Note 9 – Income Taxes

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.

The SEC recognized that a company’s review of certain income tax effects of the Act may be incomplete at the time financial statements are issued. Accordingly, the SEC issued Staff Accounting Bulletin 118, which provides that if a company does not have the necessary information available for certain effects of the Act, the Company may record provisional numbers and adjust those amounts during the measurement period not to extend beyond one year.

At December 29, 2017, the Company had not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company was not able to make a reasonable estimate and continued to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which the Company was able to determine a reasonable estimate, the Company recognized a provisional amount of $48.6 million, which is included as a component of income tax expense from continuing operations. In all cases, the Company will continue to make and refine the calculations as additional analysis is completed. In addition, the estimates may also be affected as the Company gains a more thorough understanding of the tax law.

Provisional Amounts

U.S. Deferred Tax Assets and Liabilities

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, including evaluation of limits on employee remuneration, which could affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the deferred tax balance was $6.6 million.

Foreign Tax Effects

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (E&P) that the Company previously deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time transition tax liability resulting in an increase in income tax expense of $42.0 million. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these amounts, including the benefit attributable to foreign tax credits and related elections. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculations of post-1986 foreign E&P previously deferred from U.S. taxation and finalizes the amounts of cash or other specified assets. The Act sets certain limits that may restrict the Company’s use of any foreign tax credits generated from the one-time transaction tax. As of the date of this report, management was not able to (1) determine a reasonable estimate of the tax liability for the Company’s remaining outside basis; (2) complete an analysis of the Global Intangible Low Taxed Income (GILTI); (3) determine the accounting for GILTI because ASC 740 is not clear whether GILTI will require the recording of deferred income tax expense; and (4) evaluate how the Act will impact the Company’s existing APB 23 position to indefinitely reinvest unremitted foreign earnings. This could result in a material adjustment to the provisional income tax expense recorded in the first quarter of fiscal 2018.

The income tax rate for the first quarter of fiscal 2018 was 26.9% before the effect of the provisional taxes due to the Act and was 278.3% after the effect of the provisional taxes due to the Act. The prior-year period was a benefit of 2.2%. The Company conducts business in numerous tax jurisdictions, principally in the U.S., Canada, U.K. and France. As a result, the Company’s income tax rate for the first fiscal quarter of 2018 reflects the estimated annual global effective tax rate, excluding discrete items, applied to year-to-date pre-tax earnings.

The following table summarizes the income tax rate for the first quarter of fiscal 2018 excluding and including the provisional taxes due to the Act.

In Thousands	Three Months Ended
	December 29, 2017
	Excluding			Including

Earnings from Continuing Operations Before Income Taxes	$	19,327		$	19,327

Income Tax Expense		5,573			5,573
Change in Tax Rate Due to the Act		(368	)		(368	)
Provisional Taxes Due to the Act		-			48,584
Total Income Tax Expense		5,205			53,789

Tax Rate		26.9	%		278.3	%

The income tax rate for the first quarter of fiscal 2018 reflected a blended U.S. tax rate of 24.5%, which is based upon an income tax rate of 35% for the Company’s first quarter of fiscal 2018 and 21% for the balance of the year ending September 28, 2018.

The 2.2% income tax rate in the first quarter of fiscal 2017 reflected the following items: First, a reduction of the income tax rate in France for fiscal year 2020, which resulted in a reduction in the Company’s net deferred income tax liabilities of $3.8 million. Second, $1.6 million of discrete tax benefits was recorded, primarily related to a valuation allowance release due to an expected taxable gain from a foreign income tax law change. Third, the early adoption of the accounting standard update for employee share-based payment awards resulted in a $0.7 million tax benefit.

By the end of fiscal 2018, it is reasonably possible that approximately $1.4 million of tax benefits that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of applicable statutes of limitations. The Company recognizes interest related to unrecognized tax benefits in income tax expense.