Income Taxes

12 Months Ended

Jan. 01, 2022

Income Tax Disclosure [Abstract]

Income Taxes

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

	2021		2020		2019
United States	$	35.8	$	80.2	$	126.7
Foreign	248.8		170.4		177.1
Total	$	284.6	$	250.6	$	303.8

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

	2021		2020		2019
Current
Federal	$	18.2	$	7.1	$	1.8
State	10.6		2.7		1.1
Foreign	54.6		63.5		35.9
	$	83.4	$	73.3	$	38.8
Deferred
Federal	$	1.2	$	(2.0)	$	20.4
State	(2.7)		(0.3)		2.6
Foreign	(13.4)		(14.2)		(0.6)
	(14.9)		(16.5)		22.4
Total	$	68.5	$	56.8	$	61.2

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

	2021	2020	2019
Federal Statutory Rate	21.0%	21.0%	21.0%
State Income Taxes, Net of Federal Benefit	0.5%	0.8%	1.3%
Effect of Impairment Charges	3.0%	0.9%	—%
Foreign Rate Differential	0.1%	0.8%	(1.8)%
Research and Development Credit	(2.9)%	(3.0)%	(2.5)%
Valuation Allowance	(0.5)%	(0.1)%	0.8%
Tax on Repatriation	0.3%	1.2%	3.4%
Transaction Costs	2.3%	—%	—%
Tax Impact of Divestitures	—%	—%	(1.7)%
Deferred Tax Remeasurement	0.2%	(0.4)%	0.1%
Other	0.1%	1.5%	(0.5)%
Effective Tax Rate	24.1%	22.7%	20.1%

Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability was $(616.3) million as of January 1, 2022, classified on the consolidated Balance Sheet as a net non-current deferred tax asset of $162.9 million and a net non-current deferred income tax liability of $(779.2) million. As of January 2, 2021, the Company's net deferred tax liability was $(128.1) million classified on the consolidated Balance Sheet as a net non-current deferred income tax asset of $110.7 million and a net non-current deferred income tax liability of $(238.8) million.

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

	January 1, 2022		January 2, 2021
Accrued Benefits	$	55.7	$	36.8
Bad Debt Allowances	6.9		4.9
Warranty Accruals	4.6		3.4
Inventory	(2.0)		10.4
Tax Loss Carryforward	8.8		9.2
Operating Lease Liability	49.8		18.8
Other	44.4		34.6
Deferred Tax Assets before Valuation Allowance	168.2		118.1
Valuation Allowance	(5.3)		(7.4)
Total Deferred Tax Assets	162.9		110.7
Property Related	(77.0)		(33.7)
Intangible Items	(636.2)		(170.9)
Accrued Liabilities	(15.8)		(8.8)
Derivative Instruments	(7.4)		(7.5)
Operating Lease Asset	(42.8)		(17.9)
Deferred Tax Liabilities	(779.2)		(238.8)
Net Deferred Tax Liability	$	(616.3)	$	(128.1)

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

Unrecognized Tax Benefits, December 29, 2018	$	6.5
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	0.7
Settlements with Taxing Authorities	—
Lapse of Statute of Limitations	(0.3)
Unrecognized Tax Benefits, December 28, 2019	$	6.9
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	0.2
Settlements with Taxing Authorities	—
Lapse of Statute of Limitations	(0.3)
Unrecognized Tax Benefits, January 2, 2021	$	6.8
Gross Increases from Prior Period Tax Positions	0.1
Gross Increases from Current Period Tax Positions	0.6
Gross Increases from Acquisitions	5.3
Settlements with Taxing Authorities	—
Lapse of Statute of Limitations	(4.0)
Unrecognized Tax Benefits, January 1, 2022	$	8.8

Unrecognized tax benefits as of January 1, 2022 amount to $8.8 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 years 2021, 2020 and 2019, the Company recognized approximately $(1.4) million, $0.4 million and $0.5 million in net interest (income) expense, respectively. The Company had approximately $1.3 million, $2.7 million and $2.3 million of accrued interest as of January 1, 2022, January 2, 2021 and December 28, 2019, respectively.

Due to statute expirations, approximately $2.2 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 2018, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2015. The Company is under audit in Italy and Germany for tax periods between 2015 – 2018 related to Rexnord PMC business entities arising before the Rexnord Transaction. The Company has been indemnified by Zurn for any future liability arising from these audits. Any other liabilities arising from tax years before the Rexnord Transaction relating to the Rexnord PMC business entities would be similarly indemnified.

As of January 1, 2022, the Company had approximately $8.8 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. As of January 2, 2021, the Company had approximately $9.2 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 $5.3 million and $7.4 million as of January 1, 2022 and January 2, 2021, 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 revalued its valuation allowance calculations and policies in relation to the Rexnord Transaction and released a net valuation allowance of $3.1 million.

The Company has been granted tax holidays for some of its Chinese subsidiaries. The majority of these tax holidays will expire at the end of 2022. All tax holidays will be renewed subject to certain conditions with which the Company expects to comply. In 2021, these holidays decreased the Provision for Income Taxes by $4.2 million.

The Company continues to treat approximately $169.9 million of earnings from certain foreign entities as permanently reinvested and has not recorded a deferred tax liability for the local withholding taxes of approximately $17.0 million on those earnings. The Company evaluated the permanent reinvestment assertion related to the Rexnord PMC business and is not making an assertion for the taxes associated with the repatriation of any Rexnord PMC business non-U.S. earnings. A $5.9 million deferred tax liability with no effective rate related to these earnings was included in the net identifiable assets acquired from the Rexnord Transaction.