Columbia Sportswear Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Consolidated income from continuing operations before income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2016		2015		2014
U.S. operations	$	173,798	$	173,966	$	118,743
Foreign operations	83,100		73,353		79,778
Income before income tax	$	256,898	$	247,319	$	198,521

The components of the provision (benefit) for income taxes consisted of the following (in thousands):



	Year Ended December 31,
	2016			2015			2014
Current:
Federal	$	53,840		$	61,211		$	42,790
State and local	6,370			6,520			3,175
Non-U.S.	18,708			21,014			20,679
	78,918			88,745			66,644
Deferred:
Federal	(12,921		)	(8,883		)	(5,147		)
State and local	(2,166		)	(906		)	(739		)
Non-U.S.	(5,372		)	(11,488		)	(4,096		)
	(20,459		)	(21,277		)	(9,982		)
Income tax expense	$	58,459		$	67,468		$	56,662

The following is a reconciliation of the statutory federal income tax rate to the effective rate reported in the financial statements:



	Year Ended December 31,
	2016		2015		2014
	(percent of income)
Provision for federal income taxes at the statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	1.5		2.2		1.5
Non-U.S. income taxed at different rates	(5.8	)	(3.9	)	(3.4	)
Foreign tax credits	(3.0	)	(1.7	)	—
Foreign deferred tax asset	(2.5	)	—		—
Reduction of unrecognized tax benefits	—		(0.8	)	(3.2	)
Research credits	(0.8	)	(0.9	)	(0.9	)
Reduction of valuation allowance	—		(2.7	)	—
Excess tax benefits from stock plans	(2.1	)	—		—
Other	0.5		0.1		(0.5	)
Actual provision for income taxes	22.8	%	27.3	%	28.5	%

Significant components of the Company's deferred taxes consisted of the following (in thousands):



	December 31,
	2016			2015
Deferred tax assets:
Accruals and allowances	$	51,724		$	47,290
Capitalized inventory costs	39,661			27,669
Stock compensation	6,476			6,585
Net operating loss carryforwards	3,637			2,971
Depreciation and amortization	19,313			14,288
Tax credits	443			5,805
Other	263			400
Gross deferred tax assets	121,517			105,008
Valuation allowance	(1,323		)	(258		)
Net deferred tax assets	120,194			104,750
Deferred tax liabilities:
Depreciation and amortization	(25,703		)	(26,608		)
Foreign currency loss	(667		)	(1,477		)
Other	(1,477		)	(713		)
Gross deferred tax liabilities	(27,847		)	(28,798		)
Total net deferred taxes	$	92,347		$	75,952

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company had net operating loss carryforwards at December 31, 2016 and 2015 in certain international tax jurisdictions of $19,932,000 and $12,159,000, respectively, which will begin to expire in 2027. The net operating losses result in deferred tax assets of $3,637,000 and $2,971,000 at December 31, 2016 and 2015, respectively. These deferred tax assets were subject to a valuation allowance of $1,060,000 at December 31, 2016. There was no valuation allowance for these deferred tax assets as of December 31, 2015.

The Company had undistributed earnings of foreign subsidiaries of approximately $422,940,000 at December 31, 2016 for which deferred taxes have not been provided. Such earnings are considered indefinitely invested outside of the United States. If these earnings were repatriated to the United States, the earnings would be subject to U.S. taxation. The amount of the unrecognized deferred tax liability associated with the undistributed earnings was approximately $94,193,000 at December 31, 2016. The unrecognized deferred tax liability approximates the excess of the United States tax liability over the creditable foreign taxes paid that would result from a full remittance of undistributed earnings.

The Company conducts business globally, and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, China, France, Japan, South Korea, Switzerland, and the United States. The Company has effectively settled Canadian tax examinations of all years through 2011, U.S. and Japanese tax examinations of all years through 2012, France tax examinations of all years through 2013, Italian tax examinations of all years through 2010, and Swiss tax examinations of all years through 2013. The Korean National Tax Service concluded an audit of the Company's 2009 through 2013 corporate income tax returns in 2014. Further, the Korean National Tax Service concluded an audit of the Company's 2014 corporate income tax return in 2016, and due to the nature of the findings in both of these audits, the Company has invoked the Mutual Agreement Procedures outlined in the U.S.-Korean income tax treaty. The Company does not anticipate that adjustments relative to this dispute, or any other ongoing tax audits, will result in material changes to its financial condition, results of operations or cash flows. Other than the dispute previously noted, the Company is not currently under examination in any major jurisdiction.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



	December 31,
	2016			2015			2014
Balance at beginning of year	$	11,187		$	6,630		$	14,639
Increases related to prior year tax positions	2,514			365			821
Decreases related to prior year tax positions	(5,119		)	(2,019		)	(7,623		)
Increases related to current year tax positions	1,599			6,564			2,473
Settlements	—			—			(3,121		)
Expiration of statute of limitations	(183		)	(353		)	(559		)
Balance at end of year	$	9,998		$	11,187		$	6,630

Due to the potential for resolution of income tax audits currently in progress, and the expiration of various statutes of limitation, it is reasonably possible that the unrecognized tax benefits balance may change within the twelve months following December 31, 2016 by a range of zero to $4,410,000. Open tax years, including those previously mentioned, contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenue and expenses or the sustainability of income tax credits for a given examination cycle.

Unrecognized tax benefits of $7,723,000 and $9,358,000 would affect the effective tax rate if recognized at December 31, 2016 and 2015, respectively.

The Company recognizes interest expense and penalties related to income tax matters in income tax expense. The Company recognized a net increase of accrued interest and penalties of $637,000 in 2016, and a net reversal of accrued interest and penalties of $356,000 and $65,000 in 2015 and 2014, respectively, all of which related to uncertain tax positions. The Company had $3,042,000 and $2,402,000 of accrued interest and penalties related to uncertain tax positions at December 31, 2016 and 2015, respectively.