Entity information:
Provision for Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The Tax Act includes a number of changes to existing U.S. tax laws that impact the Company including the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The Tax Act also provides for a one-time transition tax on indefinitely reinvested foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective change beginning in 2018, including the elimination of certain domestic deductions and credits, capitalization of research and development expenditures, and additional limitations on the deductibility of executive compensation and interest.
The Company recognized the income tax effects of the Tax 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 Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Tax Act for which accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The changes to existing U.S. tax laws as a result of the Tax Act, which have the most significant impact on the company’s provision for income taxes as of December 31, 2017 are as follows:
Reduction of the U.S. Corporate Income Tax Rate
The company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the company’s deferred tax assets and liabilities were adjusted to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $24.9 million increase in income tax expense for the year ended December 31, 2017 and a corresponding $24.9 million decrease in net deferred tax assets as of December 31, 2017.
Transition Tax on Foreign Earnings
The company recognized a provisional income tax expense of $13.9 million for the year ended December 31, 2017 related to the one-time transition tax on indefinitely reinvested foreign earnings. The determination of the transition tax requires further analysis regarding the amount and composition of the company’s historical foreign earnings, the amount of foreign tax credits available, and the ability to utilize certain foreign tax credits, which is expected to be completed in 2018.
The adjustments to the deferred tax assets and liabilities and the liability for the transition tax on indefinitely reinvested foreign earnings, including the analysis of our ability to fully utilize foreign tax credits associated with the transition tax, are provisional amounts estimated based on information reviewed as of December 31, 2017. As we complete our analysis of the Tax Act, review all information, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to the provisional amounts that we have recorded as of December 31, 2017 that may materially impact our provision for income taxes. Any subsequent adjustment will be recorded to current income tax expense in the quarter of 2018 when the analysis is completed.
Income (loss) before income taxes is as follows: 
 
Year Ended December 31,
(In thousands)
2017
 
2016
 
2015
Income (loss) before income taxes:
 
 
 
 
 
United States
$
(131,475
)
 
$
251,321

 
$
272,739

Foreign
121,166

 
136,961

 
113,946

Total
$
(10,309
)
 
$
388,282

 
$
386,685


The components of the provision for income taxes consisted of the following: 
 
Year Ended December 31,
(In thousands)
2017
 
2016
 
2015
Current
 
 
 
 
 
Federal
$
(46,931
)
 
$
116,637

 
$
102,317

State
(8,336
)
 
29,989

 
27,500

Other foreign countries
34,005

 
32,394

 
28,336

 
(21,262
)
 
179,020

 
158,153

Deferred
 
 
 
 
 
Federal
51,447

 
(35,748
)
 
707

State
12,080

 
(10,658
)
 
(5,703
)
Other foreign countries
(4,314
)
 
(1,311
)
 
955

 
59,213

 
(47,717
)
 
(4,041
)
Provision for income taxes
$
37,951

 
$
131,303

 
$
154,112


A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows: 
 
Year Ended December 31,
 
2017
 
2016
 
2015
U.S. federal statutory income tax rate
$
(3,608
)
35.0
 %
 
$
135,899

35.0
 %
 
$
135,340

35.0
 %
State taxes, net of federal tax impact
(9,537
)
92.5

 
9,447

2.4

 
12,252

3.2

Unrecognized tax benefits
1,178

(11.4
)
 
4,377

1.1

 
12,931

3.4

Permanent tax benefits/nondeductible expenses
2,246

(21.8
)
 
(5,177
)
(1.3
)
 
8,475

2.2

Goodwill impairment
8,522

(82.7
)
 
—

—

 
—

—

Foreign rate differential
(25,563
)
248.0

 
(25,768
)
(6.6
)
 
(21,262
)
(5.5
)
Valuation allowance
29,563

(290.3
)
 
8,798

2.3

 
10,504

2.7

Impacts related to Tax Act
38,833

(376.7
)
 
—

—

 
—

—

Other
(3,683
)
39.2

 
3,727

0.9

 
(4,128
)
(1.1
)
Effective income tax rate
$
37,951

(368.2
)%
 
$
131,303

33.8
 %
 
$
154,112

39.9
 %

The decrease in the 2017 full year effective income tax rate, as compared to 2016, is primarily attributable to the significant decrease in pre-tax earnings. In 2017, the Company recorded tax benefits for losses in the United States and reductions in the Company's total liability for unrecognized tax benefits as a result of a lapse in the statute of limitations during the current period. These benefits were offset by the impact of the Tax Act, non-deductible goodwill impairment charges and the recording of certain valuation allowances.
Deferred tax assets and liabilities consisted of the following: 
 
 
December 31,
(In thousands)
 
2017
 
2016
Deferred tax asset
 
 
 
 
Allowance for doubtful accounts and sales return reserves
 
$
52,745

 
$
53,811

Foreign net operating loss carry-forwards
 
34,542

 
26,964

Tax basis inventory adjustment
 
30,531

 
25,776

Reserves and accrued liabilities
 
20,500

 
38,819

Stock-based compensation
 
19,002

 
32,910

Deferred rent
 
18,735

 
21,168

U.S. net operating loss carryforward
 
13,382

 
3,032

Foreign tax credit carry-forwards
 
11,918

 
8,664

State tax credits, net of federal impact
 
8,555

 
7,408

Inventory obsolescence reserves
 
5,241

 
15,479

Other
 
4,340

 
3,107

Total deferred tax assets
 
219,491

 
237,138

Less: valuation allowance
 
(73,544
)
 
(37,969
)
Total net deferred tax assets
 
145,947

 
199,169

 
 
 
 
 
Deferred tax liability
 
 
 
 
Property, plant and equipment
 
(43,924
)
 
(45,178
)
Prepaid expenses
 
(18,336
)
 
(8,628
)
Intangible assets
 
—

 
(6,815
)
Other
 
(1,218
)
 
(2,506
)
Total deferred tax liabilities
 
(63,478
)
 
(63,127
)
Total deferred tax assets, net
 
$
82,469

 
$
136,042

 
 
 
 
 


All deferred tax assets and liabilities are classified in non-current on the Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and actual operating results in future years could differ from our current assumptions, judgments and estimates.
A significant portion of the Company's deferred tax assets relate to U.S. federal and state taxing jurisdictions. Realization of these deferred tax assets is dependent on future U.S. pre-tax earnings. Due to the Company's losses in the United States, the Company incurred significant net operating losses (“NOLs”) in these jurisdictions in 2017. Based on these factors, the Company has evaluated its ability to utilize these deferred tax assets in future years. In evaluating the recoverability of these deferred tax assets at December 31, 2017, the Company has considered all available evidence, both positive and negative, including but not limited to the following:
Positive
•
Availability of taxable income in the U.S. federal and certain state NOL carryback periods;
•
U.S. federal NOLs have an indefinite carryforward period beginning in 2018, pursuant to the Tax Act.
•
Definite lived tax attributes with relatively long carryforward periods; a majority from 10 to 20 years;
•
No history of U.S. federal and state tax attributes expiring unused;
•
Three year cumulative U.S. federal and state pre-tax income;
•
Relatively low values of pre-tax income required to realized deferred tax assets relative to historic income levels;
•
Restructuring plans being undertaken to improve profitability; and
•
Availability of prudent and feasible tax planning strategies.

Negative
•
Inherent challenges in forecasting future pre-tax earnings which rely on improved profitability from our restructuring efforts;
•
The continuing challenge of changes in the U.S. consumer retail business environment; and
•
While relatively long, existence of definite lived tax attributes of certain U.S. federal tax credits and state NOLs.

Based on all available evidence considered, the Company believes it is more likely than not, that most of the U.S. federal and state deferred tax assets recorded will ultimately be realized. However, as of December 31, 2017, a valuation allowance of $15.9 million has been recorded against certain state deferred tax assets where the Company has determined realization is not more likely than not. Additionally, valuation allowances have been recorded against certain deferred tax assets associated with foreign and state net operating loss carryforwards and foreign and state tax credit carryforwards as discussed further below.
As of December 31, 2017, the Company had $34.5 million in deferred tax assets associated with approximately $116.0 million in foreign net operating loss carryforwards, the majority of which have an indefinite carryforward period. As of December 31, 2017, the Company is not able to forecast the utilization of the majority of the deferred tax assets associated with foreign net operating loss carryforwards. Therefore, a valuation allowance of $32.8 million was recorded against the Company's net deferred tax assets in 2017.
As of December 31, 2017 the Company had $13.4 million in deferred tax assets associated with $207.5 million in state net operating loss carryforwards, which will begin to expire in 3 to 20 years. As of December 31, 2017 the Company believes certain deferred tax assets associated with state net operating loss carryforwards will expire unused based on the Company’s projections. Therefore, a valuation allowance of $11.7 million is recorded against these net deferred tax assets as of December 31, 2017.
As of December 31, 2017, the Company had $11.9 million in deferred tax assets associated with foreign tax credits. As of December 31, 2017 the Company believes that a portion of the foreign taxes paid would not be creditable against its future income taxes. Therefore, a valuation allowance of $9.9 million was recorded against the Company's net deferred tax assets as of December 31, 2017.
As of December 31, 2017, the Company had $8.6 million in deferred tax assets associated with state tax credits, net of federal impact, which will begin to expire in 5 to 20 years. As of December 31, 2017, the Company is not able to forecast the utilization of certain deferred tax assets associated with state tax credits. Therefore a valuation allowance of $3.2 million is recorded against these net deferred tax assets as of December 31, 2017.
As of December 31, 2017, approximately $158.7 million of cash and cash equivalents was held by the Company's non-U.S. subsidiaries whose cumulative undistributed earnings total $488.4 million. These earnings were subject to the one-time transition tax on indefinitely reinvested foreign earnings required by the Tax Act. The Company will continue to permanently reinvest these earnings, as well as future earnings from our foreign subsidiaries, to fund international growth and operations.
As of December 31, 2017 and 2016, the total liability for unrecognized tax benefits, including related interest and penalties, was approximately $55.3 million and $70.4 million, respectively. The following table represents a reconciliation of the Company's total unrecognized tax benefits balances, excluding interest and penalties, for the years ended December 31, 2017, 2016 and 2015.
 
 
Year Ended December 31,
(In thousands)
 
2017
 
2016
 
2015
Beginning of year
 
$
64,359

 
$
42,611

 
$
28,353

Increases as a result of tax positions taken in a prior period
 
457

 
661

 
203

Decreases as a result of tax positions taken in a prior period
 
(40
)
 
—

 
—

Increases as a result of tax positions taken during the current period
 
14,580

 
26,482

 
14,382

Decreases as a result of tax positions taken during the current period
 
—

 
—

 
—

Decreases as a result of settlements during the current period
 
(13,885
)
 
—

 
—

Reductions as a result of a lapse of statute of limitations during the current period
 
(13,656
)
 
(5,395
)
 
(327
)
End of year
 
$
51,815

 
$
64,359

 
$
42,611


As of December 31, 2017, $46.2 million of unrecognized tax benefits, excluding interest and penalties, would impact the Company's effective tax rate if recognized.
As of December 31, 2017 and 2016, the liability for unrecognized tax benefits included $3.5 million and $6.1 million, respectively, for the accrual of interest and penalties. For each of the years ended December 31, 2017, 2016 and 2015, the Company recorded $1.6 million, $3.1 million and $1.7 million, respectively, for the accrual of interest and penalties in its consolidated statements of operations. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is currently under audit by the Internal Revenue Service for the 2015 and 2016 tax years. The majority of the Company's returns for years before 2014 are no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities.
The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company does not anticipate that the balance of gross unrecognized tax benefits, excluding interest and penalties, will change significantly during the next twelve months. However, changes in the occurrence, expected outcomes, and timing of such events could cause the Company's current estimate to change materially in the future.