Income Taxes

9 Months Ended

Sep. 30, 2019

Note 12. Income Taxes

The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740 “Accounting for Income Taxes.” At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.

As of September 30, 2019, significant guidance with respect to the Tax Act remains proposed or outstanding. As such, many components of the 2019 tax expense remain estimates and are primarily based on proposed regulations and other guidance

as released by the IRS and United States Treasury. The most significant estimate relates to foreign derived intangible income (FDII) and global intangible low taxed income (GILTI).

During the nine months ended September 30, 2019, the Company acquired Jack Wolfskin for approximately $521,201,000 (including cash acquired of $58,096,000) in a non-taxable acquisition. The Company recorded a deferred tax liability of $88,392,000 related to the intangibles upon acquisition (see Note 4).

The realization of deferred tax assets, including loss and credit carryforwards, is subject to the Company generating sufficient taxable income during the periods in which the deferred tax assets become realizable. Due to the Company’s continued profitability, combined with future projections of profitability, the Company has determined that the majority of its U.S. deferred tax assets are more likely than not to be realized. The valuation allowance on the Company’s U.S. deferred tax assets as of September 30, 2019 primarily relates to state net operating loss carryforwards and credits that the Company estimates it may not be able to utilize in future periods. With respect to previously existing non-U.S. entities, there continues to be sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and therefore no significant valuation allowances have been established. The Company is currently assessing the need for valuation allowances within the Jack Wolfskin group. As of September 30, 2019 the Company maintains all valuation allowances established prior to the acquisition and will adjust these balances if necessary as the Company obtains more information within the measurement period.

The income tax provision was $2,128,000 and $1,335,000 for the three months ended September 30, 2019 and 2018, respectively, and $18,892,000 and $35,801,000 for the nine months ended September 30, 2019 and 2018, respectively. The increase in the quarterly provision was primarily due to an increase in pre-tax income compared to 2018. The decrease in the provision in the first nine months of 2019 was primarily due to a decrease in pre-tax income compared to 2018. As a percent of pre-tax income, the Company's effective tax rate declined to 6.4% in the third quarter of 2019 compared to 12.1% in the third quarter of 2018, primarily due to a shift in the mix of foreign earnings relative to the prior year and changes in estimates related to U.S. income tax.

At September 30, 2019, the gross liability for income taxes associated with uncertain tax positions was $12,889,000. Of this amount, $6,879,000 would benefit the Company’s consolidated condensed financial statements and effective income tax rate if favorably settled. The unrecognized tax liabilities are expected to decrease by approximately $28,000 during the next 12 months. The gross liability for uncertain tax positions increased by $581,000 for the three months ended September 30, 2019. The increase was primarily due to increases in tax positions taken in the current quarter. The gross liability for uncertain tax positions increased to $1,057,000 for the nine months ended September 30, 2019 primarily due to increases in tax positions taken in the current year.

The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended September 30, 2019 and 2018, the Company's provision for income taxes includes a net expense of $47,000 and $52,000, respectively, related to the recognition of interest and/or penalties. For the nine months ended September 30, 2019 and 2018, the Company's provision for income taxes includes a net benefit of $142,000 and a net expense of $46,000, respectively, related to the recognition of interest and/or penalties. As of September 30, 2019 and December 31, 2018, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated condensed balance sheets was $1,518,000 and $1,660,000, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in the following major jurisdictions:



Tax Jurisdiction		Years No Longer Subject to Audit
U.S. federal		2010 and prior
California (United States)		2008 and prior
Canada		2011 and prior
Japan		2012 and prior
South Korea		2013 and prior
United Kingdom		2014 and prior

Pursuant to Section 382 of the Internal Revenue Code, use of the Company's net operating losses and credit carry-forwards may be limited significantly if the Company were to experience a cumulative change in ownership of the Company's stock by “5-percent shareholders” that exceeds 50% over a rolling three-year period. The Company does not believe there

has been a cumulative change in ownership in excess of 50% during any rolling three-year period, and the Company continues to monitor changes in its ownership. If such a cumulative change did occur in any three-year period and the Company were limited in the amount of losses and credits it could use to offset its tax liabilities, the Company's results of operations and cash flows could be adversely impacted.