Income Taxes

12 Months Ended

Jan. 03, 2020

INCOME TAXES

Income before taxes and the provision (benefit) for taxes consisted of the following:



Fiscal Years	2019		2018		2017
(In millions)
Income before taxes:
United States	$	43.0	$	25.4	$	33.2
Foreign	301.8		252.6		215.0
Total	$	344.8	$	278.0	$	248.2



Provision (benefit) for taxes:
U.S. Federal:
Current	$	(3.8	)	$	(19.7	)	$	98.6
Deferred	252.3			(25.8		)	(6.1		)
	248.5			(45.5		)	92.5
U.S. State:
Current	5.1			5.0			4.5
Deferred	(0.7		)	(3.6		)	(1.0		)
	4.4			1.4			3.5
Foreign:
Current	49.2			57.0			42.7
Deferred	(471.8		)	(18.2		)	(9.0		)
	(422.6		)	38.8			33.7
Income tax provision (benefit)	$	(169.7	)	$	(5.3	)	$	129.7
Effective tax rate	(49		)%	(2		)%	52		%

The difference between the tax provision (benefit) at the statutory federal income tax rate and the tax provision (benefit) as a percentage of income before taxes ("effective tax rate") was as follows:



Fiscal Years	2019		2018		2017

Statutory federal income tax rate	21	%	21	%	35	%
Increase (reduction) in tax rate resulting from:
Foreign income taxed at different rates	(7	)%	(7	)%	(15	)%
U.S. State income taxes	2	%	1	%	1	%
U.S. Federal research and development credits	(3	)%	(4	)%	(3	)%
Stock-based compensation	1	%	1	%	2	%
Excess tax benefit related to stock-based compensation	(2	)%	(3	)%	(4	)%
Effect of U.S. tax law change	—	%	(8	)%	33	%
Other US taxes on foreign operations	1	%	2	%	—	%
Tax reserve releases	(5	)%	(9	)%	—	%
Intercompany transfer of intellectual property	(60	)%	—	%	—	%
Other	3	%	4	%	3	%
Effective tax rate	(49	)%	(2	)%	52	%

Tax Cuts and Jobs Act (the "Tax Act") reduced the U.S. federal tax rate from 35% to 21%, imposed a one-time transition tax on accumulated foreign earnings, and created new taxes on certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income ("GILTI"). As a result, the Company recorded a provisional net income tax expense of $80.2 million in fiscal 2017. In fiscal 2018, the Company completed the accounting for the tax effects of the Tax Act and made immaterial adjustments to the provisional amounts recorded previously. Additionally, in fiscal 2018, the Company finalized its accounting policy election to record GILTI deferred taxes and recorded a $15.1 million one-time tax benefit.

To align with its international business operations, in the fourth quarter of 2019, the Company completed a non-U.S. intercompany transfer of its intellectual property to a subsidiary in the Netherlands. The transaction resulted in deferred tax assets in the Netherlands and GILTI deferred tax liabilities in the U.S., recorded at the applicable statutory tax rates, resulting in a one-time income tax benefit of approximately $206.3 million.

The effective income tax rates in fiscal 2019 decreased compared to 2018 primarily due to the one-time tax benefit from the non-U.S. intercompany transfer of intellectual property.

The effective income tax rates in fiscal 2018 decreased compared to 2017 primarily due to the one-time impacts from the Tax Act, benefits from reserve releases due to the expiration of the U.S. federal statute of limitations for certain tax years, and a one-time benefit from deferred taxes in relation to GILTI.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are as follows:



At the End of Fiscal Year	2019			2018
(In millions)
Deferred tax liabilities:
Purchased intangibles	$	158.7		$	177.1
Global intangible low-taxed income	233.7			—
Operating lease right-of-use assets	35.3			—
Other	12.8			13.8
Total deferred tax liabilities	440.5			190.9

Deferred tax assets:
Expenses not currently deductible	28.0			33.4
Depreciation and amortization	471.5			7.3
U.S. tax credit carryforwards	34.2			30.3
U.S. net operating loss carryforwards	9.8			20.8
Foreign net operating loss carryforwards	16.2			16.9
Stock-based compensation	13.3			20.3
Global intangible low-taxed income	—			13.4
Operating lease liabilities	36.0			—
Other	14.1			14.7
Total deferred tax assets	623.1			157.1
Valuation allowance	(25.3		)	(27.8		)
Total deferred tax assets	597.8			129.3
Total net deferred tax assets	$	157.3		$	(61.6	)

Reported as:
Non-current deferred income tax assets	$	475.5		$	12.2
Non-current deferred income tax liabilities	(318.2		)	(73.8		)
Net deferred tax assets (liabilities)	$	157.3		$	(61.6	)

At the end of fiscal 2019, the Company has U.S. federal and foreign net operating loss carryforwards, or NOLs, of approximately $21.5 million and $81.0 million, respectively. The U.S. federal NOLs will begin to expire in 2026. There is, generally, no expiration for the foreign NOLs. Utilization of the Company’s U.S. federal and state NOLs is subject to annual limitations in accordance with the applicable tax code. The Company has determined that it is more likely than not that the Company will not realize a portion of the foreign NOLs and, accordingly, a valuation allowance has been established for such amount.

The Company has U.S. federal and California research and development credit carryforwards of approximately $11.1 million and $33.0 million, respectively. The U.S. federal tax credit carryforwards will expire beginning 2031. The California research tax credits have an indefinite carryforward period. The Company believes that it is more likely than not that the Company will not realize a portion of the California research and development credit carryforwards and, accordingly, a valuation allowance has been established for such amount.

As a result of the Tax Act, the Company can repatriate foreign earnings back to the U.S. when needed with minimal U.S. income tax consequences, other than the transition tax and GILTI tax. The Company reinvested a large portion of its undistributed foreign earnings in acquisitions and other investments and intends to bring back a portion of foreign cash which was subject to the transition tax and GILTI. During fiscal 2019, the Company repatriated $239.4 million of its foreign earnings to the U.S.

The total amount of the unrecognized tax benefits at the end of fiscal 2019 was $71.6 million. A reconciliation of gross unrecognized tax benefit is as follows:



Fiscal Years	2019			2018			2017
(In millions)
Beginning balance	$	69.1		$	82.4		$	72.9
Increase (decrease) related to prior years' tax positions	3.8			4.5			(0.6		)
Increase related to current year tax positions	12.6			10.0			12.1
Lapse of statute of limitations	(8.2		)	(18.9		)	(1.6		)
Settlement with taxing authorities	(5.7		)	(8.9		)	(0.4		)
Ending balance	$	71.6		$	69.1		$	82.4

The Company's total unrecognized tax benefits that, if recognized, would affect its effective tax rate were $59.5 million and $60.5 million at the end of fiscal 2019 and 2018, respectively.

The Company and its subsidiaries are subject to U.S. federal, state, and foreign income taxes. The Company's tax years are substantially closed for all U.S. federal and state income taxes for audit purposes through 2014. Non-U.S. income tax matters have been concluded for years through 2007. The Company is currently in various stages of multiple year examinations state, and foreign (multiple jurisdictions) taxing authorities. While the Company generally believes it is more likely than not that its tax positions will be sustained, it is reasonably possible that future obligations related to these matters could arise. The Company believes that its reserves are adequate to cover any potential assessments that may result from the examinations and negotiations.

In the first quarter of fiscal 2018, the Company had received a formal Notice of Deficiency from the Internal Revenue Service for fiscal year 2011, assessing tax and penalties totaling $51.2 million. In the third quarter of fiscal 2019, the Company received a decision from U.S. Tax Court resulting in no change to its federal income tax liability for fiscal 2011. There are no federal income tax returns currently under examination.

Although timing of the resolution and/or closure of audits is not certain, the Company does not believe that its gross unrecognized tax benefits would materially change in the next twelve months.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company’s liability for unrecognized tax benefits including interest and penalties was recorded in Other non-current liabilities in the accompanying Consolidated Balance Sheets. At the end of fiscal 2019 and 2018, the Company had accrued $11.5 million and $11.0 million, respectively, for payment of interest and penalties.