Income Taxes

Income before taxes consisted of the following (in millions):



	2018		2017		2016
United States	$	121.5	$	147.4	$	143.4
Foreign	170.7		129.8		123.0
Total	$	292.2	$	277.2	$	266.4

The provision for income taxes is summarized as follows (in millions):



	2018			2017			2016
Current
Federal	$	4.5		$	36.9		$	23.1
State	0.8			(0.3		)	3.5
Foreign	37.9			32.2			30.4
	$	43.2		$	68.8		$	57.0
Deferred
Federal	$	16.6		$	(7.2	)	$	5.6
State	2.1			2.2			1.8
Foreign	(5.5		)	(4.7		)	(7.3		)
	13.2			(9.7		)	0.1
Total	$	56.4		$	59.1		$	57.1

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law revising the US corporate income tax. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the elimination of certain deductions and imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts if the accounting assessment is incomplete for impacts of the Act, with the requirement that the accounting be finalized in a period not to exceed one year from the date of enactment. The primary impacts of the Act reflected in the 2017 Consolidated Financial Statements relate to the remeasurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate; a one-time mandatory transition tax on undistributed earnings of foreign affiliates; and deferred taxes in connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates. In the period ended December 30, 2017, the Company recorded a provisional net $1.0 million reduction in tax expense. The benefit recognized related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse was $51.0 million. The expense recognized related to the one-time tax on the mandatory deemed repatriation of foreign earnings was $40.0 million of which the Company elected to pay the one-time tax over a period of eight years. The Company also recognized an expense of $10.0 million for local withholding taxes on foreign earnings not deemed permanently reinvested. These provisional amounts have been updated as the Company completed its assessment of the Act to $52.7 million benefit for the remeasurement of deferred tax assets and liabilities and $29.8 million expense for the one-time tax on the mandatory deemed repatriation of foreign earnings. The local withholding taxes on foreign earnings not deemed permanently invested has been updated to $13.3 million. These adjustments were reflected in the 2018 Consolidated Financial Statements. For purposes of SAB 118, the Company considers the accounting for the income tax impacts of the Act complete.

The Act also subjects US shareholders to tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states than an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. The Company has elected to recognize the tax on GILTI as an expense in the period in which the tax is incurred. As of December 29, 2018, the Company has included GILTI related to current year earnings only in its annual effective tax rate and has not provided additional GILTI on deferred items.

A reconciliation of the statutory federal income tax rate and the effective tax rate reflected in the consolidated statements of income follows:



	2018	2017	2016
Federal Statutory Rate	21.0%	35.0%	35.0%
State Income Taxes, Net of Federal Benefit	1.1%	0.3%	1.5%
Domestic Production Activities Deduction	—%	(1.0)%	(1.1)%
Foreign Rate Differential - China	0.9%	(2.1)%	(2.0)%
Foreign Rate Differential - All Other	(1.4)%	(4.3)%	(6.0)%
Research and Development Credit	(2.5)%	(3.0)%	(2.3)%
Valuation Allowance	(0.3)%	(0.6)%	—%
Tax Cuts and Jobs Act of 2017	(1.3)%	(0.4)%	—%
Tax on Repatriation	1.3%	—%	—%
Adjustments to Tax Accruals and Reserves	—%	(1.9)%	0.7%
Other	0.5%	(0.7)%	(4.4)%
Effective Tax Rate	19.3%	21.3%	21.4%

Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability was $(114.1) million as of December 29, 2018, classified on the consolidated Balance Sheet as a net non-current deferred tax asset of $34.2 million and a net non-current deferred income tax liability of $(148.3) million. As of December 30, 2017, the Company's net deferred tax liability was $(106.8) million classified on the consolidated Balance Sheet as a net non-current deferred income tax benefit of $28.5 million and a net non-current deferred income tax liability of $(135.3) million.

The components of this net deferred tax liability are as follows (in millions):



	December 29, 2018			December 30, 2017
Accrued Employee Benefits	$	53.9		$	53.4
Bad Debt Allowances	2.2			2.3
Warranty Accruals	3.6			3.1
Inventory	14.6			12.9
Accrued Liabilities	(8.0		)	(5.3		)
Derivative Instruments	1.8			(4.3		)
Tax Loss Carryforward	13.1			12.9
Valuation Allowance	(4.9		)	(5.9		)
Other	14.0			1.2
Deferred Tax Assets	90.3			70.3
Property Related	(32.2		)	(26.2		)
Intangible Items	(172.2		)	(150.9		)
Deferred Tax Liabilities	(204.4		)	(177.1		)
Net Deferred Tax Liability	$	(114.1	)	$	(106.8	)

Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):



Unrecognized Tax Benefits, January 2, 2016	$	8.3
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	2.0
Settlements with Taxing Authorities	—
Lapse of Statute of Limitations	(0.3		)
Unrecognized Tax Benefits, December 31, 2016	$	10.0
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	2.7
Settlements with Taxing Authorities	(5.3		)
Lapse of Statute of Limitations	(0.7		)
Unrecognized Tax Benefits, December 30, 2017	$	6.7
Gross Increases from Prior Period Tax Positions	—
Gross Increases from Current Period Tax Positions	0.3
Settlements with Taxing Authorities	(0.1		)
Lapse of Statute of Limitations	(0.4		)
Unrecognized Tax Benefits, December 29, 2018	$	6.5

Unrecognized tax benefits as of December 29, 2018 amount to $6.5 million, all of which would impact the effective income tax rate if recognized.

Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During fiscal years 2018, 2017 and 2016, the Company recognized approximately $0.2 million, $(0.2) million and $0.2 million in net interest (income) expense, respectively. The Company had approximately $1.9 million, $1.7 million and $1.9 million of accrued interest as of December 29, 2018, December 30, 2017 and December 31, 2016, respectively.

Due to statute expirations, approximately $0.4 million of the unrecognized tax benefits, including accrued interest, could reasonably change in the coming year.

With few exceptions, the Company is no longer subject to US federal and state/local income tax examinations by tax authorities for years prior to 2013, and the Company is no longer subject to non-US income tax examinations by tax authorities for years prior to 2011.

As of December 29, 2018, the Company had approximately $13.1 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period of up to 15 years and the remaining without expiration. As of December 30, 2017, the Company had approximately $12.9 million of tax effected net operating losses in various jurisdictions with a portion expiring over a period up to 15 years and the remaining without expiration.

Valuation allowances totaling $4.9 million and $5.9 million as of December 29, 2018 and December 30, 2017, respectively, have been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if future taxable income during the carryforward period fluctuates.

The Company has been granted tax holidays for some of its Chinese subsidiaries. These tax holidays expire in 2020 and are renewable subject to certain conditions with which the Company expects to comply. In 2018, these holidays decreased the Provision for Income Taxes by $4.7 million.

The Company continues to treat approximately $103.5 million of earnings from certain foreign entities as permanently reinvested and has not recorded a deferred tax liability for the local withholding taxes of approximately $15.8 million on those earnings.