INCOME TAXES

Income before income taxes consisted of the following:



(In millions)	2017		2016		2015
Domestic	$	47.1	$	45.4	$	23.6
Foreign	57.5		58.7		62.7
	$	104.6	$	104.1	$	86.3

The income tax provision/(benefit) from continuing operations consisted of the following:



(In millions)	2017			2016			2015
Current:
Federal	$	29.7		$	9.6		$	1.2
Foreign	10.2			11.4			17.4
State	1.1			0.8			0.8
Total current	41.0			21.8			19.4
Deferred:
Federal	(10.7		)	2.9			(1.8		)
Foreign	(4.5		)	(1.0		)	(4.0		)
State	0.2			1.1			(1.0		)
Total deferred	$	(15.0	)	$	3.0		$	(6.8	)
	$	26.0		$	24.8		$	12.6

A reconciliation of the tax provision for continuing operations at the U.S. statutory rate to the effective income tax expense rate as reported is as follows:



	2017		2016		2015
U.S. Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	1.0		(0.3	)	(0.3	)
Foreign operations	(10.2	)	(8.4	)	(13.1	)
R&D tax credits	(0.9	)	(0.6	)	(1.0	)
Uncertain tax position adjustments	(0.5	)	(2.5	)	(1.5	)
Deferred tax adjustments - restructuring and rate adjustments	(1.2	)	0.3		1.1
Valuation allowance on state and foreign deferred tax	(1.2	)	2.4		4.1
Purchase of noncontrolling interest	(2.3	)	—		(9.4	)
Share-based compensation	(1.9	)	(1.1	)	—
Realized foreign currency loss	(1.5	)	—		—
Other items	(1.3	)	(1.0	)	(0.3	)
Impact of the Tax Act
Transition tax	18.1		—		—
Deferred tax effects	(8.3	)	—		—
Effective tax rate	24.8	%	23.8	%	14.6	%

The effective tax rate continues to be lower than the statutory rate of 35 percent primarily due to foreign earnings taxed at rates below the U.S. statutory rate, offset by the recognition of the impact of the U.S. Tax Cuts and Jobs Act in 2017, further reduced by U.S. tax incentives, and certain discrete events.

The U.S. Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35 percent to 21 percent and creates new incentives on U.S. based foreign exports, referred to as Foreign Derived Intangible Income, and other provisions. In addition, in 2017 the Company was subject to a transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts during 2018. Those adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.

Provisional amounts which net to $10.2 million for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018.

Transition tax

The Tax Act requires the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5 percent to the extent of foreign cash and certain other net current assets and 8 percent on the remaining earnings. The Company has recorded a provisional amount for the one-time transition tax liability and income tax expense of $18.9 million. The Company has recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from foreign subsidiaries that is not yet final due to future statutory deadlines. In addition, further analysis is required pending guidance from state and local tax authorities in the U.S.

Deferred tax effects

The Tax Act reduces the U.S. statutory tax rate from 35 percent to 21 percent for years after 2017. Accordingly, the Company has remeasured its deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. The Company recognized a deferred tax benefit of $8.7 million. Although the tax rate reduction is known, all of the data is not yet available and further analysis is required to finalize the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of December 31, 2017 are provisional.

The Company recorded discrete excess tax benefits from share-based compensation of $1.8 million in the twelve-month period ended December 31, 2017 related to the adoption of ASU 2016-09 during 2016. The adoption of ASU 2016-09 for share-based compensation can add variability to the Company’s provision for income taxes, mainly due to the timing of stock option exercises, vesting of restricted stock, and the stock price.

During the second quarter ended June 30, 2017, the Company acquired controlling interests in three U.S. distributors (see Note 3 - Acquisitions). These transactions created a discrete non-taxable gain recognized on the original minority equity investments resulting in a tax benefit of $1.9 million.

During the first quarter ended March 31, 2017, the Company realized a foreign currency translation loss on discrete intercompany loans that were long-term-investment in nature resulting in a permanent tax benefit of $1.7 million and the Company released a valuation allowance on deferred tax of $1.9 million in a foreign jurisdiction where a restructuring occurred.

Significant components of the Company’s deferred tax assets and liabilities were as follows:



(In millions)	2017			2016
Deferred tax assets:
Accrued expenses and reserves	$	9.6		$	10.0
Compensation and employee benefits	17.4			24.2
Other items	15.0			10.9
Valuation allowance on state and foreign deferred tax	(9.8		)	(9.8		)
Total deferred tax assets	32.2			35.3
Deferred tax liabilities:
Accelerated depreciation on fixed assets	12.0			13.8
Amortization of intangibles	41.9			56.5
Other items	0.3			0.9
Total deferred tax liabilities	54.2			71.2
Net deferred tax liabilities	$	(22.0	)	$	(35.9	)

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss for certain state and foreign income tax purposes incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth.

On the basis of this evaluation, as of December 31, 2017, a valuation allowance of $9.8 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The Company has foreign income tax net operating loss (“NOL”) carryforwards of $7.0 million and state income tax NOL and credit carryforwards of $7.2 million, which will expire on various dates as follows:



(In millions)
2018-2019	$	1.1
2020-2024	3.0
2025-2029	2.2
2030-2034	2.6
2035-2039	0.2
Unlimited	5.1
	$	14.2

The Company believes that it is more likely than not that the benefit from certain foreign NOL carryforwards as well as certain state NOL and state credit carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $2.7 million on the deferred tax assets related to these foreign NOL carryforwards and a valuation allowance of $7.1 million on the deferred tax assets related to these state NOL and credit carryforwards.

The Company continues to consider undistributed earnings from its foreign subsidiaries to be indefinitely reinvested with respect to the U.S. It is the Company’s policy to reinvest earnings as needed for operations, capital and acquisition spending. While the Tax Act resulted in the reduction of the excess of the amount for financial reporting over the tax basis in foreign subsidiaries, an actual repatriation from non-U.S. subsidiaries could still be subject to additional foreign withholding tax, foreign income tax, and U.S. state taxes. The Company considers the excess of the amount for financial reporting over the tax basis of its investments in its foreign subsidiaries of a provisional $325.2 million to be indefinitely reinvested and therefore have not recorded a deferred tax liability of $3.8 million.

As of the beginning of fiscal year 2017, the Company had gross unrecognized tax benefits of $1.3 million, excluding accrued interest and penalties. The unrecognized tax benefits increased due to uncertain tax positions identified in the current year based on evaluations made during 2017 which were offset by statue expirations. The Company had gross unrecognized tax benefits, excluding accrued interest and penalties, of $1.3 million as of December 31, 2017.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2017, 2016, and 2015 (excluding interest and penalties) is as follows:



(In millions)	2017			2016			2015
Beginning balance	$	1.3		$	2.4		$	4.4
Additions for tax positions of the current year	0.4			0.1			0.2
Additions for tax positions of prior years	0.2			0.1			0.2
Reductions for tax positions of prior years	—			(0.2		)	(0.8		)
Statute expirations	(0.6		)	(1.1		)	(1.6		)
Settlements	—			—			—
Ending balance	$	1.3		$	1.3		$	2.4

If recognized, each annual effective tax rate would be affected by the net unrecognized tax benefits of $1.3 million, $1.3 million, and $2.3 million as of year-end 2017, 2016, and 2015, respectively.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. In 2017, interest and penalties decreased $0.5 million, for prior year tax positions. The Company has accrued interest and penalties as of December 31, 2017, December 31, 2016, and January 2, 2016 of approximately $0.6 million, $1.1 million, and $2.3 million, respectively.

The Company is subject to taxation in the United States and various state and foreign jurisdictions. With few exceptions, as of December 31, 2017, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2014 and is no longer subject to foreign or state income tax examinations by tax authorities for years before 2012.

It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months as a result of an audit or due to the expiration of a statute of limitation. Based on the current audits in process and pending statute expirations, the payment of taxes as a result could be up to $0.9 million.