Income Taxes

12 Months Ended

Dec. 29, 2019

On December 22, 2017, the Tax Act was enacted, which 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. 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, for a net provisional charge of $4.7 million recorded in the fourth quarter of 2017. The Company finalized its assessment of the Tax Act during the fourth quarter of 2018, resulting in a decrease of $0.8 million to the provisional charge and the repatriation tax. The $12.0 million balance of the repatriation tax at outstanding at December 30, 2018 was paid in February 2019.

Income before income taxes included income from domestic operations of $295.9 million for 2019, $243.7 million for 2018 and $187.2 million for 2017. Income before taxes included income from foreign operations of $177.8 million for 2019, $150.2 million for 2018 and $99.8 million for 2017.


Income tax provision/(benefit) - (in millions):	2019		2018		2017
Current
Federal	$	66.0	$	22.9	$	54.0
State	10.6		8.1		6.4
Foreign	28.4		31.8		22.8
Total current	105.0		62.8		83.2
Deferred
Federal	(37.0)		2.3		(10.7)
State	(2.3)		0.6		(3.6)
Foreign	5.7		(5.6)		(9.1)
Total deferred	(33.6)		(2.7)		(23.4)
Provision for income taxes	$	71.4	$	60.1	$	59.8

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


Tax rate reconciliation:	2019		2018		2017
U.S. federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State and local taxes, net of federal benefit	2.1		1.9		1.8
Research and development tax credits	(2.1)		(2.3)		(3.2)
Investment tax credits	(1.1)		(1.2)		(1.5)
Qualified production activity deduction	—		—		(1.3)
Foreign rate differential	0.7		1.1		(4.2)
Net reversals for unrecognized tax benefits	(0.6)		(0.3)		(0.8)
Stock-based compensation	(3.3)		(3.3)		(3.1)
U.S. export sales	(2.4)		(1.3)		—
Provisional charges related to U.S. tax reform	—		(0.2)		1.6
Other	0.8		(0.1)		(3.5)
Effective income tax rate	15.1	%	15.3	%	20.8	%

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:	2019		2018
Long-term:
Accrued liabilities	$	20.5	$	20.3
Inventory valuation	14.5		11.9
Accrued vacation	7.8		7.8
Deferred compensation and other benefit plans	30.2		20.0
Postretirement benefits other than pensions	1.8		2.5
Operating lease liabilities	33.5		—
Capitalization of research and development	38.8		—
Tax credit and net operating loss carryforward	30.2		43.8

Valuation allowance	(6.1)		(5.4)
Total deferred income tax assets	171.2		100.9

Deferred income tax liabilities:
Long-term:
Property, plant and equipment differences	16.0		20.5

Intangible amortization	133.5		112.0
Operating lease right-of-use assets	33.5		—
Other	5.5		7.1
Total deferred income tax liabilities	188.5		139.6

Net deferred income tax liabilities	$	17.3	$	38.7

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 29, 2019, the amount of undistributed foreign earnings was $309.5 million, for which we have not recorded a deferred tax liability of approximately $1.4 million for 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 increased by $0.7 million in 2019, primarily related to the evidence for future utilization of the remaining investment tax credits.

At December 29, 2019, the Company had approximately $43.6 million of net operating loss carryforward primarily from the Company’s entity in Denmark, which has no expiration date. The Company had foreign capital loss carryforward in the amount of $2.1 million which has no expiration date. Also the Company had aggregate Canadian federal and provincial investment tax credits of $8.6 million, which have expiration dates of 2030 to 2040. In addition, the Company had domestic federal and state net operating loss carryforward of $3.8 million and $105.6 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 2039. Finally, the Company had federal research and development credit carryforward in the amount of $0.9 million which will expire between 2032 and 2035 and state tax credits of $10.6 million, of which $9.7 million have no expiration date and $0.8 million have expiration dates ranging from 2023 to 2033.


Unrecognized tax benefits (in millions):	2019		2018		2017
Beginning of year	$	25.0	$	26.0	$	24.5
Increase in prior year tax positions (a)	4.2		2.3		0.5
Increase for tax positions taken during the current period	4.3		2.1		9.8
Reduction related to settlements with taxing authorities	(4.6)		(0.1)		—
Reduction related to lapse of the statute of limitations	(4.3)		(5.2)		(8.8)
Impact of exchange rate changes	(0.1)		(0.1)		—

End of year	$	24.5	$	25.0	$	26.0
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 $3.4 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 and expense for interest and penalties related to unrecognized tax benefits within the provision for income taxes in our statements of operations of $0.3 million of benefit, $0.3 million of expense and $0.5 million of benefit, for 2019, 2018 and 2017, respectively. Interest and penalties in the amount of $1.1 million, $1.7 million and $1.4 million were recognized in the 2019, 2018 and 2017 statement of financial position, respectively. Substantially all of the unrecognized tax benefits as of December 29, 2019, 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 2015, United Kingdom income tax matters for all years through 2017, France income tax matters for all years through 2016 and Canadian income tax matters for all years through 2011.