INCOME TAXES
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consists of the following:
|
| | | | | | | | | | | | |
(thousands) | | 2017 |
| | 2016 |
| | 2015 |
|
Current: | | | | | | |
Federal | | $ | 27,833 |
| | $ | 24,205 |
| | $ | 21,554 |
|
State | | 6,036 |
| | 4,430 |
| | 3,625 |
|
Total current | | 33,869 |
| | 28,635 |
| | 25,179 |
|
Deferred: | | | | | | |
Federal | | (6,289 | ) | | (474 | ) | | (1,563 | ) |
State | | (188 | ) | | (86 | ) | | (236 | ) |
Total deferred | | (6,477 | ) | | (560 | ) | | (1,799 | ) |
Income taxes | | $ | 27,392 |
| | $ | 28,075 |
| | $ | 23,380 |
|
As discussed in Note 4, the Company acquired LMI in November 2017 which included a manufacturing facility in China. For tax year ending December 31, 2017, there was no material foreign provision for income taxes required to be reported as a result of this acquisition.
A reconciliation of the differences between the actual provision for income taxes and the tax provisions for income taxes at the federal statutory income tax rate of 35% for each of the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | | | | | | | | | | | |
(thousands) | | 2017 | | 2016 | | 2015 |
Rate applied to pretax income | | $ | 39,588 |
| 35.0 | % | | $ | 29,278 |
| 35.0 | % | | $ | 22,960 |
| 35.0 | % |
State taxes, net of federal tax effect | | 4,060 |
| 3.6 |
| | 2,818 |
| 3.4 |
| | 2,654 |
| 4.0 |
|
Remeasurement of net deferred tax liabilities | | (7,699 | ) | (6.8 | ) | | — |
| — |
| | — |
| — |
|
Excess tax benefit on stock-based compensation | | (6,009 | ) | (5.3 | ) | | (1,256 | ) | (1.5 | ) | | — |
| — |
|
Other | | (2,548 | ) | (2.3 | ) | | (2,765 | ) | (3.3 | ) | | (2,234 | ) | (3.4 | ) |
Income taxes | | $ | 27,392 |
| 24.2 | % | | $ | 28,075 |
| 33.6 | % | | $ | 23,380 |
| 35.6 | % |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21% for tax years ending after December 31, 2017; (2) bonus depreciation that will allow for full expensing of qualified property acquired and placed in service after September 27, 2017; (3) repealing the Domestic Production Activities Deduction for years beginning after December 31, 2017; and (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations.
The SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
The Company has not completed the accounting for the income tax effects of certain elements of the TCJA. If the Company was able to make reasonable estimates of the effects of elements for which the analysis is not yet complete, provisional adjustments were recorded. If the Company was not yet able to make reasonable estimates of the impact of certain elements, no adjustments were recorded related to those elements and the Company has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the TCJA.
For certain deferred tax assets and deferred tax liabilities, the Company recorded a provisional net reduction to income tax expense of $7.7 million for the year ended December 31, 2017, reflecting the impact on net deferred tax liabilities of the reduction in the Federal corporate tax rate described above. While the Company was able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the TCJA, including, but not limited to, its assessment of available tax methods and elections, refinements of computations, and the state tax effect of adjustments made to federal temporary differences.
The TCJA creates a new requirement that certain income (i.e., global intangible low taxed income (“GILTI”)) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. The Company does not anticipate incurring a GILTI liability related to its investment in China, therefore, no provisional adjustment was recorded, and the Company has not made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into the measurement of deferred taxes.
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in deductible or taxable amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable or refundable for the current period plus or minus the change in deferred tax assets and liabilities during the period.
In 2017 and 2016, the Company realized approximately $15.4 million and $3.2 million, respectively, of additional taxable deductions related to excess tax benefits on share-based compensation, which had not been recorded as deferred tax assets at December 31, 2016 and 2015. These tax benefits were recorded as a reduction to income tax expense upon realization in relation to the 2016 adoption of the share-based payment awards accounting standard.
The composition of the deferred tax assets and liabilities as of December 31, 2017 and 2016 is as follows:
|
| | | | | | |
(thousands) | 2017 |
| 2016 |
|
Long-term deferred income tax assets (liabilities): | | |
Trade receivables allowance | $ | 48 |
| $ | 36 |
|
Inventory capitalization | 1,646 |
| 1,142 |
|
Accrued expenses | 4,005 |
| 4,248 |
|
Deferred compensation | 473 |
| 701 |
|
Inventory reserves | 1,154 |
| 1,501 |
|
State NOL Carryforwards | — |
| 13 |
|
Share based compensation | 3,875 |
| 3,983 |
|
Pension liability | 2 |
| 13 |
|
Other | 8 |
| — |
|
Intangibles | (16,042 | ) | (9,467 | ) |
Depreciation expense | (8,254 | ) | (6,658 | ) |
Prepaid expenses | (555 | ) | (500 | ) |
Deferred tax liabilities, net | $ | (13,640 | ) | $ | (4,988 | ) |
The Company paid income taxes of $38.6 million, $29.2 million and $24.1 million in 2017, 2016 and 2015, respectively.
The Company did not reflect any unrecognized tax benefits in its financial statements as of December 31, 2017 or December 31, 2016 and does not expect any significant changes relating to unrecognized tax benefits in the 12 months following December 31, 2017.
The Company is subject to periodic audits by domestic tax authorities. For the majority of tax jurisdictions, the U.S. federal statute of limitations remains open for the years 2014 and later. The Company is currently under audit by the Internal Revenue Service for the 2015 tax year and the State of Indiana for tax years 2013, 2014 and 2015.