Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Income before income taxes for the years ended December 31, 2019, 2018 and 2017 was derived from the following sources:



(In thousands)	2019		2018		2017
Domestic	$	145,215	$	61,545	$	13,363
Foreign	172,834		192,887		171,368
Income before income tax expense	$	318,049	$	254,432	$	184,731

Income tax expense for the years ended December 31, 2019, 2018 and 2017 is summarized as follows:



(In thousands)	2019			2018			2017
Current:
Federal	$	35,497		$	(14,775	)	$	60,529
State	2,625			1,605			808
Foreign	39,075			38,723			36,700
	77,197			25,553			98,037
Deferred (net of valuation allowance):
Federal	(10,966		)	(13,399		)	249
State	(1,018		)	(370		)	(891		)
Foreign	(2,024		)	1,893			2,270
	(14,008		)	(11,876		)	1,628
Income tax expense	$	63,189		$	13,677		$	99,665

Income tax expense differs from the expected amounts based upon the statutory federal tax rates for the years ended December 31, 2019, 2018 and 2017 as follows:



(In thousands)	2019			2018			2017
Expected federal income tax at statutory rate	$	66,790		$	53,431		$	64,656
State income taxes before valuation allowance, net of federal tax effect	(1,563		)	605			(1,376		)
Effect of foreign source income	(1,362		)	2,359			(27,581		)
Tax contingencies	1,785			468			2,816
Valuation allowance	2,051			527			3,195
U.S. federal research credit	(6,514		)	(2,263		)	(4,881		)
Equity compensation	(1,411		)	(3,826		)	(2,321		)
Transition tax	—			89			72,993
Remeasurement of deferred taxes	—			619			(10,248		)
Incremental taxes on unremitted foreign earnings release	—			—			3,968
Foreign derived intangible income	(7,851		)	(4,846		)	—
Legal entity restructuring foreign tax credit	—			(25,080		)	—
Legal entity restructuring dividends received deduction	9,398			(9,398		)	—
Other items, net	1,866			992			(1,556		)
Income tax expense	$	63,189		$	13,677		$	99,665

In 2012, Entegris’ Korean subsidiary made commitments to produce a certain line of products in Korea. In return for this commitment, the Company had 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 $4.0 million ($0.03 per diluted share) and $7.4 million ($0.05 per diluted share) for the years ended December 31, 2018 and 2017, respectively. The tax holiday benefit ceased during the year ended December 31, 2018. The 2017 effective tax rate included an additional benefit of $4.3 million since the corporate tax rate in Korea was 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 $5.8 million ($0.04 per diluted share), $6.3 million ($0.04 per diluted share) and $4.7 million ($0.03 per diluted share) for the years ending December 31, 2019, 2018 and 2017, respectively. The 2019, 2018 and 2017 effective tax rates include additional benefits of $3.3 million, $3.6 million and $12.4 million, because the corporate tax rate in Singapore is lower than the U.S. rate.

At December 31, 2019, there were approximately $35.9 million of accumulated undistributed earnings of subsidiaries outside of the 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.

The significant components of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are as follows:



(In thousands)	2019			2018
Deferred tax assets attributable to:
Accounts receivable	$	87		$	247
Inventory	6,517			4,085
Accruals not currently deductible for tax purposes	7,568			8,694
Net operating loss and credit carryforwards	22,316			15,878
Capital loss carryforward	—			2,450
Equity compensation	3,415			3,054
Asset impairments	452			452
Other, net	5,990			3,488
Gross deferred tax assets	46,345			38,348
Valuation allowance	(20,118		)	(18,079		)
Total deferred tax assets	26,227			20,269
Deferred tax liabilities attributable to:
Purchased intangible assets	(44,447		)	(50,128		)
Depreciation	(6,491		)	(3,874		)
Total deferred tax liabilities	(50,938		)	(54,002		)
Net deferred tax liabilities	$	(24,711	)	$	(33,733	)

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, 2019 and 2018, the Company had a net U.S. deferred tax liability of $12.2 million and $24.5 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 and state credits will not be realized. In recognition of this risk, management has provided a valuation allowance of $10.4 million and $10.7 million as of December 31, 2019 and 2018, 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, 2019 will be recognized as a reduction of income tax expense.

At December 31, 2019, the Company had state operating loss and credit carryforwards of approximately $10.5 million, which begin to expire in 2020 and foreign operating loss carryforwards of $29.6 million, which begin to expire in 2020.

As of December 31, 2019 and 2018, the Company had a net non-U.S. deferred tax asset of $7.7 million and $8.8 million, respectively, for which management determined based upon the available evidence a valuation allowance of $9.7 million and $7.3 million as of December 31, 2019 and 2018, 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.

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, 2019 and 2018 are as follows:



(In thousands)	2019			2018
Gross unrecognized tax benefits at beginning of year	$	12,295		$	12,561
Increase in tax positions from prior years	1,786			61
Decrease in tax positions from prior years	(54		)	(234		)
Increases in tax positions for current year	3,414			2,970
Settlement of tax positions for current year	(421		)	(2,577		)
Lapse in statute of limitations	(826		)	(486		)
Gross unrecognized tax benefits at end of year	$	16,194		$	12,295

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $12.5 million at December 31, 2019.

Penalties and interest paid or received are recorded in other income, net, in the consolidated statements of operations. As of December 31, 2019 and 2018, the Company has accrued interest and penalties related to unrecognized tax benefits of $3.9 million and $1.7 million, respectively. Expenses of $0.6 million, $0.8 million and $0.3 million were recognized as interest and penalties in the consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017, 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 2015 and 2015, 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 2013.

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 $2.0 million.