Income Taxes

The components of income from continuing operations before taxes are as follows:



	Fiscal Year Ended
	April 29, 2017		April 30, 2016		April 25, 2015
Income from continuing operations before taxes
United States	$	217,529	$	270,501	$	235,421
International	33,352		31,192		38,897
Total	$	250,881	$	301,693	$	274,318

Significant components of income tax expense are as follows:



	Fiscal Year Ended
	April 29, 2017			April 30, 2016			April 25, 2015
Current:
Federal	$	72,339		$	105,104		$	73,004
Foreign	9,100			11,690			11,764
State	9,367			15,249			9,007
Total current	90,806			132,043			93,775
Deferred:
Federal	(11,802		)	(14,308		)	497
Foreign	(28		)	323			44
State	(1,883		)	(2,049		)	(81		)
Total deferred	(13,713		)	(16,034		)	460
Income tax expense	$	77,093		$	116,009		$	94,235

Deferred tax assets and liabilities are included in other non-current assets and deferred income taxes on the consolidated balance sheets. Significant components of Patterson’s deferred tax assets (liabilities) as of April 29, 2017 and April 30, 2016 are as follows:



	April 29, 2017			April 30, 2016
Deferred tax assets:
Capital accumulation plan	$	7,676		$	5,898
Inventory related items	6,236			6,776
Bad debt allowance	2,317			2,649
Stock based compensation expense	8,663			9,985
Interest rate swap	8,656			9,749
Foreign tax credit	8,917			9,300
Net operating loss carryforwards	—			363
Other	14,269			11,979
Gross deferred tax assets	56,734			56,699
Less: Valuation allowance	(14,053		)	(14,007		)
Total net deferred tax assets	42,681			42,692
Deferred tax liabilities
LIFO reserve	(25,833		)	(21,294		)
Amortizable intangibles	(133,037		)	(156,782		)
Goodwill	(61,108		)	(57,405		)
Property, plant, equipment	(14,389		)	(11,748		)
Total deferred tax liabilities	(234,367		)	(247,229		)
Deferred net long-term income tax liability	$	(191,686	)	$	(204,537	)

At April 29, 2017, we had a U.S. foreign tax credit asset that will expire in 9 years. In addition, we have deferred tax assets which would give rise to tax capital losses if triggered in the future. These losses have a 5 year carryforward period and can only be used against capital gain income. At this time, we believe that it is more likely than not that the foreign tax credit and capital loss carryforward attributes totaling $14,053 will not be fully utilized prior to expiration. As a result, a full valuation allowance has been established against these assets.

No provision has been made for U.S. federal income taxes on certain undistributed earnings of foreign subsidiaries that we intend to permanently invest or that may be remitted substantially tax-free. The total undistributed earnings that would be subject to federal income tax if remitted under existing law are approximately $121,347 as of April 29, 2017. Determination of the unrecognized deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical calculation. If a future distribution of these earnings is made, we will be subject to U.S. taxes and withholding taxes payable to various foreign governments. A credit for foreign taxes already paid may be available to reduce the U.S. tax liability.

In fiscal 2016, we approved a one-time repatriation of approximately $200,000 of foreign earnings. This one-time repatriation reduced the overall cost of funding the acquisition of Animal Health International, Inc. In addition, certain foreign cash at Patterson Medical was required to be repatriated as part of the sale transaction. The continuing operations tax impact of $12,300 from the repatriation was recorded in fiscal 2016. During fiscal 2017, we recorded a $2,406 benefit related to a change in estimate of the tax impact of the cash repatriation. We have previously asserted that our foreign earnings are permanently reinvested. Except for the repatriations described above, there is no change in our on-going assertion.

Income tax expense varies from the amount computed using the U.S. statutory rate. The reasons for this difference and the related tax effects are shown below:



	Fiscal Year Ended
	April 29, 2017			April 30, 2016			April 25, 2015
Tax at U.S. statutory rate	$	87,807		$	105,593		$	96,012
State tax provision, net of federal benefit	5,217			7,364			6,479
Effect of foreign taxes	(2,602		)	(1,195		)	(1,806		)
Permanent differences	(6,861		)	(3,693		)	(5,363		)
Tax on dividends, net of foreign tax credit	(2,406		)	12,300			—
Other	(4,062		)	(4,360		)	(1,087		)
Income tax expense	$	77,093		$	116,009		$	94,235

We have accounted for the uncertainty in income taxes recognized in the financial statements in accordance with ASC Topic 740, “Income Taxes”. This standard clarifies the separate identification and reporting of estimated amounts that could be assessed upon audit. The potential assessments are considered unrecognized tax benefits, because, if it is ultimately determined they are unnecessary, the reversal of these previously recorded amounts will result in a beneficial impact to our financial statements.

As of April 29, 2017 and April 30, 2016, Patterson’s gross unrecognized tax benefits were $14,211 and $13,560, respectively. If determined to be unnecessary, these amounts (net of deferred tax assets of $3,883 and $3,800, respectively, related to the tax deductibility of the gross liabilities) would decrease our effective tax rate. The gross unrecognized tax benefits are included in other long-term liabilities on the consolidated balance sheet.

A summary of the changes in the gross amounts of unrecognized tax benefits for the years ended April 29, 2017 and April 30, 2016 is shown below:



	April 29, 2017			April 30, 2016
Balance at beginning of period	$	13,560		$	16,661
Additions for tax positions related to the current year	1,900			1,794
Additions for tax positions of prior years	418			560
Reductions for tax positions of prior years	(194		)	(1,599		)
Statute expirations	(1,145		)	(3,486		)
Settlements	(328		)	(370		)
Balance at end of period	$	14,211		$	13,560

We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. As of April 29, 2017 and April 30, 2016, we had recorded $1,568 and $1,438, respectively, for interest and penalties. These amounts are also included in other long-term liabilities on the consolidated balance sheet. These amounts, net of related deferred tax assets, if determined to be unnecessary, would decrease our effective tax rate. During the year ended April 29, 2017, we recorded as part of tax expense $350 related to an increase in our estimated liability for interest and penalties.

Patterson files income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions. During fiscal year 2017, the Internal Revenue Service (“IRS”) began an audit of fiscal years ended April 25, 2015 and April 30, 2016. During fiscal 2016, the IRS completed an audit of our fiscal years ended April 27, 2013 and April 27, 2014. The outcome of this audit did not have a material adverse impact on our financial statements. The IRS has either examined or waived examination for all periods up to and including our fiscal year ended April 27, 2013, resulting in these periods being closed. In addition to the IRS, periodically, state, local and foreign income tax returns are examined by various taxing authorities. We do not believe that the outcome of these various examinations will have a material adverse impact on our financial statements.