Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing the territorial tax system and imposing a tax on deemed repatriation of non-U.S. earnings. As a result of the Tax Act, Teledyne incurred provisional charges of $4.7 million in the fourth quarter of 2017 primarily due to the repatriation tax and the remeasurement of U.S. deferred tax assets and liabilities. In accordance with the Tax Act, the Company will elect to pay the repatriation tax liability over a period of eight years, with the first installment of $3.1 million due in 2018. The remainder of the tax liability is recorded in non-current income tax payable. The repatriation tax resulted in a net tax expense of $26.2 million and the remeasurement of U.S. deferred tax assets and liabilities resulted in a net tax benefit of $21.5 million. The impacts of the Tax Act may differ from this estimate, possibly materially (and the amount of the provisional charge may accordingly be adjusted over the course of 2018), due to changes in interpretations and assumptions Teledyne has made, guidance that may be issued, and actions Teledyne may take as a result of the Tax Act. These adjustments to the provisional charge related to the Tax Act will be recorded quarterly until the computations are complete which is expected no later than the fourth quarter of 2018.

Income before income taxes included income from domestic operations of $187.2 million for 2017, $195.2 million for 2016 and $213.8 million for 2015. Income before taxes included income from foreign operations of $99.8 million for 2017, $46.1 million for 2016 and $44.4 million for 2015.



Income tax provision/(benefit) - (in millions):	2017			2016			2015
Current
Federal	$	54.0		$	43.0		$	54.4
State	6.4			3.9			5.3
Foreign	22.8			3.4			4.0
Total current	83.2			50.3			63.7
Deferred
Federal	(10.7		)	4.3			3.5
State	(3.6		)	(4.8		)	(2.5		)
Foreign	(9.1		)	0.6			(2.0		)
Total deferred	(23.4		)	0.1			(1.0		)
Provision for income taxes	$	59.8		$	50.4		$	62.7

The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:



Tax rate reconciliation:	2017		2016		2015
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal benefit	1.8		1.6		1.9
Research and development tax credits	(3.2	)	(2.0	)	(3.4	)
Investment tax credits	(1.5	)	(1.8	)	(1.2	)
Qualified production activity deduction	(1.3	)	(1.6	)	(2.2	)
Foreign rate differential	(4.2	)	(2.7	)	(2.1	)
Net reversals for unrecognized tax benefits	(0.8	)	(1.5	)	(2.1	)
Stock-based compensation (ASU No. 2016-09)	(3.1	)	(3.5	)	—
Provisional charges related to U.S. tax reform	1.6		—		—
Other	(3.5	)	(2.6	)	(1.6	)
Effective income tax rate	20.8	%	20.9	%	24.3	%

Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse.

The categories of assets and liabilities that have resulted in differences in the timing of the recognition of income and expense were as follows (in millions):



Deferred income tax assets:	2017			2016
Long-term:
Accrued liabilities	$	16.9		$	36.4
Inventory valuation	14.3			17.7
Accrued vacation	7.6			10.7
Deferred compensation and other benefit plans	11.6			24.5
Postretirement benefits other than pensions	3.0			4.6
Tax credit and net operating loss carryforward	49.8			47.7
Valuation allowance	(8.8		)	(16.9		)
Total deferred income tax assets	94.4			124.7
Deferred income tax liabilities:
Long-term:
Property, plant and equipment differences	28.6			30.6
Intangible amortization	113.4			110.7
Other	3.4			4.8
Total deferred income tax liabilities	145.4			146.1
Net deferred income tax liabilities	$	51.0		$	21.4

On a provisional basis, we intend to reinvest indefinitely the earnings of our material foreign subsidiaries in our operations outside of the United States. The cash that the Company's foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. We estimate that future domestic cash generation will be sufficient to meet future domestic cash requirements. Due to the Tax Act, U.S. federal and applicable state income taxes have been accrued for the deemed repatriation. At December 31, 2017, the amount of undistributed foreign earnings was $324.3 million, for which we have not recorded a deferred tax liability of approximately $1.4 million for state corporate income taxes which would be due if reinvested foreign earnings were repatriated. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that we would no longer indefinitely reinvest the earnings outside the United States.

In assessing the need for a valuation allowance, we consider all positive and negative evidence, including recent financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable income in carryback periods and tax planning strategies. Based on a review of such information, management believes that it is possible that some portion of deferred tax assets will not be realized as a future benefit and therefore has recorded a valuation allowance. The valuation allowance for deferred tax assets decreased by $8.1 million in 2017, primarily related to the utilization of net operating loss carryforward and evidence for future utilization of the remaining investment tax credit and net operating loss carryforwards.

At December 31, 2017, the Company had approximately $60.6 million of net operating loss carryforward from foreign entities primarily from the Company’s Danish entity, which has no expiration date. The Company had foreign capital loss carryforward in the amount of $2.2 million which has no expiration date. Also the Company had aggregate Canadian federal and provincial investment tax credits of $19.9 million, which have expiration dates of 2029 to 2037. In addition, the Company had domestic federal and state net operating loss carryforward of $3.8 million and $131.1 million, respectively. Generally, federal net operating loss carryforward amounts are limited in their use by earnings of certain acquired subsidiaries, and have expiration dates ranging from 2030 to 2037 and the state net operating loss carryforward amounts have expiration dates ranging from 2020 to 2037. Finally, the Company had federal research and development credit carryforward in the amount of $1.2 million which will expire between 2032 and 2035 and state tax credits of $13.8 million, of which $11.6 million have no expiration date and $2.2 million have expiration dates ranging from 2019 to 2033.



Unrecognized tax benefits (in millions):	2017			2016			2015
Beginning of year	$	24.5		$	28.8		$	32.3
Increase in prior year tax positions (a)	0.5			1.6			2.1
Increase for tax positions taken during the current period	9.8			1.6			1.6
Reduction related to settlements with taxing authorities	—			—			(1.5		)
Reduction related to lapse of the statute of limitations	(8.8		)	(7.5		)	(5.0		)
Impact of exchange rate changes	—			—			(0.7		)
End of year	$	26.0		$	24.5		$	28.8
a) Includes the impact of acquisitions in all years.

The Company anticipates the total unrecognized tax benefit for various federal, state and foreign tax items may be reduced by $4.9 million due to the expiration of statutes of limitation for various federal, state and foreign tax issues in the next 12 months.

We recognized net tax benefits for interest and penalties related to unrecognized tax benefits within the provision for income taxes in our statements of operations of $0.5 million, $0.2 million and $0.2 million, for 2017, 2016 and 2015, respectively. Interest and penalties in the amount of $1.4 million, $1.9 million and $2.1 million were recognized in the 2017, 2016 and 2015 statement of financial position, respectively. Substantially all of the unrecognized tax benefits as of December 31, 2017, if recognized would affect our effective tax rate.

We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. The Company has substantially concluded on all U.S. federal income tax matters for all years through 2013, United Kingdom and France tax matters for all years through 2014 and Canadian income tax matters for all years through 2009.