NOTE 7 - INCOME TAXES

Income before provision for income taxes on a legal entity basis consists of the following (in thousands):

	2017		2016		2015
U.S. income before taxes	$	26,299	$	44,384	$	34,099
Non-U.S. income before taxes		25,155		24,741		37,065
Income before income taxes	$	51,454	$	69,125	$	71,164

The Company conducts business globally and, as a result, is subject to income taxes in the U.S. federal, state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities in many countries, such as Germany, Hong Kong, Switzerland and the United States. The Company is no longer subject to income tax examination for years ended prior to January 31, 2013, with few exceptions.

The provision for income taxes for the fiscal years ended January 31, 2017, 2016 and 2015 consists of the following components (in thousands):

	2017			2016			2015
Current:
U.S. Federal	$	14,079		$	17,776		$	8,412
U.S. State and Local		1,117			1,434			770
Non-U.S.		5,091			5,291			3,945
		20,287			24,501			13,127
Deferred:
U.S. Federal		(4,231	)		(1,995	)		3,763
U.S. State and Local		(167	)		(228	)		420
Non-U.S.		426			1,082			1,954
		(3,972	)		(1,141	)		6,137
Provision for income taxes	$	16,315		$	23,360		$	19,264

Significant components of the Company’s deferred income tax assets and liabilities as of January 31, 2017 and 2016 are as follows (in thousands):

	2017 Deferred Taxes					2016 Deferred Taxes
	Assets			Liabilities		Assets			Liabilities
Net operating loss carryforwards	$	10,516		$	—	$	9,182		$	—
Inventory		3,782			—		3,103			—
Unprocessed returns		1,200			—		1,538			—
Receivables allowances		1,151			—		847			—
Deferred compensation		18,955			—		16,286			—
Unrepatriated earnings		—			2,956		—			2,877
Capital loss carryforwards		389					216			—
Depreciation/amortization		—			1,245		—			1,234
Other provisions/accruals		207			—		200			—
Miscellaneous		955			—		992			—
		37,155			4,201		32,364			4,111
Valuation allowance		(8,714	)		—		(8,089	)		—
Total deferred tax assets and liabilities	$	28,441		$	4,201	$	24,275		$	4,111

As of January 31, 2017, the Company had no U.S. federal net operating loss carryforwards and had U.S. state and foreign net operating loss carryforwards of approximately $9.3 million and $38.1 million, respectively, with expiration dates ranging from 1-19 years and some foreign jurisdictions with an indefinite carryforward period. Of the foreign net operating losses, $15.9 million are related to Switzerland and the remaining is related to Germany and other foreign countries.

A valuation allowance is required to be established unless management determines it is more likely than not that the Company will ultimately utilize the tax benefit associated with a deferred tax asset. The Company has U.S. state and foreign valuation allowances of $0.1 million and $8.6 million, respectively, which are primarily related to net operating loss carryforwards.

Management will continue to evaluate the appropriate level of valuation allowance on all deferred tax assets considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.

The recognition of deductible windfall tax benefits related to stock-based compensation is prohibited until realized through a reduction to income taxes payable. Shortfall tax expenses of $0.3 million and $0.0 million and windfall tax benefit of $1.3 million, were recorded in additional paid-in-capital during fiscal years 2017, 2016 and 2015, respectively.

The provision for income taxes differs from the U.S. federal statutory rate due to the following (in thousands):

	Fiscal Year Ended January 31,
	2017			2016			2015
Provision for income taxes at the U.S. statutory rate	$	18,009		$	24,194		$	24,906
Lower effective non-U.S. income tax rate		(4,725	)		(4,463	)		(7,257	)
Change in valuation allowance		828			986			1,298
U.S. tax provided on earnings of non-U.S. subsidiaries		541			1,029			639
Change in liabilities for uncertain tax positions, net		215			(98	)		179
State and local taxes, net of federal benefit		617			1,234			693
(Benefit) provided on intercompany transactions		—			—			(1,652	)
Other, net		830			478			458
Total provision for income taxes	$	16,315		$	23,360		$	19,264

The effective tax rate for fiscal 2017 was 31.7%, primarily as a result of foreign profits being taxed in lower taxing jurisdictions offset by no tax benefit being recognized on certain earnings of foreign subsidiaries and U.S. tax provided on earnings of non-U.S. subsidiaries. The effective tax rate for fiscal 2016 was 33.8% primarily as a result of foreign profits being taxed in lower taxing jurisdictions offset by U.S. tax provided on earnings of non-U.S. subsidiaries. The effective tax rate for fiscal 2015 was 27.1%, primarily as a result of foreign profits being taxed in lower taxing jurisdictions and the recognition of a tax benefit related to intercompany profit in certain jurisdictions.

The Company performs a quarterly assessment reviewing its global cash projections and investment needs, and considers such factors as projected future results, continued need for investment in the overseas business as well as cash needs in the U.S., among other countries. The Company has recorded a federal income tax liability of $3.0 million related to $12.7 million of pre-2013 foreign earnings which have been earmarked for future repatriation. This deferred tax liability is net of the estimated foreign tax credits that would be generated upon repatriation of such earnings. A deferred tax liability has not been recorded for the remaining undistributed foreign earnings of approximately $307 million, because the Company intends to permanently reinvest such earnings in its foreign operations. It is not practicable to estimate the amount of tax that may be payable on the eventual distribution of these earnings.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (exclusive of interest) for the fiscal years ended January 31, 2017, 2016 and 2015 are as follows (in thousands):

	2017			2016			2015
Beginning balance	$	2,481		$	2,657		$	2,740
Additions for tax positions taken in the current year		142			175			128
Lapse of statute of limitations		—			(311	)		(34	)
Non U.S. currency exchange fluctuations		(4	)		(40	)		(177	)
Ending balance	$	2,619		$	2,481		$	2,657

Included in the balances at January 31, 2017, January 31, 2016 and January 31, 2015 are $2.6 million, $2.4 million, and $2.5 million of unrecognized tax benefits which would impact the Company’s effective tax rate, if recognized. Interest and penalties, if any, related to unrecognized tax benefits are recorded as income tax expense in the consolidated statement of operations. As of January 31, 2017, January 31, 2016 and January 31, 2015, the Company had $0.7 million, $0.6 million and $0.7 million, respectively of accrued interest (net of tax benefit) and penalties related to unrecognized tax benefits. During fiscal years 2017, 2016 and 2015, the Company accrued $0.1 million, $0.1 million and $0.1 million of interest (net of tax benefit) and penalties. It is reasonably possible that within the next 12 months unrecognized tax benefits could decrease by up to $0.6 million, exclusive of interest and penalties, due to the closure of audit periods in multiple taxing jurisdictions. We expect that the majority of the decrease would impact the Company’s effective tax rate, if recognized.