Income Taxes
Provision for Income Taxes
The components of income tax expense are as follows:
|
| | | | | | | | | | | |
| For the years ended |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 13,483 |
| | $ | 5,710 |
| | $ | 11,468 |
|
State | 648 |
| | (1,287 | ) | | (22 | ) |
Foreign | 8,148 |
| | 6,008 |
| | 2,208 |
|
Total | 22,279 |
| | 10,431 |
| | 13,654 |
|
Deferred: | | | | | |
Federal | (923 | ) | | (1,729 | ) | | (3,751 | ) |
State | 387 |
| | (1,156 | ) | | (613 | ) |
Foreign | (641 | ) | | (131 | ) | | — |
|
Total | (1,177 | ) | | (3,016 | ) | | (4,364 | ) |
Provision for income taxes | $ | 21,102 |
| | $ | 7,415 |
| | $ | 9,290 |
|
The Company's income before provision for income taxes was subject to taxes in the following jurisdictions for the following periods:
|
| | | | | | | | | | | |
| For the years ended |
| 2017 | | 2016 | | 2015 |
United States | $ | 36,555 |
| | $ | 22,348 |
| | $ | 24,308 |
|
Foreign | 27,730 |
| | 20,742 |
| | 9,936 |
|
| $ | 64,285 |
| | $ | 43,090 |
| | $ | 34,244 |
|
The following table presents a reconciliation of the statutory federal rate and the Company’s effective tax rate for the periods presented:
|
| | | | | | | | |
| For the years ended |
| 2017 | | 2016 | | 2015 |
Tax at federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal benefit | 2.0 |
| | 1.0 |
| | 2.2 |
|
Stock-based compensation | (10.6 | ) | | (2.0 | ) | | (0.1 | ) |
Foreign rate differential | (4.6 | ) | | (9.4 | ) | | — |
|
Change in tax rates due to Tax Cuts and Jobs Act | (3.8 | ) | | — |
| | — |
|
Research and development tax credit | (2.2 | ) | | (2.0 | ) | | (2.9 | ) |
Change in liability for unrecognized tax benefits | (1.7 | ) | | (4.9 | ) | | (2.8 | ) |
California business development tax credit | — |
| | (1.1 | ) | | — |
|
Manufacturing deduction | — |
| | — |
| | (2.0 | ) |
Valuation allowance on foreign tax credits | 9.4 |
| | — |
| | — |
|
Tax on unremitted foreign earnings | 8.9 |
| | — |
| | — |
|
Other | 0.4 |
| | 0.6 |
| | (2.3 | ) |
Total provision | 32.8 | % | | 17.2 | % | | 27.1 | % |
The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017. The TCJA reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on unremitted earnings of certain foreign subsidiaries, creates a new minimum tax on certain foreign earnings, and provides incentives for US companies to sell and license goods and services abroad, among other changes.
Effective January 1, 2016, the Company sold the net assets of its Taiwan branch operations and its shares of Fox Factory IP Holding Corp. to Fox Factory Switzerland GmbH. The Company’s Taiwan operations were as a result, organized as a branch of the Swiss entity (together, "Fox Switzerland"). Fox Switzerland owns or licenses the Company’s non-US intangible property and generates earnings that prior to the enactment of TCJA, were not currently subject to payment of US income taxes or accrual of deferred tax expense because the Company asserted that such earnings were permanently invested outside the US. The unremitted earnings of Fox Switzerland became subject to US tax as a result of the one-time transition tax provided for by the TCJA, which approximated $3,706. As a result of the change in US taxation, the Company no longer considers the unremitted earnings of Fox Switzerland to be permanently reinvested, and as such recorded a deferred tax liability of approximately $2,026, primarily representing foreign withholding tax due upon remittance.
As permitted by the Securities and Exchange Commission's Staff Accounting Bulletin 118, the Company has not completed its accounting for the tax effects of the enactment of the TCJA; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects of the new law. In other cases, primarily the impact of grandfathering on limitations of deductibility of executive compensation, the Company has not been able to make a reasonable estimate because clarifying regulations have not been issued, and as such continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to the enactment. The Company has recognized provisional amounts for all items for which it was able to determine a reasonable estimate. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company's estimates may be affected as interpretations of the law through regulations and common practice emerge.
Provisional amounts
Deferred Tax Assets and Liabilities: The Company remeasured its US deferred tax assets and liabilities that give rise to future tax deductions based on the enacted tax rates in effect for the periods in which the deductions are expected to be taken. However, certain aspects of the TCJA could potentially affect the measurement of these balances or give rise to new deferred tax amounts. For example, differences between the provisional and actual calculations of the on-time transition tax could result in the need for changes to the amount of the valuation allowance on the balance that is not utilized to pay such tax. The provisional amount recorded related to the remeasurement of our deferred tax balance was a net benefit of $2,448.
One-Time Transition Tax: The one-time transition tax is based on the total post-1986 earnings and profits on which US tax were previously deferred. The Company recorded a provisional amount as an increase in income tax expense related to the one-time transition tax of $3,706. Because of the complexities of TCJA, the Company has estimated the amount of earnings and profits subject to the tax. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. The Company's estimates may change when it finalizes the calculations required to determine the ultimate amount of the transition tax.
The Company has obtained tax incentives in Switzerland that are effective through March 2019 that result in a rate reduction provided that the Company meets specified criteria. Upon expiration, the Company may renew the arrangement on demand, as long as the applicable law and operating criteria remain in place. The effect of the tax incentive was not material to the Company's income tax provision for the years ended December 29, 2017 or December 30, 2016.
On February 3, 2015, the Company announced that it had been awarded a four-year, $1,700 tax credit from the State of California, subject to certain in-state growth requirements. The Company will evaluate the requirements in each of the eligible years and realize the benefits of the credit if conditions are met. For the year ended December 30, 2016, the Company met requirements to recognize a benefit of $750, or $488 net of federal income tax.
Deferred Income Taxes
|
| | | | | | | |
| December 29, | | December 30, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Foreign tax credits | $ | 9,381 |
| | $ | 2,128 |
|
Research and development tax credits | 2,473 |
| | 1,244 |
|
Inventory | 2,344 |
| | 3,174 |
|
Accrued withholding taxes | 1,940 |
| | — |
|
Stock-based compensation | 1,718 |
| | 2,043 |
|
Accrued liabilities | 1,649 |
| | 2,384 |
|
Other | 703 |
| | 741 |
|
Total deferred tax asset | 20,208 |
| | 11,714 |
|
Valuation allowance | (6,336 | ) | | — |
|
Net deferred tax asset | 13,872 |
| | 11,714 |
|
Deferred tax liabilities: | | | |
Depreciation | (4,496 | ) | | (5,707 | ) |
Intangible assets | (3,545 | ) | | (1,769 | ) |
Accrued withholding tax on unremitted foreign dividends | (2,179 | ) | | — |
|
Other | (983 | ) | | (156 | ) |
Total deferred tax liability | (11,203 | ) | | (7,632 | ) |
Net deferred tax asset | $ | 2,669 |
| | $ | 4,082 |
|
As of December 29, 2017, the Company had foreign tax credits of $9,381 which begins to expire in 2025, unless previously utilized, and foreign net operating loss carryforwards of $908, of which $564 begin to expire in 2034 if not utilized and $344 which do not expire. The Company also had federal and state research and development credits of approximately $1,409 and $2,123. The federal research and development credits begin to expire in 2036 unless previously utilized, and the state research credits do not expire.
As of December 29, 2017, the Company assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for deferred tax assets for each jurisdiction based on the framework of ASC 740. As a result of TCJA, the Company believes that it is more likely than not that a portion of its foreign tax credits will not be realizable, and as such, provided an allowance of $6,031. A full valuation allowance was avoided primarily due to the decision to implement a prudent and feasible tax planning strategy to restructure business functions such that both US taxable income and foreign sourced income will increase in future years, allowing a portion of the foreign tax credits to be utilized.
Additionally, based on available evidence, it was concluded on a more likely than not basis that deferred tax assets of the Company's Canadian subsidiary and Austrian branch are not realizable. Accordingly, a valuation allowance of $305 has been recorded to offset the deferred tax assets in these jurisdictions.
Unrecognized Tax Benefits
|
| | | | | | | | | | | |
| For the years ended |
| 2017 | | 2016 | | 2015 |
Balance - beginning of period | $ | 7,440 |
| | $ | 8,924 |
| | $ | 7,785 |
|
Increase related to current year tax positions | 460 |
| | 1,828 |
| | 1,878 |
|
Increase (decrease) related to prior year tax positions | 1,770 |
| | (1,193 | ) | | 584 |
|
Decrease due to expiration of statute of limitations | (1,516 | ) | | (2,119 | ) | | (1,323 | ) |
Balance - end of period | $ | 8,154 |
| | $ | 7,440 |
| | $ | 8,924 |
|
As of December 29, 2017, the Company had $8,154 of unrecognized tax benefits, of which approximately $6,966, if recognized, would favorably impact the effective tax rate. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. On January 30, 2018, the Company received a no change letter from the Internal Revenue Service ("IRS") related to the audit of the Company's 2015 federal tax return. Specifically, the audit resolved issues involving the 2015 deductibility of amortization and depreciation arising from the acquisition of the Company in 2008. The favorable conclusion of the audit will result in a decrease in the unrecognized tax benefits of $1,490, of which $1,352 will favorably impact the effective tax rate in 2018. The IRS is considering a closing agreement that will resolve the uncertainty about acquisition related amortization and depreciation deductions for all open tax years. As a result, the Company believes that it is reasonably possible that unrecognized tax benefits at December 29, 2017 could be reduced by an additional $5,162 in the next twelve months. Including the reversal of amounts presented as contra to our deferred tax assets, the favorable impact of the closing agreement on the effective tax rate could amount to approximately $8,256 in 2018.
As of December 29, 2017 and December 30, 2016, the Company had approximately $311 and $193, respectively, of cumulative interest and penalties related to the uncertain tax positions, and has elected to treat interest and penalties as a component of income tax expense.
The Company's 2014 and 2016 federal tax returns, state tax returns from 2013 and forward, and foreign tax returns from 2015 and forward are subject to examination by tax authorities.