Note 21 - Income Taxes

We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results, and transfer pricing and tax regulations in the related jurisdictions.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Among other changes, the Tax Act lowered the U.S. corporate income tax rate from 35% to 21% and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of certain foreign subsidiaries. The rate change is effective at the beginning of calendar year 2018 and, as a result, we have a blended U.S. federal statutory tax rate of 32.7% for our fiscal year 2018.

Under accounting standards for income taxes, the impact of new tax legislation must be taken into account in the period in which it is enacted. Subsequent to the Tax Act, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) allowing companies to use provisional estimates to record the effects of the Tax Act. SAB 118 also provides a measurement period (not to exceed one year from the date of enactment) to complete the accounting for the impacts of the Tax Act.

As a result of the enactment, we have recorded a provisional tax expense of $17.9 million related to the one-time remeasurement of our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, the one-time repatriation tax applied to our undistributed foreign earnings, and the impact of executive compensation that is no longer deductible under the Tax Act. The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued and actions the we may take as a result of the Tax Act. Any subsequent adjustments to provisional estimates will be reflected in our income tax provision during one or more periods in our fiscal 2019.

Due to the enactment of the Tax Act, future repatriations of foreign earnings will generally be free of U.S. federal income tax but may incur withholding or state taxes. As of February 28, 2018, we have not made a change to our assertion that undistributed net earnings with respect to certain foreign subsidiaries are indefinitely reinvested outside the United States. All undistributed net earnings have been taxed in the U.S. as a result of the Tax Act, and consistent with our assertion, the Company intends to limit any future distributions to previously taxed income. However, we are continuing to analyze the impact of the Tax Act on our assertion.

Our components of income before income tax expense are as follows:

COMPONENTS OF INCOME BEFORE TAXES


	Fiscal Years Ended the Last Day of February,
(in thousands)	2018		2017		2016
U.S.	$	23,824	$	20,878	$	17,069
Non-U.S.		131,614		134,839		88,943
Total	$	155,438	$	155,717	$	106,012

Our components of income tax expense (benefit) are as follows:

COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)


	Fiscal Years Ended the Last Day of February,
(in thousands)	2018		2017		2016
U.S.
Current	$	3,380	$	19,195	$	10,444
Deferred		19,578		(10,475)		(4,428)
		22,958		8,720		6,016

Non-U.S.
Current		1,912		(290)		4,919
Deferred		1,686		2,977		2,086
		3,598		2,687		7,005
Total	$	26,556	$	11,407	$	13,021

Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. A summary of these differences are as follows:

INCOME TAX RATE RECONCILIATION


	Fiscal Years Ended the Last Day of February,
	2018			2017			2016
Effective income tax rate at the U.S. statutory rate		32.7	%		35.0	%		35.0	%
Impact of U.S. state income taxes		0.5	%		0.5	%		(0.1)	%
Effect of statutory tax rate in Macau		(19.5)	%		(20.1)	%		(21.8)	%
Effect of statutory tax rate in Barbados		(5.2)	%		(7.3)	%		(7.6)	%
Effect of statutory tax rate in Europe		(5.3)	%		(3.6)	%		-	%
Effect of statutory tax rate in Switzerland		-	%		-	%		(6.5)	%
Effect of income from other non-U.S. operations subject to varying rates		2.1	%		2.1	%		4.6	%
Effect of foreign exchange fluctuations		0.3	%		0.4	%		3.8	%
Effect of asset impairment charges		2.2	%		0.4	%		1.3	%
Effect of U.S. tax reform		11.5	%		-	%		-	%
Effect of uncertain tax positions		(1.3)	%		-	%		-	%
Other Items		(0.9)	%		(0.1)	%		3.6	%
Effective income tax rate		17.1	%		7.3	%		12.3	%

Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell. We have an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain employment and investment thresholds. We have not experienced any issues in meeting the required thresholds and are unaware of any regulatory changes or impending circumstances that would restrict our right to continue to benefit from the tax holiday. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau.

Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of the last day of February 2018 and 2017 are as follows:

COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES


	Last Day of February,
(in thousands)	2018		2017
Deferred tax assets, gross:
Operating loss carryforwards	$	32,829	$	16,799
Accounts receivable		4,767		7,375
Inventories		7,183		11,057
Accrued expenses and other		7,385		12,007
Total gross deferred tax assets		52,164		47,238

Valuation allowance		(17,747)		(17,600)
Deferred tax liabilities:
Depreciation and amortization		(24,859)		(47,774)
Total deferred tax liabilities, net	$	9,558	$	(18,136)

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not be recoverable. In fiscal 2018, the $0.1 million net decrease in our valuation allowance was principally due to changes in estimates regarding the value of operating loss carryforwards to be used in the future.

As of February 28, 2018 and 2017, we had remaining tax-deductible goodwill of $19.0 million and $113.0 million, respectively, resulting from acquisitions. The amortization of this goodwill is deductible over various periods ranging up to 2 years. The tax deduction for goodwill in fiscal 2019 is expected to be approximately $1.3 million.

The composition of our operating loss carryforwards at the end of fiscal 2018 is as follows:

SUMMARY OF OPERATING LOSS CARRYFORWARD


	Balances at February 28, 2018
	Tax Year	Deferred		Operating
	Expiration	Tax		Loss
(in thousands)	Date Range	Assets		Carryforward
U.S. federal and state operating loss carryforward	2021 - Indefinite	$	16,549	$	81,856
Non-U.S. operating loss carryforwards with definite carryover periods	2020 - 2035		2,103		7,853
Non-U.S. operating loss carryforwards with indefinite carryover periods	Indefinite		14,177		50,436
Subtotals			32,829	$	140,145
Less portion of valuation allowance established for operating loss carryforwards			(16,406)
Total		$	16,423

Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced.

During fiscal 2018 and 2017, changes in the total amount of unrecognized tax benefits were as follows:

UNRECOGNIZED TAX BENEFITS


	Fiscal Years Ended
	the Last Day of February,
(in thousands)	2018		2017
Total unrecognized tax benefits, beginning balance	$	6,611	$	8,737
Tax positions taken during the current period		-		-
Resolution of tax dispute		(1,486)		-
Changes in tax positions taken during a prior period		88		(1,260)
Lapse in statute of limitations		(890)		(218)
Impact of foreign currency re-measurement		218		(133)
Settlements		(113)		(515)
Total unrecognized tax benefits, ending balance		4,428		6,611
Less current unrecognized tax benefits		(1,079)		-
Noncurrent unrecognized tax benefits	$	3,349	$	6,611

Included in the balance of unrecognized tax benefits at the end of fiscal 2018 were $4.4 million of tax benefits, which, if recognized, would affect our effective tax rate. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities.

We classify interest and penalties on uncertain tax positions as income tax expense. At the end of February 2018 and 2017, the liability for tax-related interest and penalties included in unrecognized tax benefits was $1.1 million and $1.7 million, respectively. Additionally, during fiscal 2018, 2017 and 2016 we recognized expense (benefit) of ($0.5) ($0.6) and $0.5 million, respectively, in the consolidated statements of income.

We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. We do not expect that any proposed adjustments from these tax jurisdictions will have a material impact on our consolidated financial statements.

As of February 28, 2018, tax years under examination or still subject to examination by material tax jurisdictions are as follows:


Jurisdiction	Tax Years Under Examination	Open Tax Years
United Kingdom	- None -	2017	-	2018
United States	2016	2007, 2008, 2015 - 2018
Switzerland	- None -	2014	-	2018
Hong Kong	- None -	2010	-	2018

During fiscal 2017 we received an assessment from a state tax authority which adjusted taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. We believe we have accurately reported our taxable income and are vigorously protesting the assessment through administrative processes with the state. We believe it is unlikely that the outcome of these matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.