Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

INCOME TAXES

NOTE 5.           INCOME TAXES

The geographic distribution of pretax income from continuing operations is as follows:

	Years Ended December 31,
	2019		2018		2017
Domestic	$	(20,597)	$	22,325	$	29,088
Foreign		87,791		150,051		169,103
	$	67,194	$	172,376	$	198,191

The provision for income taxes from continuing operations is summarized as follows:

	Years Ended December 31,
	2019		2018		2017
Current:
Federal	$	(9,627)	$	1,423	$	26,550
State		882		12		601
Foreign		18,429		13,772		9,621
Total current provision	$	9,684	$	15,207	$	36,772
Deferred:
Federal	$	3,822	$	4,021	$	28,297
State		(178)		2,363		(1,000)
Foreign		(2,629)		3,636		(1,979)
Total deferred provision		1,015		10,020		25,318
Total provision for income taxes	$	10,699	$	25,227	$	62,090

The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the years ended December 31, 2019 and December 31, 2018, primarily due to the benefit of tax credits and earnings in foreign jurisdictions which are subject to lower tax rates, offset by additional GILTI tax in the US and withholding taxes.

The Company’s effective tax rate differs from the U.S. federal statutory rate of 35% for the year ended December 31, 2017, primarily due to the benefit related to the wind down of our solar inverter business and earnings in foreign jurisdictions, which are subject to lower tax rates, offset by the impact of U.S. tax reform. The principal causes of the difference between the federal statutory rate and the effective income tax rate for each the years below are as follows:

	Years Ended December 31,
	2019		2018		2017
Income taxes per federal statutory rate	$	14,111	$	36,199	$	69,348
State income taxes, net of federal deduction		10		2,372		1,794
Transition tax - U.S. Tax Reform		—		1,174		61,690
Corporate tax rate changes - U.S. Tax Reform		—		(652)		11,177
Tax benefit associated with inverter business wind down		—		—		(33,837)
Stock based compensation		(97)		(974)		(5,263)
GILTI Tax		8,796		13,064		—
Tax effect of foreign operations		(13,086)		(19,162)		(47,482)
Uncertain tax position		(4,487)		(3,088)		4,948
Unremitted earnings		1,624		2,564		—
Tax credits		(6,280)		(9,844)		(658)
Change in valuation allowance		7,222		(1,306)		841
Withholding taxes		6,500		1,371		—
Other permanent items, net		(3,614)		3,509		(468)
Total provision for income taxes	$	10,699	$	25,227	$	62,090

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:

	Years Ended December 31,
	2019		2018
Deferred tax assets
Stock based compensation	$	1,757	$	1,337
Net operating loss and tax credit carryforwards		86,879		38,622
Interest expense limitation		7,620		—
Pension obligation		13,473		3,302
Excess and obsolete inventory		3,217		2,161
Deferred revenue		3,305		6,903
Employee bonuses and commissions		2,537		1,874
Depreciation and amortization		29,015		29,525
Operating lease liabilities		23,451		—
Other		9,685		9,961
Deferred tax assets		180,939		93,685
Less: Valuation allowance		(76,206)		(30,924)
Net deferred tax assets		104,733		62,761
Deferred tax liabilities
Depreciation and amortization		41,549		17,723
Unremitted earnings		4,740		3,529
Operating lease right-of-use assets		22,774		—
Other		2,966		1,267
Deferred tax liabilities		72,029		22,519
Net deferred tax assets	$	32,704	$	40,242

Of the $32.7 million and $40.2 million net deferred tax asset at December 31, 2019 and 2018, respectively, $42.7 million and $47.1 million is reflected as a net non-current deferred tax asset and $10.0 million and $7.0 million is reflected as a long-term liability at December 31, 2019 and 2018, respectively.

As of December 31, 2019, the Company has recorded a valuation allowance on $16.0 million of its U.S. domestic deferred tax assets, largely attributable to acquired federal capital loss carryforwards for which the Company does not have sufficient income in the character to realize that attribute, and state carryforward attributes that are expected to expire before sufficient income can be realized in those jurisdictions. The remaining valuation allowance on deferred tax assets approximates $60.2 million and is associated primarily with operations in Austria, Germany, Hong Kong and Switzerland. As of December 31, 2019, there is not sufficient positive evidence to conclude that such deferred tax assets, presently reduced by a valuation allowance, will be recognized. The December 31, 2019 valuation allowance balance reflects an increase of $45.3 million during the year. The change in the valuation allowance is primarily due to increases from acquired Artesyn positions and current year activity, partially offset by decreases due to foreign exchange movements

As of December 31, 2019, the Company had U.S., foreign and state tax loss carryforwards of $54.4 million, $206.8 million, and $146.2 million, respectively. Additionally, the Company had $40.7 million and $32.9 million of capital loss and interest expense limitation carryforwards, respectively. Finally, the Company had U.S. and state tax credit carryforwards of $3.8 million and $1.8 million, respectively. The U.S. and state net operating losses, tax credits, and interest expense limitation are subject to various utilization limitations under Section 382 of the Internal Revenue Code and applicable state laws. These Section 382 limited attributes have various expiration periods through 2036 or, in

the case of the interest expense limitation amount, no expiration period. The majority of the foreign jurisdiction, and $4.6 million of the federal net operating loss carry forwards, have no expiration period.

We operate under a tax holiday in one of our foreign jurisdictions. This tax holiday is in effect through June 30, 2027. The tax holiday is conditional upon our meeting certain employment and investment thresholds. The impact of the tax holiday decreased foreign taxes by $4.0 million and $17.8 million for 2019 and 2018, respectively. The benefit of the tax holiday on earnings per diluted share was $0.12 and $0.47 for 2019 and 2018, respectively.

In the third quarter of 2019, following a review of our operations, liquidity and funding, tax implications of cash repatriation, political risk, and investment opportunities, we determined that the ability to access certain amounts of foreign earnings that were previously indefinitely reinvested would provide greater investment returns, treasury controls, and other working capital needs if repatriated to the U.S. Accordingly, in the third quarter of 2019, we withdrew the permanent reinvestment assertion on $123.9 million of earnings generated by certain of our operations through December 2018. Resulting from this change in permanent reinvestment assertion, the Company recorded a deferred tax liability of $2.9 million related to withholding and state income taxes.

There is no certainty as to the timing of when such foreign earnings will be distributed to the United States in whole or in part.

Certain foreign subsidiary earnings are subject to U.S. taxation under the U.S. Tax Act, which also repeals U.S. taxation on the subsequent repatriation of those earnings. We have not provided for U.S. state or foreign income taxes on $26.5 million of our subsidiaries’ undistributed earnings as of December 31, 2019. The $26.5 million of undistributed foreign earnings continue to be reinvested in our foreign operations, as we have determined that these earnings are necessary to support our planned growth and strategic acquisitions in our foreign operations, and as a result, these earnings remain indefinitely reinvested in those operations. In making this decision, we considered cash needs for investing in our existing businesses, currency controls, and the tax cost of cash repatriation. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before recognizing these positions in the financial statements. The reconciliation of our total gross unrecognized tax benefits is as follows:

	Years Ended December 31,
	2019		2018		2017
Balance at beginning of period	$	13,162	$	15,990	$	11,401
Additions based on tax positions taken during a prior period		484		94		1,258
Additions based on tax positions taken during a prior period - acquisitions		4,479		757		—
Additions based on tax positions taken during the current period		—		—		4,433
Reductions based on tax positions taken during a prior period		(4,295)		(153)		—
Reductions related to a lapse of applicable statute of limitations		(821)		(3,144)		(1,102)
Reductions related to a settlement with taxing authorities		—		(382)		—
Balance at end of period	$	13,009	$	13,162	$	15,990

The unrecognized tax benefits of $13.0 million, if recognized, will impact the Company’s effective tax rate. In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We had $3.0 million and $1.2 million of accrued interest and penalties at December 31, 2019 and 2018, respectively. We expect the total amount of tax contingencies will decrease by approximately $3.5 million in 2020 based on statute of limitation expiration.

With few exceptions, the Company is no longer subject to federal, state or foreign income tax examinations by tax authorities for years before 2016.