OWENS & MINOR INC/VA/

Income Taxes

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the Act). The Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently we recorded a corresponding net one-time tax benefit of approximately $35 million, substantially all of which was non-cash. This benefit reflects (i) the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent, partially offset by (ii) a one-time transition tax on our unremitted foreign earnings and profits (E&P), which we will elect to pay over an eight-year period.

Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) 118 requires that the company include in its financial statements the reasonable estimate of the impact of the Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the U.S. provision for income tax for 2017 is based on the reasonable estimate guidance provided by SAB 118. While we have substantially completed our provisional analysis of the income tax effects of the Act and recorded a reasonable estimate of such effects, the net one-time impact related to the Act may differ, possibly materially, due to, further refinement of our calculations as we review all the data necessary to measure the underlying tax basis of certain temporary differences, further analyze the post-1986 E&P for foreign subsidiaries, complete our analysis of the 2017 Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, or other standard-setting bodies. We will complete our analysis over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included as an adjustment to income tax expense in the reporting period when such adjustments are determined.

We have not completed our accounting for the income tax effects of certain elements of the Act, including the new GILTI and BEAT taxes. Due to the complexity of these new tax rules, we are continuing to evaluate these provisions of the Act and, for GILTI, whether such taxes are recorded as a current-period expense when incurred or whether such amounts should be factored into a company’s measurement of its deferred taxes. As a result, we have not included an estimate of the tax expense/benefit related to these items for the period ended December 31, 2017.

The components of income (loss) before income taxes consist of the following:



Year ended December 31,	2017		2016		2015
Income (loss) before income taxes:
U.S.	$	49,903	$	150,942	$	167,444
Foreign	7,575		21,600		5,766
Income before income taxes	$	57,478	$	172,542	$	173,210

The income tax provision consists of the following:



Year ended December 31,	2017				2016				2015
Current tax provision (benefit):
Federal		$	27,043			$	46,846			$	60,757
State	5,455				8,512				11,431
Foreign	2,175				4,179				3,714
Total current tax provision	34,673				59,537				75,902
Deferred tax provision (benefit):
Federal	(43,838			)	5,303				(4,744			)
State	(1,068			)	885				(376			)
Foreign	(5,082			)	(1,970			)	(981			)
Total deferred tax provision	(49,988			)	4,218				(6,101			)
Total income tax provision		$	(15,315	)		$	63,755			$	69,801

A reconciliation of the federal statutory rate to our effective income tax rate is shown below:



Year ended December 31,	2017		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
Increases (decreases) in the rate resulting from:
State income taxes, net of federal income tax impact	4.3	%	3.7	%	4.1	%
Foreign income taxes	(8.2	)%	(4.3	)%	(2.8	)%
Valuation allowance	(1.9	)%	0.5	%	1.2	%
Tax Reform	(60.2	)%	—	%	—	%
Other	4.4	%	2.1	%	2.8	%
Effective income tax rate	(26.6	)%	37.0	%	40.3	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:



December 31,	2017				2016
Deferred tax assets:
Employee benefit plans		$	23,181			$	35,540
Accrued liabilities not currently deductible	20,477				15,693
Finance charges	2,007				3,803
Capital leases	3,732				6,607
Allowance for losses on accounts and notes receivable	4,043				4,069
Net operating loss carryforwards	16,536				12,722
Other	4,311				4,183
Total deferred tax assets	74,287				82,617
Less: valuation allowances	(12,726			)	(12,332			)
Net deferred tax assets	61,561				70,285
Deferred tax liabilities:
Merchandise inventories	43,683				71,035
Goodwill	26,194				37,854
Property and equipment	10,669				14,910
Computer software	9,473				15,363
Insurance	243				368
Intangible assets	38,726				18,887
Other	212				230
Total deferred tax liabilities	129,200				158,647
Net deferred tax liability		$	(67,639	)		$	(88,362	)

The valuation allowances relate to deferred tax assets in various state and non-U.S. jurisdictions. Based on management’s judgments using available evidence about historical and expected future taxable earnings, management believes it is more likely than not that we will realize the benefit of the existing deferred tax assets, net of valuation allowances, at December 31, 2017. The valuation allowances primarily relate to net operating loss carryforwards in non-U.S. jurisdictions which have various expiration dates ranging from five years to an unlimited carryforward period.

As part of the Act described above, and as a result of the tax on the deemed repatriation of foreign earnings, substantially all of the Company’s foreign earnings have been subjected to tax in the U.S. However, the Company’s foreign subsidiaries are considered indefinitely reinvested, and no provision for deferred U.S. income taxes has been recorded on the basis differences attributable to those subsidiaries.

Cash payments for income taxes, including interest, for 2017, 2016 and 2015 were $41.8 million, $74.1 million and $52.4 million.

At December 31, 2017 and 2016, the liability for unrecognized tax benefits was $13.6 million and $10.7 million. A reconciliation of the changes in unrecognized tax benefits from the beginning to the end of the reporting period is as follows:



	2017				2016
Unrecognized tax benefits at January 1,		$	10,725			$	7,657
Increases for positions taken during current period	1,644				2,322
Increases for positions taken during prior periods	1,928				1,135
Decreases for positions taken during prior periods	(712			)	(242			)
Lapse of statute of limitations	—				(21			)
Settlements with taxing authorities	—				(126			)
Unrecognized tax benefits at December 31,		$	13,585			$	10,725

Included in the liability for unrecognized tax benefits at December 31, 2017 and 2016, were $5.0 million and $4.7 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. These tax positions are temporary differences which do not impact the annual effective tax rate under deferred tax accounting. Any change in the deductibility period of these tax positions would impact the timing of cash payments to taxing jurisdictions. Unrecognized tax benefits of $6.4 million and $5.5 million at December 31, 2017 and 2016, would impact our effective tax rate if recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest at December 31, 2017 and 2016 was $0.6 million and $0.4 million. We recognized $0.2 million in interest expense in 2017, $0.2 million in 2016 and $0.1 million in 2015. There were no penalties accrued at December 31, 2017 and 2016 or recognized in 2017, 2016 and 2015.

We file income tax returns in the U.S. federal and various state and foreign jurisdictions. Our U.S. federal income tax returns for the years 2014, 2015 and 2016 are subject to examination. Our income tax returns for U.S. state and local jurisdictions are generally open for the years 2014 through 2016; however, certain returns may be subject to examination for differing periods. The former owners are contractually obligated to indemnify us for all income tax liabilities incurred by the Movianto business prior to its acquisition on August 31, 2012 and for all income tax liabilities incurred by Byram entities prior to its acquisition on August 1, 2017.