9. INCOME TAXES

Income taxes as presented are calculated on a separate tax return basis. The Company determined the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company looked to the future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. The need for a valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated and combined financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

As of January 31, 2017, the Company has recorded a tax indemnity payable to B/E Aerospace totaling $4.7, of which $0.1 is classified in other current liabilities and $4.6 is classified in other long‑term liabilities.

Components of earnings (loss) before incomes taxes were:


	Year Ended						Month Ended
	January 31, 2017		January 31, 2016		December 31, 2014		January 31, 2015
Earnings (loss) before income taxes
United States	$	41.3	$	(624.4)	$	210.9	$	11.3
Foreign		12.2		10.3		32.9		0.1
Earnings (loss) before income taxes	$	53.5	$	(614.1)	$	243.8	$	11.4

Income tax expense (benefit) consists of the following:


	Year Ended						Month Ended
	January 31, 2017		January 31, 2016		December 31, 2014		January 31, 2015
Current:
Federal	$	—	$	0.7	$	75.4	$	3.5
State		0.3		(1.5)		8.5		0.4
Foreign		(1.3)		3.8		29.0		0.8
		(1.0)		3.0		112.9		4.7
Deferred:
Federal		14.4		(213.3)		42.8		—
State		1.3		(17.4)		3.5		—
Foreign		(9.4)		(0.6)		(3.5)		(0.4)
		6.3		(231.3)		42.8		(0.4)
Total income tax expense (benefit)	$	5.3	$	(228.3)	$	155.7	$	4.3

The difference between income tax expense (benefit) and the amount computed by applying the statutory U.S. federal income tax rate (35%) to the pre‑tax earnings consists of the following:


	Year Ended						Month Ended
	January 31, 2017		January 31, 2016		December 31, 2014		January 31, 2015
Statutory federal income tax expense (benefit)	$	18.7	$	(214.9)	$	85.3	$	4.0
U.S. state income taxes		1.5		(17.5)		6.0		0.3
Foreign tax rate differential		0.1		(0.2)		(3.7)		0.8
Change in unrecognized tax benefits		(7.8)		0.4		—		—
Change in valuation allowance on foreign interest loss carryforwards		(1.6)		5.3		—		—
Other, net		1.3		2.0		0.8		(0.8)
Non-taxable/non-deductible items		(6.9)		(3.4)
Exit taxes		—		—		67.3		—
	$	5.3	$	(228.3)	$	155.7	$	4.3

The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consist of the following:


	January 31, 2017		January 31, 2016
Deferred tax assets:
Inventory reserves	$	24.8	$	15.4
Accrued liabilities		12.9		15.7
Intangible Assets		44.2		84.2
Net operating loss carryforward		81.2		59.5
Inventory capitalization		14.9		10.7
Other		19.9		5.2
	$	197.9	$	190.7
Deferred tax liabilities:
Intangible assets		(12.8)		(16.1)
Depreciation		(25.3)		(5.5)
		(38.1)		(21.6)
Net deferred tax asset before valuation allowance		159.8		169.1
Valuation allowance		(17.8)		(21.9)
Net deferred tax asset	$	142.0	$	147.2

A reconciliation of the beginning and ending amounts of gross uncertain tax positions is presented below:


	January 31, 2017		January 31, 2016		January 31, 2015
Unrecognized tax benefit at beginning of period	$	9.0	$	9.4	$	10.1
Additions for current year tax positions		4.6		—		—
Additions for prior year tax positions		1.3		—		—
Decreases for prior year tax positions		(7.6)		—		—
Currency fluctuations		(0.1)		(0.4)		(0.7)
Unrecognized tax benefit at end of period	$	7.2	$	9.0	$	9.4

Included in the balance of unrecognized tax benefits as of January 31, 2017, 2016 and 2015 are $4.4, $9.0 and $9.4, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within twelve months of this reporting date. The Company classifies interest and penalties related to income tax as income tax expense. The amount included in the Company’s liability for unrecognized tax benefits for interest and penalties was immaterial as of January 31, 2017, 2016 and 2015.

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States, the United Kingdom, France and Germany. Tax years that remain subject to examinations by major tax jurisdictions vary by legal entity but are generally open for the U.S. for tax years ending in 2014 and after and outside the U.S. for the tax years ending after 2007.

As of January 31, 2017, the Company has federal net operating loss carryforwards of $148.9 expiring beginning in 2035 and state net operating loss carryforwards of $97.9 expiring between 2020 and 2035 with the majority expiring in 2035. The Company has $88.1 of foreign net operating loss carryforwards as of January 31, 2017 for which a valuation allowance of $66.1 has been recognized.

All of the Company’s foreign net operating losses have an indefinite carryforward period. The Company’s future tax provision will reflect any favorable or unfavorable adjustments to its estimated tax liabilities when resolved. The Company is unable to predict the outcome of these matters. However, the Company believes that none of these matters will have a material effect on the results of operations or financial condition of the Company.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of January 31, 2017 that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by $0.5 if and when such deferred tax assets are ultimately realized. We use FASB ASC 740, Income Taxes ordering when determining when excess tax benefits have been realized.

Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to $68.8 at January 31, 2017. Those earnings are considered to be permanently reinvested and no provision for U.S. federal and state income taxes has been made. Distribution of these earnings in the form of dividends or otherwise could result in U.S. federal taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in various foreign countries. It is not currently practical to determine the amount of U.S. income and foreign withholding tax payable in the event all such foreign earnings are repatriated.

The Company’s effective tax rate can fluctuate as operations and the local country tax rates fluctuate due to the number of tax jurisdictions in which the Company operates.

The Company recorded deferred charges during the year ended January 31, 2017 related to the deferral of income tax expense on intra-entity profits that resulted from the sale of our intellectual property rights (including intellectual property acquired during the current year) in Germany to our U.S. parent, KLX Inc. The deferred charges are included in the “Other current assets” and “Other assets” lines in the accompanying consolidated balance sheet as of January 31, 2017 in the amounts of $0.3 and $7.6, respectively. The deferred charges are amortized as a component of income tax expense over the fifteen year economic life of the intellectual property.

Under the tax sharing and indemnity agreement between the Company and B/E Aerospace, B/E Aerospace generally assumes liability for all federal and state income taxes for all tax periods ending on or prior to December 31, 2014. B/E Aerospace assumes the liability for all federal and state income taxes of KLX’s U.S. operations through the distribution date. KLX assumes all other federal taxes, foreign income tax/non‑income taxes and state/local non‑income taxes related to its business for all periods and B/E Aerospace assumes all other federal taxes, foreign income tax/non‑income taxes and state/local non‑income taxes related to their business for all periods. Additional taxes incurred related to the internal restructuring to separate the businesses to complete the spin‑off shall be shared equally between B/E Aerospace and KLX. Taxes incurred related to certain international tax initiatives for the KLX business shall be assumed by KLX subject to the calculation provisions of the tax sharing and indemnity agreement. In addition, B/E Aerospace transferred to KLX all the deferred tax assets and liabilities related to the KLX business as of December 16, 2014.