Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 17—Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act significantly changed U.S. tax law, including lowering the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, and implementing a one-time “deemed repatriation” tax on unremitted earnings accumulated in non-U.S. jurisdictions since 1986 (the “Transition Tax”). In 2017, the Company recorded a provisional estimate of the impact of the Act, which included an income tax benefit of $90,965 related to the remeasurement of its domestic net deferred tax liabilities and deferred tax assets due to the lower U.S. corporate tax rate, and a net income tax expense of $1,132 as its provisional estimate of the Transition Tax related to the deemed repatriation of unremitted earnings of foreign subsidiaries. During the fourth quarter of 2018, the Company finalized its assessment of the impact of the Act on the Company’s domestic net deferred tax liabilities and deferred tax assets and recorded an income tax benefit of $2,049, as well as additional income tax expense of $151 related to the Transition Tax.

Additionally, the Act subjects a U.S. shareholder to current tax on “global intangible low-taxed income” (“GILTI”) of its controlled foreign corporations. GILTI is based on the excess of the aggregate of a U.S. shareholder’s pro rata share of net income of its controlled foreign corporations over a specified return. The Company has elected to account for GILTI in the year during which the tax is incurred.

A summary of domestic and foreign income before income taxes follows:

	Fiscal Year Ended December 31,
	2019			2018		2017
Domestic	$	(572,287	)	$	132,482	$	153,280
Foreign		38,124			29,115		34,864
Total	$	(534,163	)	$	161,597	$	188,144

The income tax expense (benefit) consisted of the following:

	Fiscal Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	28,908		$	20,609		$	61,890
State		4,613			5,726			6,267
Foreign		12,540			7,870			7,298
Total current expense		46,061			34,205			75,455
Deferred:
Federal		(37,166	)		6,194			(101,774	)
State		(11,207	)		(880	)		(796	)
Foreign		1,007			(741	)		(81	)
Total deferred (benefit) expense		(47,366	)		4,573			(102,651	)
Income tax (benefit) expense	$	(1,305	)	$	38,778		$	(27,196	)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Deferred income tax assets and liabilities consisted of the following:

	December 31,
	2019			2018
Deferred income tax assets:
Inventory reserves and capitalization	$	8,659		$	8,664
Allowance for doubtful accounts		1,194			709
Accrued liabilities		8,391			7,087
Equity based compensation		3,998			3,431
Federal tax loss carryforwards		525			743
State tax loss carryforwards		2,703			1,554
Foreign tax loss carryforwards		15,874			14,034
Foreign tax credit carryforwards		5,397			5,397
Deferred rent and lease incentives(1)		—			13,565
Section 163(j) Interest Limitation		9,134			1,625
Lease Liabilities		224,966			—
Other		2,231			1,808
Deferred income tax assets before valuation allowances		283,072			58,617
Less: valuation allowances		(24,623	)		(21,879	)
Deferred income tax assets, net	$	258,449		$	36,738
Deferred income tax liabilities:
Depreciation	$	21,211		$	23,720
Trade Name		135,751			145,767
Amortization of goodwill and other assets		16,111			38,712
Foreign earnings expected to be repatriated		1,177			1,132
Lease Right of Use Assets		208,772			—
Other		1,488			826
Deferred income tax liabilities	$	384,510		$	210,157

(1) In accordance with ASC 842, deferred rent and lease incentives are part of the Lease Right of Use Assets as of 2019.

The Company nets all of its deferred income tax assets and liabilities on a jurisdictional basis and classifies them as noncurrent on the balance sheet. In the Company’s December 31, 2019 consolidated balance sheet, $20 was included in “other assets, net” and $126,081 was included in deferred income tax liabilities. In the Company’s December 31, 2018 consolidated balance sheet, $1,008 was included in “other assets, net” and $174,427 was included in deferred income tax liabilities. 

Management assesses the available positive and negative evidence to estimate if sufficient taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, a valuation allowance was recorded to reduce the total deferred tax assets to an amount that will, more-likely-than-not, be realized in the future. The change in the valuation allowance primarily relates to carryforwards of foreign and state net operating losses, and the ending balance also includes foreign tax credit carryforwards.

As of December 31, 2019, the Company had foreign tax-effected net operating loss carryforwards in Germany of $9,134, the United Kingdom of $4,269, and Australia of $599, all of which have an unlimited carryforward; as well as $1,872 from other foreign countries, which expire at different dates. In addition, the U.S. federal net operating loss carryforwards begin to expire in 2032, the U.S. state net operating loss carryforwards begin to expire in 2022 and the foreign tax credit carryforwards begin to expire in 2020.

The difference between the Company’s effective income tax rate and the U.S. statutory income tax rate is as follows:

	Fiscal Year Ended December 31,
	2019			2018			2017
Tax provision at U.S. statutory income tax rate		21.0	%		21.0	%		35.0	%
State income tax, net of federal income tax		1.0			2.4			1.9
Domestic production activities deduction		—			—			(1.4	)
Valuation allowances		(0.4	)		0.6			2.1
GILTI and Foreign-Derived Intangible Income		(0.6	)		1.1			—
Foreign earnings		(1.5	)		0.2			(1.7	)
U.S.—foreign rate differential		(0.6	)		0.4			(1.9	)
Transition Tax on unremitted foreign earnings, net		—			0.1			0.6
Effect of the Act on Federal deferred income tax assets and liabilities		—			(1.3	)		(48.4	)
Goodwill Impairment		(17.9	)		—			—
Other		(0.8	)		(0.5	)		(0.7	)
Effective income tax rate		0.2	%		24.0	%		(14.5	)%

Transition Tax on Unremitted Foreign Earnings: As a result of the Act, the U.S. transitioned from a worldwide system of international taxation to a territorial tax system, thereby eliminating the U.S. federal tax on foreign earnings. However, the Act required a one-time deemed repatriation tax on such earnings and, accordingly, during the fourth quarter of 2017, the Company provisionally recorded a Transition Tax of $11,500 related to such requirement. Prior to the fourth quarter of 2017, the Company recorded deferred income tax liabilities for certain foreign earnings which were expected to be remitted to the U.S. in future periods. Therefore, the expense that was recorded due to the deemed repatriation tax, $11,500, was mostly offset by the reversal of previously recorded deferred income tax liabilities on unremitted foreign earnings, $10,368. During the fourth quarter of 2018, the Company finalized its assessment of the Transition Tax and recorded additional income tax expense of $151. At December 31, 2019, $4,205 of the Transition Tax remains unpaid and is recorded in “Other long-term liabilities” in the Company’s consolidated balance sheet. The Company has elected to pay the Transition Tax over eight annual installments without interest. A deferred tax liability, in the amount of $1,177, is recorded on the Company’s consolidated balance sheet due to the impact of foreign withholding taxes and state income taxes on the future repatriation of certain foreign earnings. No provision has been made for deferred taxes related to any other remaining historical outside basis differences in the Company’s non-U.S. subsidiaries.

Effect of the Act on Federal Deferred Income Tax Assets and Liabilities: The deferred federal income tax benefit for the year ended December 31, 2017 includes a $90,965 provisional benefit due to the Act changing the U.S. corporate income tax rate from 35% to 21%. During the fourth quarter of 2018, the Company finalized its assessment of the impact of the Act on the Company’s domestic net deferred tax liabilities and deferred tax assets and recorded an income tax benefit of $2,049. See above for further discussion.

Goodwill Impairment: During the third and fourth quarters of 2019, the Company recognized non-cash goodwill impairment charges totaling $556,056. No tax benefit was recognized on $455,689 of the charge, resulting in a 17.9% unfavorable impact to the income tax rate.

Other differences between the effective income tax rate and the federal statutory income tax rate are composed primarily of reserves for unrecognized tax benefits, non-deductible meals and entertainment expenses, benefits related to the exercise of stock options, and the Work Opportunity Tax Credit.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits:

	Fiscal Year Ended December 31,
	2019			2018			2017
Balance at beginning of year	$	1,320		$	855		$	913
Increases related to current period tax positions		652			40			100
Increases (decreases) related to prior period tax positions		3,030			495			(158	)
Decreases related to settlements		—			—			—
Decreases related to lapsing of statutes of limitations		(111	)		(70	)		—
Balance at end of year	$	4,891		$	1,320		$	855

The Company’s total unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were $4,891 and $1,320 at December 31, 2019 and 2018, respectively. As of December 31, 2019, it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $3,000 within the next 12 months.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has accrued $618 and $129 for the potential payment of interest and penalties at December 31, 2019 and 2018, respectively. Such amounts are not included in the table above.

The IRS is currently conducting an examination of the year ended December 31, 2015. For U.S. state income tax purposes, tax years 2015-2019 generally remain open; whereas for non-U.S. income tax purposes, tax years 2014-2019 generally remain open.