Income Taxes

The effective income tax rate for the year ended April 28, 2018 was (12.1)% compared to 30.7% for year ended April 29, 2017.

The tax benefit for the year ended April 28, 2018 was primarily due to the impact of the Tax Cuts and Jobs Act ("Tax Act"), enacted on December 22, 2017 by the U.S. government. The Tax Act significantly revises the future ongoing U.S. federal corporate income tax by, among other things, lowering the U.S. federal corporate tax rate and implementing a territorial tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from 35.0% to 21.0%. For the fiscal year ended April 28, 2018, we utilized a blended rate of approximately 30.5%. For the fiscal year ended April 28, 2018, these impacts resulted in a provisional discrete net tax benefit of $76,648, which included provisional amounts of $81,871 of tax benefit on U.S. deferred tax assets and liabilities, $4,006 of tax expense for a one-time transition tax on unremitted foreign earnings and $1,217 in withholding tax paid on current year distributions. In accordance with the Tax Act, the transition tax will be payable over an eight year period.

The legislative changes included in the Tax Act are broad and complex. We determined that the transition tax on unremitted foreign earnings is provisional because various components of the computation are unknown as of April 28, 2018. In addition, we determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the amount cannot be calculated until the underlying timing differences are known rather than estimated.

During the fourth quarter, and directly connected to the transition tax legislation, the Company approved a one-time repatriation of cash included in the transition tax computation. There was an approximate $1,217 one-time cost recorded to reflect the added withholding tax cost associated with this repatriation. With the exception of this one-time repatriation, the Company will continue to apply ASC 740 based on the provisions of the tax law that were in effect immediately prior to the enactment of the new law. With regard to unremitted earnings of foreign subsidiaries generated after December 31, 2017, we do not currently provide for U.S. taxes since we intend to invest such undistributed earnings indefinitely outside of the U.S.

We continue to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion and anti-abuse tax (“BEAT”) provisions which are not effective until fiscal 2019. We have not recorded any impact associated with either GILTI or BEAT for the fiscal year ended April 28, 2018.

The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any federal and/or state legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the transition impacts. The Securities and Exchange Commission has issued rules, under SAB 118, that will allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.

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



	Fiscal Year Ended
	April 28, 2018		April 29, 2017		April 30, 2016
Income from continuing operations before taxes
United States	$	144,278	$	217,529	$	270,501
International	34,985		33,352		31,192
Total	$	179,263	$	250,881	$	301,693

Significant components of income tax expense (benefit) are as follows:



	Fiscal Year Ended
	April 28, 2018			April 29, 2017			April 30, 2016
Current:
Federal	$	5,876		$	72,339		$	105,104
Foreign	11,228			9,100			11,690
State	2,243			9,367			15,249
Total current expense	19,347			90,806			132,043
Deferred:
Federal	(45,177		)	(11,802		)	(14,308		)
Foreign	(743		)	(28		)	323
State	4,862			(1,883		)	(2,049		)
Total deferred benefit	(41,058		)	(13,713		)	(16,034		)
Income tax expense (benefit)	$	(21,711	)	$	77,093		$	116,009

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 28, 2018 and April 29, 2017 are as follows:



	April 28, 2018			April 29, 2017
Deferred tax assets:
Capital accumulation plan	$	4,862		$	7,676
Inventory related items	4,407			6,236
Bad debt allowance	1,052			2,317
Stock based compensation expense	6,514			8,663
Interest rate swap	4,712			8,656
Foreign tax credit	8,472			8,917
Other	11,748			14,269
Gross deferred tax assets	41,767			56,734
Less: Valuation allowance	(13,830		)	(14,053		)
Total net deferred tax assets	27,937			42,681
Deferred tax liabilities
LIFO reserve	(19,727		)	(25,833		)
Amortizable intangibles	(84,778		)	(133,037		)
Goodwill	(41,635		)	(61,108		)
Property, plant, equipment	(33,376		)	(14,389		)
Total deferred tax liabilities	(179,516		)	(234,367		)
Deferred net long-term income tax liability	$	(151,579	)	$	(191,686	)

At April 28, 2018, we had a U.S. foreign tax credit asset that will expire in eight 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 five 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 $13,830 will not be fully utilized prior to expiration. As a result, a full valuation allowance has been established against these assets.

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. In addition, during the fourth quarter of fiscal 2018, and directly connected to the transition tax legislation, the Company approved a one-time repatriation of cash included in the transition tax computation. There was an approximate $1,217 one-time cost recorded to reflect the added withholding tax cost associated with this 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 28, 2018			April 29, 2017			April 30, 2016
Tax at U.S. statutory rate	$	54,674		$	87,807		$	105,593
State tax provision, net of federal benefit	4,650			5,217			7,364
Effect of foreign taxes	(186		)	(2,602		)	(1,195		)
Permanent differences	(4,219		)	(6,861		)	(3,693		)
Tax on dividends, net of foreign tax credit	—			(2,406		)	12,300
Tax reform	(76,648		)	—			—
Other	18			(4,062		)	(4,360		)
Income tax expense (benefit)	$	(21,711	)	$	77,093		$	116,009

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 28, 2018 and April 29, 2017, Patterson’s gross unrecognized tax benefits were $14,227 and $14,211, respectively. If determined to be unnecessary, these amounts (net of deferred tax assets of $2,418 and $3,883, 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 28, 2018 and April 29, 2017 is shown below:



	April 28, 2018			April 29, 2017
Balance at beginning of period	$	14,211		$	13,560
Additions for tax positions related to the current year	1,713			1,900
Additions for tax positions of prior years	232			418
Reductions for tax positions of prior years	(475		)	(194		)
Statute expirations	(1,284		)	(1,145		)
Settlements	(170		)	(328		)
Balance at end of period	$	14,227		$	14,211

We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. As of April 28, 2018 and April 29, 2017, we had recorded $1,764 and $1,568, 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 28, 2018, we recorded as part of tax expense $428 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 2018, the Internal Revenue Service (“IRS”) concluded 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 these audits 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 30, 2016, 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.