METHODE ELECTRONICS INC

Income Taxes

Significant components of our deferred tax assets and liabilities were as follows:



	April 29, 2017		April 30, 2016
Deferred tax liabilities:
Accelerated tax depreciation	$	2.0	$	4.1
Foreign tax withheld	4.2		2.1
Deferred income	0.4		0.8
Deferred tax liabilities, gross	6.6		7.0
Deferred tax assets:
Deferred compensation and stock award amortization	10.1		7.9
Inventory valuation differences	2.9		2.3
Property valuation differences	1.9		2.0
Accelerated book amortization	7.2		8.9
Environmental reserves	0.5		0.7
Bad debt reserves	0.1		0.1
Vacation accruals	1.0		1.1
Foreign investment tax credit	17.9		14.4
Net operating loss carryovers	4.7		4.4
Foreign tax credits	—		0.9
Other accruals	2.6		3.0
Deferred tax assets, gross	48.9		45.7
Less valuation allowance	1.9		1.3
Deferred tax assets, net of valuation allowance	47.0		44.4
Net deferred tax assets	$	40.4	$	37.4
Balance sheet classification:
Current asset	$	—	$	11.8
Non-current asset	40.4		27.7
Current liability	—		(2.1		)
	$	40.4	$	37.4

In addition to the deferred tax assets listed in the table above, the Company had an unrecorded tax benefit of $2.7 million at April 29, 2017, primarily attributable to the difference between the amount of the financial statement expense and the allowable tax deduction for the Company's common stock issued under the Company's stock compensation plans. Although not recognized for financial reporting purposes, this unrecognized tax benefit is available to reduce future taxable income and is incorporated into our tax attribute carry-forwards, which are discussed below.

The Company evaluated all available positive and negative evidence, including past operating results and the projection of future taxable income and determined it is more likely than not that expected future taxable income will be sufficient to utilize substantially all of our state net deferred tax assets. We will continue to maintain a valuation allowance of $1.9 million related to certain state, federal and foreign net operating loss carryovers until we determine that these deferred tax assets are more likely than not realizable.

At April 29, 2017, we had available $2.1 million of federal and $79.7 million of state net operating loss carryforwards (having a tax benefit of $0.7 million and $4.0 million, respectively). If unused, the U.S. federal net operating loss carryforwards will expire in the years 2018 through 2031. The state net operating loss carryforwards will expire in the years 2017 through 2037.

The tax laws of Malta provide for investment tax credits of 30% of certain qualified expenditures. Total unused credits are $17.9 million as of April 29, 2017, of which $16.0 million can be carried forward indefinitely and $1.9 million expire in 2020. We record investment tax credits using the "flow through" method.

Components of income before income taxes are as follows:



	Fiscal Year Ended
	April 29, 2017		April 30, 2016		May 2, 2015
Domestic source	$	21.6	$	25.3	$	39.9
Foreign source	94.3		85.6		80.9
Income before income tax	$	115.9	$	110.9	$	120.8

Income taxes consisted of the following:



	Fiscal Year Ended
	April 29, 2017			April 30, 2016		May 2, 2015
Current
Federal	$	9.2		$	2.8	$	5.4
Foreign	17.0			14.7		13.8
State	0.7			0.6		0.9
Subtotal	26.9			18.1		20.1

Deferred
Federal and state	(1.2		)	5.5		6.0
Foreign	(2.7		)	2.7		(6.3		)
Subtotal	(3.9		)	8.2		(0.3		)
Total income tax expense	$	23.0		$	26.3	$	19.8

A reconciliation of the consolidated provisions for income taxes from continuing operations to amounts determined by applying the prevailing statutory federal income tax rate to pre-tax earnings is as follows:



	Fiscal Year Ended
	April 29, 2017					April 30, 2016					May 2, 2015
Income tax at statutory rate	$	40.5		35.0	%	$	38.9		35.0	%	$	42.2		35.0	%
Effect of:
State income taxes, net of federal benefit	0.9			0.8	%	0.4			0.4	%	0.8			0.6	%
Foreign operations with lower statutory rates	(14.5		)	(12.5	)%	(11.9		)	(10.7	)%	(11.5		)	(9.5	)%
Foreign losses with no tax benefit	—			—	%	—			—	%	0.1			0.1	%
Foreign investment tax credit	(4.7		)	(4.1	)%	(2.1		)	(1.9	)%	(8.3		)	(6.9	)%
Change in tax reserve	0.1			0.1	%	0.1			0.1	%	0.2			0.2	%
Change in permanent reinvestment assertion	—			—	%	—			—	%	0.3			0.2	%
Change in valuation allowance	0.3			0.3	%	0.1			0.1	%	(3.6		)	(3.0	)%
Other, net	0.4			0.3	%	0.8			0.8	%	(0.4		)	(0.3	)%
Income tax provision/(benefit)	$	23.0		19.9	%	$	26.3		23.8	%	$	19.8		16.4	%

We paid income taxes of $19.0 million in fiscal 2017, $10.0 million in fiscal 2016 and $9.0 million in fiscal 2015. No U.S. provision has been made for income taxes on undistributed net income of foreign operations, as we expect them to be indefinitely reinvested within our foreign operations. If the undistributed net income of $407.9 million were distributed as dividends, we would be subject to foreign tax withholdings and incur additional income tax expense of approximately $142.8 million, before available foreign tax credits. It is not practicable to estimate the amount of foreign tax withholdings or foreign tax credits that may be available.

As of April 29, 2017, our gross unrecognized tax benefits totaled $1.3 million, which would favorably affect the effective tax rate if resolved in our favor.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:



Balance at April 30, 2016	$	1.2
Increases for positions related to the prior years	—
Increases for positions related to the current year	0.1
Decreases for positions related to the prior years	—
Lapsing of statutes of limitations	—
Balance at April 29, 2017	$	1.3

The U.S. federal statute of limitations remains open for fiscal years ended on or after 2014 and for state tax purposes on or after fiscal year 2013. Tax authorities may have the ability to review and adjust net operating losses or tax credits that were generated prior to these fiscal years. In the major foreign jurisdictions, fiscal year 2012 and subsequent periods remain open and subject to examination by taxing authorities.

The continuing practice of the Company is to recognize interest and penalties related to income tax matters in the provision for income taxes. We had $0.1 million accrued for interest and no accrual for penalties at April 29, 2017.