INCOME TAXES

12 Months Ended

Jan. 03, 2020

Income Before Tax Expense: Domestic income before income taxes was $244.2 million, $167.8 million and $178.1 million for 2019, 2018 and 2017, respectively. Foreign income before income taxes was $49.2 million, $55.4 million and $59.5 million for 2019, 2018 and 2017, respectively.

Tax Provisions and Reconciliation to the Statutory Rate: The components of Anixter's tax expense and the reconciliation to the statutory federal rate are identified below. Income tax expense was comprised of:


	Years Ended
(In millions)	January 3, 2020		December 28, 2018		December 29, 2017
Current:
Foreign	$	21.7	$	24.2	$	21.7
State	10.3		9.4		8.3
Federal	39.9		34.2		99.4
	71.9		67.8		129.4
Deferred:
Foreign	(3.5)		(2.5)		0.2
State	0.5		0.2		2.0
Federal	(38.4)		1.4		(3.0)
	(41.4)		(0.9)		(0.8)
Income tax expense	$	30.5	$	66.9	$	128.6

Reconciliations of income tax expense to the statutory corporate federal tax rate of 21% were as follows:


	Years Ended
(In millions)	January 3, 2020		December 28, 2018		December 29, 2017
Statutory tax expense	$	61.6	$	46.9	$	83.2
Increase (reduction) in taxes resulting from:
State income taxes, net	9.7		7.9		4.4
Foreign tax effects	3.5		11.9		2.0
Change in valuation allowance	(42.3)		(0.6)		(0.3)
Impact of tax legislation	—		(2.1)		35.6
Foreign derived intangible income deduction	(4.5)		—		—
Other, net	2.5		2.9		3.7
Income tax expense	$	30.5	$	66.9	$	128.6

Impact of Tax Legislation: On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act made significant changes to the U.S. tax code. The changes impacting the Company beginning in the fourth quarter of 2017, the period of enactment, include:

•The reduction of the U.S. corporate tax rate to 21% results in an adjustment to the Company's U.S. deferred tax assets and liabilities to the lower rate. The impact of the deferred tax adjustment was measured and recorded as an increase in earnings for the quarter ending December 29, 2017, of $14.4 million. The impact was revised and a deferred tax adjustment of $0.7 million was recorded as a decrease in earnings for the quarter ending December 28, 2018; and

•The tax reform legislation will subject the earnings of the Company's cumulative foreign earnings and profits to U.S. income taxes as a deemed repatriation. The estimated provisional impact of the deemed repatriation decreased earnings for the quarter ending December 29, 2017 by $50.0 million. The tax impact was revised to $47.2 million and finalized in 2018.

The Act subjects U.S. shareholders to tax on Global Intangible Low-Taxed Income ("GILTI") earned by certain foreign subsidiaries. The Company is electing to recognize the tax on GILTI as a period expense in the period tax is incurred. Under this policy, the Company has not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period.

Tax Payments: The Company made net payments for income taxes in 2019, 2018 and 2017 of $87.1 million, $88.4 million and $76.4 million, respectively.

Net Operating Losses: Anixter International Inc. and its U.S. subsidiaries file a U.S. federal corporate income tax return on a consolidated basis. At January 3, 2020, various of Anixter's foreign subsidiaries had aggregate cumulative net operating loss ("NOL") carryforwards for foreign income tax purposes of approximately $89.7 million which are subject to various provisions of each respective country. Approximately $71.9 million of the NOL carryforwards may be carried forward indefinitely. The remaining NOL carryforwards expire at various times between 2020 and 2028.

Foreign Tax Credit Carryforwards: At January 3, 2020, the Company estimated and accrued provisional transition taxes. As a result of the transition tax, the Company estimates that it will also have foreign tax credit carryforwards of $41.7 million. At December 28, 2018, a full valuation allowance was recorded against the deferred tax asset related to foreign tax credits as there was not sufficient foreign-source income projected to utilize the foreign tax credits. After considering the relevant evidence in assessing the realizability of the deferred tax asset related to foreign tax credits, in particular the effects of changing to a U.S.-center-led business model during 2019, the Company reversed its valuation allowance in the amount of $41.7 million in 2019.

Undistributed Earnings: Undistributed earnings of Anixter's foreign subsidiaries amounted to approximately $680.0 million at January 3, 2020. The Act converted the U.S. system of taxing foreign earnings from a worldwide system to a territorial system. Future distributions of foreign earnings by Anixter affiliates abroad will no longer result in U.S. taxation. In converting to a territorial system the Act levied a one-time transition tax on deferred foreign earnings as of 2017. Anixter has calculated the net combined U.S. tax impact on this deemed repatriation to be approximately $47.2 million and plans to elect to pay the federal portion of this tax liability in installments over eight years. Despite the conversion to a territorial system, Anixter considers the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, Anixter may be subject to withholding taxes payable to the various foreign countries. With respect to the countries that have undistributed earnings as of January 3, 2020, according to the foreign laws and treaties in place at that time, estimated foreign jurisdiction withholding taxes of approximately $37.6 million would be payable upon the remittance of all earnings at January 3, 2020.

Deferred Income Taxes: Significant components of the Company's deferred tax assets (liabilities) included in "Other assets" and "Other liabilities" on the Consolidated Balance Sheets were as follows:


(In millions)	January 3, 2020		December 28, 2018
Deferred compensation and other postretirement benefits	$	38.4	$	36.0
Foreign NOL carryforwards and other	26.1		28.1
Operating lease obligations	67.6		1.6
Accrued expenses and other	9.1		8.4
Inventory reserves	8.7		8.5
Unrealized foreign exchange	0.5		2.7
Allowance for doubtful accounts	6.5		7.9
Federal and state credits	54.5		50.6
Gross deferred tax assets	$	211.4	$	143.8
Property, equipment, intangibles and other	(74.8)		(90.1)
Operating lease assets	(66.5)		—
Gross deferred tax liabilities	$	(141.3)	$	(90.1)
Deferred tax assets, net of deferred tax liabilities	70.1		53.7
Valuation allowance	(38.3)		(79.1)
Net deferred tax assets (liabilities)	$	31.8	$	(25.4)

Uncertain Tax Positions and Jurisdictions Subject to Examinations: A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2017, 2018 and 2019 is as follows:


(In millions)
Balance at December 30, 2016	$	5.0
Reductions for tax positions of prior years	(0.3)
Balance at December 29, 2017	$	4.7
Additions for tax positions of prior years	0.6
Reductions for tax positions of prior years	(0.6)
Balance at December 28, 2018	$	4.7
Additions for tax positions of prior years	0.1
Reductions for tax positions of prior years	(2.6)
Balance at January 3, 2020	$	2.2

Interest and penalties accrued for unrecognized tax benefits were $0.2 million in 2019, 2018 and 2017. The Company estimates that of the unrecognized tax benefit balance of $2.2 million, all of which would affect the effective tax rate, $0.2 million may be resolved in a manner that would impact the effective rate within the next twelve months. The reserves for uncertain tax positions, including interest and penalties, of $3.0 million cover a range of issues, including intercompany charges and withholding taxes, and involve various taxing jurisdictions.

Only the returns for fiscal tax years 2014 and later remain open to examination by the Internal Revenue Service ("IRS") in the U.S., which is Anixter's most significant tax jurisdiction. For most states, fiscal tax years 2015 and later remain subject to examination. In Canada, the fiscal tax years 2015 and later are still subject to examination, while in the United Kingdom, the fiscal tax years 2018 and later remain subject to examination.