Income Taxes

12 Months Ended

Dec. 31, 2019

Note 12. Income Taxes

The Company’s income before income tax provision was subject to taxes in the following jurisdictions for the following periods (in thousands):



	Years Ended December 31,
	2019		2018		2017
United States	$	55,352	$	100,031	$	50,706
Foreign	40,417		31,241		17,349
	$	95,769	$	131,272	$	68,055

The expense (benefit) for income taxes is comprised of (in thousands):



	Years Ended December 31,
	2019			2018		2017
Current tax provision:
Federal	$	1,022		$	736	$	610
State	1,403			1,880		1,259
Foreign	9,933			6,577		6,135
	12,358			9,193		8,004
Deferred tax expense (benefit):
Federal	10,185			14,844		20,746
State	335			1,086		(1,127		)
Foreign	(6,338		)	895		(1,235		)
	4,182			16,825		18,384
Income tax provision	$	16,540		$	26,018	$	26,388

In December 2017, the Tax Act was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the toll charge or transition tax. Additionally, the Tax Act implemented a tax on foreign earnings called Global Intangible Low-Taxed Income (“GILTI”). The Company has elected to treat GILTI as a period cost and will expense GILTI in the period it is incurred.

On January 4, 2019, the Company acquired Jack Wolfskin for approximately $521,201,000 (including cash acquired of $58,096,000) in a taxable stock acquisition. The Company recorded a deferred tax liability of $88,462,000 related to the intangibles upon acquisition in addition to $11,384,000 deferred tax assets acquired (see Note 5).

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Reserves and allowances not currently deductible for tax purposes	$	22,926		$	13,495
Basis difference related to fixed assets	8,381			5,342
Compensation and benefits	7,580			8,416
Basis difference for inventory valuation	849			1,784
Compensatory stock options and rights	3,404			3,988
Operating loss carryforwards	9,080			7,191
Tax credit carryforwards	55,001			54,219
ASC 842 lease liability	44,768			—
Interest expense carryforward	5,057			—
Basis difference related to intangible assets with a definite life	354			12,767
Other	2,790			5,798
Total deferred tax assets	160,190			113,000
Valuation allowance for deferred tax assets	(14,469		)	(13,408		)
Deferred tax assets, net of valuation allowance	$	145,721		$	99,592
Deferred tax liabilities:
Prepaid expenses	(1,685		)	(1,181		)
Basis difference related to intangible assets with an indefinite life	(99,712		)	(25,128		)
ASC 842 right-of-use assets	(43,859		)	—
Total deferred tax liabilities	(145,256		)	(26,309		)
Net deferred tax assets	$	465		$	73,283
Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows:
Non-current deferred tax assets	$	73,948		$	75,079
Non-current deferred tax liabilities	(73,483		)	(1,796		)
Net deferred tax assets	$	465		$	73,283

The net change in net deferred taxes in 2019 of $72,818,000 is primarily comprised of the acquired net deferred tax liabilities as a result of the Jack Wolfskin acquisition combined with the utilization of net operating losses and tax credits through profitable operations.

Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect at the time the differences are expected to reverse. The realization of the deferred tax assets, including loss and credit carry forwards, is subject to the Company generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions.

The Company has evaluated all available positive and negative evidence and determined that the majority of its U.S. deferred tax assets were more likely than not to be realized. The valuation allowance on the Company's U.S. deferred tax assets as of December 31, 2019 and 2018 relate primarily to state net operating loss carryforwards and credits the Company estimates it may not be able to utilize in future periods. With respect to 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 no significant allowances have been established. With respect to the Jack Wolfskin acquisition, no significant valuation allowances were acquired at acquisition or established during 2019.

At December 31, 2019, the Company had federal and state income tax credit carryforwards of $47,378,000 and $20,088,000, respectively, which will expire if unused at various dates beginning on December 31, 2020. Such credit carryforwards expire as follows (in thousands):



U.S. foreign tax credit	$	28,599	2020 - 2029
U.S. research tax credit	$	18,758	2031 - 2039
U.S. business tax credits	$	21	2031 - 2039
State investment tax credits	$	1,148	Do not expire
State research tax credits	$	18,940	Do not expire

The Company has recorded a deferred tax asset reflecting the benefit of operating loss carryforwards. The net operating losses expire as follows (in thousands):



U.S. loss carryforwards	$	—	N/A
State loss carryforwards	$	101,205	2025 - 2036

The Company’s ability to utilize the losses and credits to offset future taxable income may be deferred or limited significantly if the Company were to experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that no ownership change has occurred for purposes of Section 382 for the period ended December 31, 2019.

A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:



	Years Ended December 31,
	2019		2018		2017
Statutory U.S. tax rate	21.0	%	21.0	%	35.0	%
State income taxes, net of U.S. tax benefit	1.6	%	1.8	%	1.8	%
Foreign income taxed at other than U.S. statutory rate	(5.0	)%	1.1	%	(0.6	)%
Federal tax credits	(3.5	)%	(4.4	)%	(2.7	)%
Other non-deductible expenses	1.2	%	0.7	%	1.1	%
Non-deductible compensation	1.5	%	0.8	%	0.7	%
Stock option compensation excess tax benefits	(1.5	)%	(1.0	)%	(2.0	)%
Intra-entity asset transfers	—	%	0.8	%	(6.3	)%
U.S. foreign tax inclusions	0.1	%	1.1	%	1.6	%
Foreign derived intangible income deduction	(3.2	)%	(2.7	)%	—	%
Impact of uncertain tax positions	3.7	%	0.8	%	1.8	%
Enactment of the Tax Cuts and Jobs Act	—	%	0.3	%	11.1	%
Change in deferred tax valuation allowance	0.2	%	—	%	(2.0	)%
Other	1.2	%	(0.5	)%	(0.7	)%
Effective tax rate	17.3	%	19.8	%	38.8	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	2019			2018			2017
Balance at January 1	$	11,832		$	9,300		$	8,256
Additions based on tax positions related to the current year	3,224			1,354			1,061
Additions for tax positions of prior years	593			1,624			233
Reductions for tax positions of prior years	(174		)	(148		)	(192		)
Settlement of tax audits	(7		)	—			(33		)
Current year acquisitions	11,006			—			—
Reductions due to lapsed statute of limitations	(481		)	(298		)	(25		)
Balance at December 31	$	25,993		$	11,832		$	9,300

As of December 31, 2019, the gross liability for income taxes associated with uncertain tax benefits was $25,993,000. This liability could be reduced by $1,339,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, which was recorded as a long-term income tax receivable, as well as $13,795,000 of deferred taxes. The net amount of $10,859,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.

The Company does not expect changes to the unrecognized tax benefits in the next 12 months to have a material impact on its results of operations or its financial position.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company recognized a tax expense of approximately $9,000, $42,000, and $301,000 for the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019 and 2018, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $1,669,000 and $1,660,000, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows:



Major Tax Jurisdiction	Years No Longer Subject to Audit
U.S. federal	2010 and prior
California (U.S.)	2008 and prior
Germany	2013 and prior
Japan	2012 and prior
South Korea	2013 and prior
United Kingdom	2015 and prior

As of December 31, 2019, the Company had $167,933,000 of undistributed foreign earnings and profits. Pursuant to the Tax Act, the Company’s undistributed foreign earnings and profits were deemed repatriated as of December 31, 2017 and subsequent foreign profits are not expected to be subject to U.S. income tax upon repatriation. The Company has not provided deferred tax liabilities for foreign withholding taxes and certain state income taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States, and expects the net impact of any future repatriations of permanently invested earnings on the Company’s overall tax liability to be insignificant. For jurisdictions in which the Company is not permanently reinvested, the Company has estimated and accrued approximately $1,400,000 for the net impact on the Company’s overall tax liability.