GLOBUS MEDICAL INC

INCOME TAXES

The components of income before income taxes are as follows:



			Year ended
(In thousands)	December 31, 2017		December 31, 2016		December 31, 2015
Domestic	$	155,051	$	154,377	$	171,278
Foreign	14,877		2,902		1,527
Total	$	169,928	$	157,279	$	172,805

The components of the provision for income taxes are as follows:



				Year ended
(In thousands)	December 31, 2017			December 31, 2016			December 31, 2015
Current:
Federal	$	46,728		$	51,785		$	45,813
State	5,009			4,533			7,193
Foreign	2,638			748			673
	54,375			57,066			53,679
Deferred:
Federal	10,553			(4,527		)	5,926
State	(1,123		)	204			480
Foreign	(1,225		)	195			(64		)
	8,205			(4,128		)	6,342
Total	$	62,580		$	52,938		$	60,021

A reconciliation of the statutory U.S. federal tax rate to our effective rate is as follows:



	Year ended
	December 31, 2017		December 31, 2016		December 31, 2015
Statutory U.S. federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.9		2.2		3.0
Foreign taxes	1.0		0.4		0.2
Domestic production activities deduction	(2.3	)	(2.7	)	(2.6	)
Tax credits	(3.8	)	(1.3	)	(0.9	)
Stock compensation windfall	(1.4	)	—		—
Nondeductible expenses	0.1		0.1		0.1
Other	(0.2	)	—		(0.1	)
Tax reform impact	6.5		—		—
Effective tax rate	36.8	%	33.7	%	34.7	%

Deferred income taxes reflect the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting purposes and tax purposes. Significant components of our deferred income taxes are as follows:



(In thousands)	December 31, 2017			December 31, 2016
Deferred tax assets:
Inventory reserve	$	23,087		$	31,202
Accruals, reserves, and other currently not deductible	7,812			13,269
Stock-based compensation	9,109			10,595
Foreign net operating loss carryforwards	1,924			227
Total deferred tax assets	41,932			55,293
Valuation allowance	(1,821		)	(83		)
Total deferred tax assets, net of valuation allowance	40,111			55,210
Deferred tax liabilities:
Depreciation and amortization	(30,749		)	(32,448		)
Total deferred tax liabilities	(30,749		)	(32,448		)
Net deferred tax assets	$	9,362		$	22,762

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2017 and 2016. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

As of December 31, 2017 and 2016, we have NOL carryforwards of $0.2 million and $1.9 million, respectively, which, if unused, will expire in years 2020 through 2027.

The Company has established valuation allowances of $1.8 million and $0.1 million at December 31, 2017 and 2016, respectively, primarily related to the uncertainty of the utilization of certain deferred tax assets and primarily comprised of tax loss carryforwards in various jurisdictions. The increase in the valuation allowance during fiscal year 2017 is primarily driven by the acquisition of foreign tax loss carryforwards that is more likely than not to be realized.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



			Year ended
(In thousands)	December 31, 2017		December 31, 2016		December 31, 2015
Unrecognized tax benefits at the beginning of the year	$	1,862	$	1,575	$	3,228
Additions related to current year tax positions	—		—		316
Additions related to prior year tax positions	739		287		261
Reductions related to prior year tax positions	—		—		(2,230		)
Unrecognized tax benefits at the end of the year	$	2,601	$	1,862	$	1,575

The impact of our unrecognized tax benefits to the effective income tax rate is as follows:



(In thousands)	December 31, 2017		December 31, 2016		December 31, 2015
Portion of total unrecognized tax benefits that, if recognized, would affect the effective income tax rate	$	2,076	$	1,542	$	1,335

We have not recorded income taxes on the undistributed earnings of our foreign subsidiaries based upon our intention to indefinitely reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the United States. The undistributed earnings of our foreign subsidiaries as of December 31, 2017 are immaterial. In the event we are required to repatriate funds from outside of the United States, such repatriation may be subject to local laws, customs, and tax consequences.

Interest and penalties are recorded in the statement of income as provision for income taxes. The total interest and penalties recorded in the statement of income was nominal for the years ended December 31, 2017, 2016 and 2015. We do not expect a significant change in our uncertain tax benefits in the next twelve months. We are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, we are no longer subject to income tax examination by tax authorities in major jurisdictions for years prior to 2013 as of December 31, 2017.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted. The Tax Reform Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21%, repeals the deduction for domestic production activities, implements a territorial tax system and imposes a repatriation tax on earnings of foreign subsidiaries, among other things.

The Company recognized the income tax effects of the Tax Reform Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Reform Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Tax Reform Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Reform Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. Due to the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) tax rules and Base Erosion and Anti-Abuse Tax (“BEAT”), the Company continues to evaluate these provisions of the Tax Reform Act and the application of ASC Topic 740 and therefore has not made any adjustments or estimates related to potential GILTI or BEAT tax in its financial statements as of December 31, 2017.

The Company has recorded a net tax charge of $10.3 million related to the re-measurement of its deferred tax assets as well as a current tax charge of $0.7 million related to the deemed repatriation of its foreign earnings for the three months and year ended December 31, 2017. Both of the tax charges represent provisional amounts and the Company’s current best estimates. Any adjustments recorded to the provisional amounts through the fourth quarter of fiscal 2018 will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance. The Company intends to indefinitely reinvest its foreign earning abroad to ensure sufficient working capital for further expansion of its existing operations outside the United States, therefore no provisional adjustments were made pertaining to local or state tax consequences.

On December 18, 2015 the Protecting Americans from Tax Hikes Act of 2015 (“PATH”) was signed into law. One of the provisions of PATH was the permanent extension of Internal Revenue Code section 41 research and development tax credit. As of December 31, 2015 a benefit was recognized for this tax credit and is included in the 2015 tax provision.