INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act makes broad and complex changes to the U.S. tax code that will affect 2017, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The Tax Cuts and Jobs Act also provides for a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 and the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including the repeal of the domestic manufacturing deduction, additional limitations on executive compensation and limitations on the deductibility of interest.

The Security and Exchange Commission (SEC) staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Cuts and Jobs Act enactment date for entities to complete the accounting under ASC 740. In accordance with SAB 118, an entity must reflect the income tax effects of those aspects of the Tax Cuts and Jobs Act for which the accounting under Accounting Standards Codification (ASC) 740 is complete. To the extent that an entity's accounting for certain income tax effects of the Tax Cuts and Jobs Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If an entity cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Cuts and Jobs Act.

The Company has calculated its best estimate of the impact of the Tax Cuts and Jobs Act in its year end income tax provision in accordance with its understanding of the Tax Cuts and Jobs Act and guidance available as of the date of this filing. As a result, the Company recorded a discrete net tax expense of $66.7 million in the period ending December 31, 2017. This net expense primarily consists of a net benefit for the corporate rate reduction of $10.2 million and a net expense for the transition tax of $73.0 million and $4.0 million of additional tax related to no longer asserting that a significant portion of the Company's undistributed earnings are considered indefinitely reinvested overseas. For various reasons that are discussed more fully below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Cuts and Jobs Act. If the Company was able to make reasonable estimates of the effects of elements for which its analysis is not yet complete, the Company recorded provisional adjustments. If the Company was not yet able to make reasonable estimates of the impact of certain elements, it has not recorded any adjustments related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Cuts and Jobs Act. The Company continues to analyze the implications of the global intangible low taxed income ("GILTI") provision of the Tax Cuts and Jobs Act and delays finalizing its GILTI policy election under SAB 118 until it has the necessary information available to analyze and make an informed policy decision. The changes to existing U.S. tax laws as a result of the Tax Cuts and Jobs Act, which the Company believes have the most significant impact on the Company’s federal income taxes are as follows:

Reduction of U.S. federal corporate tax rate

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $10.2 million decrease in income tax expense for the year ended December 31, 2017 and a corresponding decrease in net deferred tax liabilities as of December 31, 2017. Included in this benefit are provisional amounts related to certain deferred tax assets and liabilities where the necessary information is not available, prepared or analyzed. Examples of this include fixed assets and compensation. The Company expects to complete its analysis of these provisional items when the necessary information becomes available to accurately analyze and compute in reasonable detail under ASC Topic 740. The Company estimates such analysis will be completed in the second half of 2018.

Transition Tax on Foreign Earnings

The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company recognized a provisional income tax expense of $73.0 million for the year ended December 31, 2017 related to the one-time Transition Tax on certain foreign earnings. This resulted in a corresponding decrease in deferred tax assets due to the utilization of foreign tax credit carryforwards of $10.2 million and research and development credit carryforwards of $11.8 million. The determination of the Transition Tax requires further analysis regarding the amount and composition of the Company’s historical earnings, which is expected to be completed when the necessary information becomes available to accurately analyze and compute in reasonable detail under ASC Topic 740. The Company estimates such analysis will be completed in the second half of 2018.

Acceleration of Depreciation

The Company recorded a provisional benefit of $1.3 million attributable to the accelerated depreciation for certain assets placed into service after September 27, 2017. This resulted in a decrease of approximately $3.2 million to our current income tax payable and a corresponding increase in our deferred tax liabilities of approximately $1.9 million (after considering the effects of the reduction in income tax rates). The income tax effects for this position requires further analysis due to the volume of data required to complete the calculations. The Company expects to complete this analysis when the necessary information becomes available to accurately analyze and compute in reasonable detail under ASC Topic 740. The Company estimates such analysis will be completed in the second half of 2018.

Excessive Compensation under Sec. 162(m)

The Tax Cuts and Jobs Act repeals the exceptions to the section 162(m) deduction limitation for commissions and performance-based compensation. The Tax Cuts and Jobs Act provides a transition rule which states that the expansion of section 162(m) does not apply to any remuneration paid under a written, binding contract in effect on November 2, 2017, which was not materially modified on or after this date. The Tax Cuts and Jobs Act does not specifically define the criteria for a binding contract and no further guidance was provided on this topic. The Company has determined this change would be immaterial and its analysis will be completed when the necessary information becomes available to accurately analyze and compute in reasonable detail under ASC Topic 740. The Company estimates such analysis will be completed in the second half of 2018.

Undistributed Foreign Earnings

As of December 31, 2017, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $943.7 million subject to the one-time Transition Tax on foreign earnings required by the Tax Cuts and Jobs Act or has otherwise been previously taxed. As of January 1, 2017, the Company removed its assertion on its Korean entities. Additionally, due to tax reform, the Company removed its prior year assertion on all but certain entities and recorded the associated withholding tax of $4.0 million. At December 31, 2017, there were approximately $30.7 million of accumulated undistributed earnings of subsidiaries outside of United States, all of which are considered to be indefinitely reinvested. Management estimates that no material withholding taxes would be incurred if these undistributed earnings were distributed.

Income (loss) before income taxes for the years ended December 31, 2017, 2016 and 2015 was derived from the following sources:



(In thousands)	2017		2016			2015
Domestic	$	13,363	$	(7,328	)	$	(16,751	)
Foreign	171,368		127,327			108,936
Income before income tax expense and equity in net loss of affiliate	$	184,731	$	119,999		$	92,185

Income tax expense for the years ended December 31, 2017, 2016 and 2015 is summarized as follows:



(In thousands)	2017			2016			2015
Current:
Federal	$	60,529		$	7,759		$	4,170
State	808			(10		)	528
Foreign	36,700			31,387			18,817
	98,037			39,136			23,515
Deferred (net of valuation allowance):
Federal	249			(8,183		)	(11,374		)
State	(891		)	250			(738		)
Foreign	2,270			(8,351		)	(1,201		)
	1,628			(16,284		)	(13,313		)
Income tax expense	$	99,665		$	22,852		$	10,202

Income tax (benefit) expense differs from the expected amounts based upon the statutory federal tax rates for the years ended December 31, 2017, 2016 and 2015 as follows:



(In thousands)	2017			2016			2015
Expected federal income tax at statutory rate	$	64,656		$	42,000		$	32,265
State income taxes before valuation allowance, net of federal tax effect	(1,376		)	(769		)	(576		)
Effect of foreign source income	(27,581		)	(22,242		)	(23,374		)
Tax contingencies	2,816			1,103			1,483
Valuation allowance	3,195			1,713			1,109
U.S. federal research credit	(4,881		)	(1,676		)	(3,905		)
Equity compensation	(2,321		)	815			739
Transition tax	72,993			—			—
Remeasurement of deferred taxes	(10,248		)	—			—
Incremental taxes on unremitted foreign earnings release	3,968			—			—
Other items, net	(1,556		)	1,908			2,461
Income tax expense	$	99,665		$	22,852		$	10,202

As a result of commitments made by the Company related to investments in tangible property and equipment, the establishment of a research and development center in 2006 and certain employment commitments, income from certain manufacturing activities in Malaysia has been exempt from tax for years up through 2015. The income tax benefits attributable to the tax status of this subsidiary is $10.2 million ($0.07 per diluted share) for the year ended December 31, 2015. The 2017, 2016 and 2015 effective tax rates include additional benefits of $2.0 million, $4.3 million, and $4.4 million, respectively, because the corporate tax rate in Malaysia is lower than the U.S. rate.

In 2012, Entegris' Korean subsidiary made commitments to produce a certain line of products. In return for this commitment, the Company has a tax holiday on income earned on sales of these products for five years and a partial holiday for two additional years. The income tax benefits attributable to this tax holiday are $7.4 million ($0.05 per diluted share), $3.3 million ($0.02 per diluted share) and $1.5 million ($0.01 per diluted share) for the years ended December 31, 2017, 2016 and 2015, respectively. The 2017, 2016 and 2015 effective tax rates include additional benefits of $4.3 million, $1.9 million and $0.9 million, respectively, because the corporate tax rate in Korea is lower than the U.S. rate.

The Company also has made employment and spending commitments to Singapore. In return for those commitments, the Company has been granted a partial tax holiday for eight years starting in 2013. During 2017, this agreement was extended to 2027 in exchange for revised employment and spending commitments. The income tax benefits attributable to the tax status are $4.7 million ($0.03 cents per diluted share), $2.3 million ($0.02 cent per diluted share) and $1.7 million ($0.01 cent per diluted share) for the years ending December 31, 2017, 2016 and 2015, respectively. The 2017, 2016 and 2015 effective tax rates include additional benefits of $12.4 million, $6.5 million and $4.6 million, because the corporate tax rate in Singapore is lower than the U.S. rate.

The Company has remeasured its deferred tax assets and liabilities as a result of passage of the Tax Cuts and Jobs Act. The primary impact of this remeasurement was a reduction in deferred tax assets and liabilities in connection with the reduction of the U.S. corporate income tax rate as described above. The significant components of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows:



(In thousands)	2017			2016
Deferred tax assets attributable to:
Accounts receivable	$	32		$	470
Inventory	4,132			5,061
Accruals not currently deductible for tax purposes	8,641			3,729
Net operating loss and credit carryforwards	15,184			27,198
Capital loss carryforward	2,391			3,134
Depreciation	—			8,395
Equity compensation	3,658			5,134
Asset impairments	452			1,467
Other, net	2,549			4,356
Gross deferred tax assets	37,039			58,944
Valuation allowance	(17,494		)	(14,661		)
Total deferred tax assets	19,545			44,283
Deferred tax liabilities attributable to:
Purchased intangible assets	(28,956		)	(55,809		)
Depreciation	(2,512		)	—
Total deferred tax liabilities	(31,468		)	(55,809		)
Net deferred tax liabilities	$	(11,923	)	$	(11,526	)

Deferred tax assets are generally required to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2017 and 2016, the Company had a net U.S. deferred tax liability of $5.1 million and $3.5 million, respectively, which are composed of temporary differences and various tax credit carryforwards. Management believes that it is more likely than not that the benefit from certain state net operating loss carryforwards, state credits, capital asset impairments, and a federal capital loss carryforward will not be realized. In recognition of this risk, management has provided a valuation allowance of $10.6 million and $9.6 million as of December 31, 2017 and 2016, respectively, on the related deferred tax assets. If the assumptions change and management determines the assets will be realized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2017 will be recognized as a reduction of income tax expense.

As of December 31, 2017 and 2016, the Company had a net non-U.S. deferred tax asset of $10.7 million and $6.6 million, respectively, for which management determined based upon the available evidence a valuation allowance of $6.9 million and $5.0 million as of December 31, 2017 and 2016, respectively, was required against the non-U.S. gross deferred tax assets. For other non-U.S. jurisdictions, management is relying upon projections of future taxable income to utilize deferred tax assets.

At December 31, 2017, the Company had state operating loss and credit carryforwards of approximately $7.9 million, which begin to expire in 2019 and foreign operating loss carryforwards of $25.0 million, which begin to expire in 2018.

Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax positions will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that fail to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The provisions also provide guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

Reconciliations of the beginning and ending balances of the total amounts of gross unrecognized tax benefits for the years ended December 31, 2017 and 2016 are as follows:



(In thousands)	2017			2016
Gross unrecognized tax benefits at beginning of year	$	8,293		$	7,621
Increase in tax positions from prior years	298			14
Increases in tax positions for current year	4,724			1,944
Lapse in statute of limitations	(754		)	(1,286		)
Gross unrecognized tax benefits at end of year	$	12,561		$	8,293

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $9.9 million at December 31, 2017.

Penalties and interest paid or received are recorded in other income, net, in the consolidated statements of operations. For the years ended December 31, 2017 and 2016, the Company has accrued interest and penalties related to unrecognized tax benefits of $1.0 million and $0.7 million, respectively. Expenses of $0.3 million, $0.1 million and $0.1 million were recognized as interest and penalties in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company files income tax returns in the U.S. and in various state, local and foreign jurisdictions. The statutes of limitations related to both the consolidated Federal income tax return and state returns are closed for all years up to and including 2013 and 2013, respectively. With respect to foreign jurisdictions, the statute of limitations varies from country to country, with the earliest open year for the Company’s major foreign subsidiaries being 2011.

Due to the expiration of various statutes of limitations and settlement of audits, it is reasonably possible that the Company’s gross unrecognized tax benefit balance may decrease within the next twelve months by approximately $1.8 million.