction in the tax rate is partially due to the reduction in the U.S. statutory tax rate to 21%.

There were discrete tax benefits of $660 and $5,714 for the three months ended September 30, 2018 and 2017, respectively, and $5,178 and $14,761 for the nine months ended September 30, 2018 and 2017, respectively. The discrete benefits for the three months ended September 30, 2018 include $1,026 related to excess equity based compensation and $4,247 for return to provision adjustments. These were offset by discrete detriments for a U.S. tax rate adjustment of $2,195 related to profit in inventory from 2017 that flowed through to consolidated earnings in 2018 and $3,046 related to a valuation allowance primarily related to state tax credits. The discrete benefits for the nine months ended September 30, 2018 include $10,920 related to excess equity based compensation and $4,001 related to provision to return adjustments. These were offset by discrete detriments for the U.S. tax rate adjustment of 6,584 related to profit in inventory from 2017 that flowed through to consolidated earnings in 2018 and 3,046 related to a valuation allowance reflected primarily for state tax credits that exceed state income taxes in specific states. The discrete benefits in the three months ended September 30, 2017 include $3,738 related to excess equity based compensation and $2,111 related to provision to return related adjustments. The discrete benefits for the nine months ended September 30, 2017 include $10,883 related to excess equity based compensation, $2,240 related to the reversal of a tax reserve and $2,111 related to provision to return adjustments.

In addition to the discrete items above, the effective tax rate for the three months ended September 30, 2018 benefited from certain tax adjustments made in accordance with SAB 118. SAB 118 provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act and allows a measurement period of up to one year from enactment to complete the accounting under ASC 740. The Company reduced its annual effective rate because of changes in the Global Intangible Low Taxed Income ("GILTI") tax calculation resulting from newly proposed regulations issued by the Treasury. The impact reduced the estimated tax expense for the nine months ended September 30, 2018 by $7,939, of which $4,747 had been reflected in tax expense as of June 30, 2018. The Company also finalized its calculation of the liability due to the deemed repatriation tax included in the Tax Act and recorded a $3,621 tax benefit which is included in the discrete benefit for provision to return adjustments detailed above.

The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. The following is a summary of the activity of the Company’s unrecognized tax benefits for nine months ended September 30, 2018 and 2017:


	2018		2017
Balance at January 1	$	10,370	$	6,403
Change in prior period positions	(1,067)		(2,240)
Additions for tax positions in current period	1,012		1,500
Foreign currency translation	(771)		—
Balance at September 30	$	9,544	$	5,663

Substantially all of the liability for uncertain tax benefits related to various federal, state and foreign income tax matters would benefit the Company's effective tax rate, if recognized. The Company is under tax audit in Germany (2013 - 2016) and Japan (2015 - 2017) and has been notified that a tax audit in Korea (2013 – 2017) will start later this year.