Income Taxes

Income before taxes consisted of the following (in millions):



	2017		2016		2015
United States	$	147.4	$	143.4	$	25.8
Foreign	129.8		123.0		171.1
Total	$	277.2	$	266.4	$	196.9

The provision for income taxes is summarized as follows (in millions):



	2017			2016			2015
Current
Federal	$	36.9		$	23.1		$	13.5
State	(0.3		)	3.5			0.2
Foreign	32.2			30.4			45.1
	$	68.8		$	57.0		$	58.8
Deferred
Federal	$	(7.2	)	$	5.6		$	(2.0	)
State	2.2			1.8			(0.9		)
Foreign	(4.7		)	(7.3		)	(7.5		)
	(9.7		)	0.1			(10.4		)
Total	$	59.1		$	57.1		$	48.4

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law revising the US corporate income tax. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the elimination of certain deductions and imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries. The primary impacts of the Act reflected in the consolidated financial statements relate to the remeasurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate; a one-time mandatory transition tax on undistributed earnings of foreign affiliates; and deferred taxes in connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates. The SEC provided guidance that allows the Company to record provisional amounts if the accounting assessment is incomplete for impacts of the Act, with the requirement that the accounting be finalized in a period not to exceed one year from the date of enactment. As of December 30, 2017, the Company has not completed the accounting for the tax effects of the Act. Therefore, the Company has recorded provisional amounts for certain effects of the Act. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state conformity to federal changes. The Act also creates a new requirement that certain income earned by controlled foreign corporations must be included currently in gross income of the controlled foreign corporations’ US shareholder. Due to the complexity of the new Global Intangible Low Taxed Income tax rules, the Company is currently evaluating this provision of the Act and its application under the applicable accounting guidance. Therefore, the Company has not recognized any provisional amounts for this provision of the Act in its consolidated financial statements.

The Company recorded a net $1.0 million reduction in tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional benefit recognized related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse was $51.0 million. The provisional expense recognized related to the one-time tax on the mandatory deemed repatriation of foreign earnings was $40.0 million of which the Company will elect to pay the one-time tax over a period of eight years. The Company also recognized a provisional expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested. Additional analysis of historical foreign earnings is necessary to finalize the tax impact of the Act and any subsequent adjustment to these amounts will be recorded as current tax expense in the quarter of 2018 in which the analysis is complete.

On February 13, 2018 the Internal Revenue Service issued Revenue Proclamation 2018-17 modifying existing procedures for changing the annual accounting period of certain foreign corporations whose US shareholders are subject to the new mandatory deemed repatriation of deferred foreign earnings. The Company is currently analyzing the impact of Revenue Proclamation 2018-17 and anticipates the impact to tax expense to be between $4.0 million to $5.0 million. As the Revenue Proclamation was issued after the Company’s fiscal year end, the current consolidated financial statements do not reflect this impact.

A reconciliation of the statutory federal income tax rate and the effective tax rate reflected in the consolidated statements of income follows:



	2017		2016		2015
Federal Statutory Rate	35.0	%	35.0	%	35.0	%
State Income Taxes, Net of Federal Benefit	0.3	%	1.5	%	(0.2	)%
Domestic Production Activities Deduction	(1.0	)%	(1.1	)%	(1.0	)%
Foreign Rate Differential - China	(2.1	)%	(2.0	)%	(3.3	)%
Foreign Rate Differential - All Other	(4.3	)%	(6.0	)%	(7.2	)%
Research and Development Credit	(3.0	)%	(2.3	)%	(4.1	)%
Goodwill Impairment	—	%	—	%	4.0	%
Valuation Allowance	(0.6	)%	—	%	—	%
Tax Cuts and Jobs Act of 2017	(0.4	)%	—	%	—	%
Adjustments to Tax Accruals and Reserves	(1.9	)%	0.7	%	2.1	%
Write Down of Venezuelan Assets	—	%	—	%	2.3	%
Other	(0.7	)%	(4.4	)%	(3.0	)%
Effective Tax Rate	21.3	%	21.4	%	24.6	%

Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability was $(106.8) million as of December 30, 2017, classified on the consolidated Balance Sheet as a net non-current deferred tax asset of $28.5 million and a net non-current deferred income tax liability of $(135.3) million. As of December 31, 2016, the Company's net deferred tax liability was $(75.3) million classified on the consolidated Balance Sheet as a net non-current deferred income tax benefit of $22.4 million and a net non-current deferred income tax liability of $(97.7) million. The Company remeasured its US deferred assets and liabilities at the applicable tax rate of 21% in accordance with the Act. The remeasurement resulted in a decrease of $51.0 million to the net deferred tax liability.

The components of this net deferred tax liability are as follows (in millions):



	December 30, 2017			December 31, 2016
Accrued Employee Benefits	$	53.4		$	75.1
Bad Debt Allowances	2.3			2.7
Warranty Accruals	3.1			5.5
Inventory	12.9			21.3
Accrued Liabilities	(5.3		)	9.2
Derivative Instruments	(4.3		)	25.9
Tax Loss Carryforward	12.9			12.4
Valuation Allowance	(5.9		)	(6.8		)
Other	1.2			5.0
Deferred Tax Assets	70.3			150.3
Property Related	(26.2		)	(31.4		)
Intangible Items	(150.9		)	(194.2		)
Deferred Tax Liabilities	(177.1		)	(225.6		)
Net Deferred Tax Liability	$	(106.8	)	$	(75.3	)

Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):



Unrecognized Tax Benefits, January 3, 2015	$	5.8
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	4.0
Settlements with Taxing Authorities	(1.3		)
Lapse of Statute of Limitations	(0.2		)
Unrecognized Tax Benefits, January 2, 2016	$	8.3
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	2.0
Settlements with Taxing Authorities	—
Lapse of Statute of Limitations	(0.3		)
Unrecognized Tax Benefits, December 31, 2016	$	10.0
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	2.7
Settlements with Taxing Authorities	(5.3		)
Lapse of Statute of Limitations	(0.7		)
Unrecognized Tax Benefits, December 30, 2017	$	6.7

Unrecognized tax benefits as of December 30, 2017 amount to $6.7 million, all of which would impact the effective income tax rate if recognized.

Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During fiscal 2017, 2016 and 2015, the Company recognized approximately $(0.2) million, $0.2 million and $0.6 million in net interest (income) expense, respectively. The Company had approximately $1.7 million, $1.9 million and $1.7 million of accrued interest as of December 30, 2017, December 31, 2016 and January 2, 2016, respectively.

Due to statute expirations, approximately $0.4 million of the unrecognized tax benefits, including accrued interest, could reasonably change in the coming year.

With few exceptions, the Company is no longer subject to US federal and state/local income tax examinations by tax authorities for years prior to 2012, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2010.

At December 30, 2017, the Company had approximately $12.9 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period of up to 15 years and the remaining without expiration. At December 31, 2016, the Company had approximately $12.4 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period up to 15 years and the remaining without expiration.

Valuation allowances totaling $5.9 million and $6.8 million as of December 30, 2017 and December 31, 2016, respectively, have been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if future taxable income during the carryforward period fluctuates.

The Company has been granted tax holidays for some of its Chinese subsidiaries. These tax holidays expire in 2020 and are renewable subject to certain conditions with which the Company expects to comply. In 2017, these holidays decreased the Provision for Income Taxes by $4.2 million.

The Act included a mandatory one-time tax on all accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no US tax liability had been accrued have now been subject to US tax. The Company recognized a provisional one-time tax of $40.0 million and a provisional expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested. As a result, earnings in foreign jurisdictions are available for distribution without incremental US tax cost.