Income Taxes

6 Months Ended

Jun. 30, 2020

Note 13. 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.

In January 2019, the Company acquired Jack Wolfskin for approximately $521,201,000 (including cash acquired of $58,096,000). The Company recorded a deferred tax liability of $88,392,000 related to the intangibles upon acquisition in addition to $11,384,000 deferred tax assets acquired (see Note 5). In the second quarter of 2020, due to a decline in projected revenues caused by COVID-19, the Company recognized an impairment charge of $174,269,000 to write down the goodwill and trade name associated with Jack Wolfskin to its fair value (see Note 9). This impairment was excluded from ordinary income and discretely calculated in the income tax provision in the second quarter of 2020. The impaired goodwill was comprised of book basis over tax basis with no corresponding deferred tax liability. The brand value impairment resulted in the reduction of approximately $7,900,000 of the deferred tax liability previously recorded as part of acquisition accounting.

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 historical 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 June 30, 2020 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 Jack Wolfskin and 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 has considered the business disruption impacts from the COVID-19 pandemic and determined that this hasn’t impacted the realization of its deferred tax assets. As this is a dynamically evolving business disruption, the Company will continue to evaluate the COVID-19-related impacts on the realization of its deferred tax assets as new information becomes available.

The Company recorded an income tax benefit of $7,931,000 and an income tax provision of $7,208,000 for the three months ended June 30, 2020 and 2019, respectively, and an income tax provision of $1,220,000 and $16,764,000 for the six months ended June 30, 2020 and 2019, respectively. The decrease in the provision was primarily due to the reduction of earnings caused by the COVID-19 pandemic and the impairment of the Jack Wolfskin goodwill and trade name in June 2020. As a percentage of pre-tax income, the Company's effective tax rate decreased to 4.5% in the second quarter of 2020 compared to 20.0% in the second quarter of 2019, primarily due to the reduction of earnings caused by the COVID-19 pandemic and the impairment of the Jack Wolfskin goodwill and trade name in the second quarter of 2020.

At June 30, 2020, the gross liability for income taxes associated with uncertain tax positions was $27,117,000. Of this amount, $11,424,000 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 $404,000 during the next 12 months. The gross liability for uncertain tax positions increased by $737,000 and $1,124,000 for the three and six months ended June 30, 2020, respectively, primarily due to increases in tax positions taken during the current quarter.

The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended June 30, 2020 and 2019, the Company's provision for income taxes includes an expense of $25,000 and a benefit of $221,000, respectively, and an expense of $54,000 and a benefit of $189,000, for the six months ended June 30, 2020 and 2019, respectively, related to the recognition of interest and/or penalties. As of June 30, 2020 and December 31, 2019, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated condensed balance sheets was $1,723,000 and $1,669,000, 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 (U.S.)		2008 and prior
Germany		2014 and prior
Japan		2013 and prior
South Korea		2014 and prior
United Kingdom		2015 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.