Entity information:
Income Taxes

The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) was signed into law on December 22, 2017 and is generally effective for tax years beginning January 1, 2018. The most significant impacts of the 2017 Tax Act to the Company include a decrease in the federal corporate income tax rate from 35% to 21%, and a one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. For 2017, the Company recorded a provisional net income tax expense of $7,487,000, including the impact of state taxes, which consists of a provisional amount for our one-time mandatory transition tax of $10,303,000, partially offset by a provisional net tax benefit of
$2,816,000 for the re-measurement of our deferred income tax assets and liabilities due to the decrease in the federal corporate income tax rate. The Company anticipates offsetting the one-time mandatory transition tax against existing tax attributes, which will reduce the required federal payment to approximately $4,599,000 over the elected eight-year payment period.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) related to the income tax accounting implications of the 2017 Tax Act, which provides guidance on accounting for the 2017 Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the 2017 Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the 2017 Tax Act under ASC Topic 740. In accordance with SAB 118, a company must reflect the income tax effects of the 2017 Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete. To the extent that a company’s accounting for certain income tax effects of the 2017 Tax Act is incomplete, a company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. In accordance with SAB 118, the Company has recognized the provisional tax impacts, outlined above, related to the re-measurement of our deferred income tax assets and liabilities and the one-time mandatory transition tax on deemed repatriation of unremitted foreign earnings. The ultimate impact may differ from the provisional amounts, due to, among other things, the significant complexity of the 2017 Tax Act and anticipated additional regulatory guidance that may be issued by the Internal Revenue Service, changes in analysis, interpretations and assumptions the Company has made and actions the Company may take as a result of the 2017 Tax Act.
While the 2017 Tax Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, Global Intangible Low-Taxed Income (GILTI) and Base Erosion Anti-Abuse Tax (BEAT). The Company has elected to account for any potential GILTI tax in the period in which it is incurred, and therefore has not provided any deferred income tax impacts of GILTI in its consolidated financial statements for 2017. In addition, the Company does not expect to be subject to the minimum tax pursuant to the BEAT provisions.
The components of income from continuing operations before provision for income taxes are as follows:
(In thousands)
 
December 30, 2017
 
December 31, 2016
 
January 2, 2016
Domestic
 
$
2,797

 
$
6,196

 
$
13,076

Foreign
 
54,856

 
38,353

 
36,295

 
 
$
57,653

 
$
44,549

 
$
49,371


The components of the provision for income taxes from continuing operations are as follows:
(In thousands)
 
December 30, 2017
 
December 31, 2016
 
January 2, 2016
Current Provision:
 
 
 
 
 
 
Federal
 
$
7,835

 
$
535

 
$
4,693

Foreign
 
17,372

 
11,323

 
10,623

State
 
285

 
838

 
1,152

 
 
25,492

 
12,696

 
16,468

Deferred Provision (Benefit):
 
 

 
 

 
 

Federal
 
4,682

 
1,738

 
45

Foreign
 
(3,563
)
 
(1,818
)
 
(1,378
)
State
 
(541
)
 
(533
)
 
(373
)
 
 
578

 
(613
)
 
(1,706
)
 
 
$
26,070

 
$
12,083

 
$
14,762


The provision for income taxes included in the accompanying consolidated statement of income is as follows:
(In thousands)
 
December 30, 2017
 
December 31, 2016
 
January 2, 2016
Continuing Operations
 
$
26,070

 
$
12,083

 
$
14,762

Discontinued Operation
 
—

 
2

 
43

 
 
$
26,070

 
$
12,085

 
$
14,805



The Company receives a tax deduction upon the exercise of nonqualified stock options and the vesting of RSUs. The current provision for income taxes in the accompanying consolidated statement of income does not reflect $881,000 in 2015 of such excess tax benefits, from the exercise of stock options and vesting of RSUs. In 2016, the Company adopted ASU No. 2016-09, Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. This ASU requires that excess income tax benefits and tax deficiencies related to stock-based compensation arrangements be recognized as discrete items within the provision for income taxes instead of capital in excess of par value in the reporting period in which they occur. The Company recognized an income tax benefit of $608,000 in 2017 and $582,000 in 2016 in the Company's accompanying consolidated statement of income.
The provision for income taxes from continuing operations in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes due to the following:
(In thousands)
 
December 30, 2017
 
December 31, 2016
 
January 2, 2016
Provision for Income Taxes at Statutory Rate
 
$
20,179

 
$
15,592

 
$
17,279

Increases (Decreases) Resulting From:
 
 

 
 

 
 

State income taxes, net of federal tax
 
151

 
189

 
506

U.S. tax cost of foreign earnings
 
761

 
192

 
455

Foreign tax rate differential
 
(3,747
)
 
(3,921
)
 
(3,852
)
Provision for (reversal of) tax benefit reserves, net
 
1,517

 
(76
)
 
33

Change in valuation allowance
 
(341
)
 
(131
)
 
99

Nondeductible expenses
 
1,177

 
1,090

 
704

Research and development tax credits
 
(297
)
 
(229
)
 
(210
)
Excess tax benefit related to share-based compensation
 
(581
)
 
(553
)
 
—

Impact of the U.S. Tax Cuts and Jobs Act
 
7,093

 
—

 
—

Other
 
158

 
(70
)
 
(252
)
 
 
$
26,070

 
$
12,083

 
$
14,762


Net deferred tax liability in the accompanying consolidated balance sheet consists of the following:
(In thousands)
 
December 30, 2017
 
December 31, 2016
Deferred Tax Asset:
 
 
 
 
Foreign, state, and alternative minimum tax credit carryforwards
 
$
185

 
$
161

Reserves and accruals
 
4,455

 
4,842

Net operating loss carryforwards
 
15,161

 
13,694

Inventory basis difference
 
3,265

 
3,005

Research and development
 
88

 
75

Employee compensation
 
2,610

 
4,966

Allowance for doubtful accounts
 
505

 
488

Revenue recognition
 
—

 
636

Other
 
59

 
249

Deferred tax asset, gross
 
26,328

 
28,116

Less: valuation allowance
 
(10,835
)
 
(10,863
)
Deferred tax asset, net
 
15,493

 
17,253

Deferred Tax Liability:
 
 

 
 

Goodwill and intangible assets
 
(32,120
)
 
(21,853
)
Fixed asset basis difference
 
(4,213
)
 
(4,325
)
Provision for unremitted foreign earnings
 
(2,718
)
 
—

Other
 
(554
)
 
(1,199
)
Deferred tax liability
 
(39,605
)
 
(27,377
)
Net deferred tax liability
 
$
(24,112
)
 
$
(10,124
)


The Company has established valuation allowances related to certain domestic and foreign deferred tax assets on deductible temporary differences, tax losses, and tax credit carryforwards. The valuation allowance at year-end 2017 was $10,835,000, consisting of $506,000 in the United States and $10,329,000 in foreign jurisdictions. The decrease in the valuation allowance in 2017 of $28,000 related primarily to fluctuations in foreign currency exchange rates, tax rate changes, and expected future utilization of net operating losses in certain state and foreign jurisdictions. Compliance with ASC 740 requires the Company to periodically evaluate the necessity of establishing or adjusting a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related tax benefit will be realized in future periods. When assessing the need for a valuation allowance in a tax jurisdiction, the Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As part of this evaluation, the Company considers its cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. As of year-end 2017, the Company continued to maintain a valuation allowance in the United States against a portion of its state net operating loss carryforwards due to the uncertainty of future profitability in state jurisdictions. As of year-end 2017, the Company maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability.
At year-end 2017, the Company had domestic state net operating loss carryforwards of $32,879,000 and foreign net operating loss carryforwards of $52,813,000. The domestic state net operating loss carryforwards will expire in the years 2018 through 2037. Their utilization is limited to future taxable income from the Company's domestic subsidiaries. The foreign net operating loss carryforwards do not expire.
At year-end 2017, the Company had approximately $245,640,000 of unremitted foreign earnings. The Company intends to repatriate the distributable reserves of select foreign subsidiaries back to the United States and has recognized $2,718,000 of tax expense on the estimated repatriation amount in the fourth quarter of 2017. Except for these select foreign subsidiaries, the Company intends to reinvest indefinitely the earnings of its international subsidiaries in order to support the current and future capital needs of their operations in the foreign jurisdictions, including the repayment of the Company’s foreign debt. The related foreign tax withholding, which would be required if the Company were to remit these foreign earnings to the United States, would be approximately $3,740,000.
The Company operates within multiple tax jurisdictions and could be subject to audit in those jurisdictions. Such audits can involve complex income tax issues, which may require an extended period of time to resolve and may cover multiple years. In management's opinion, adequate provisions for income taxes have been made for all years subject to audit.
As of year-end 2017, the Company had $7,843,000 of unrecognized tax benefits which, if recognized, would reduce the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits at year-end 2017 and year-end 2016 is as follows:
(In thousands)
 
December 30, 2017
 
December 31, 2016
Unrecognized Tax Benefits, Beginning of Year
 
$
5,467

 
$
5,052

Gross Increases—Tax Positions in Prior Periods
 
4

 
403

Gross Decreases—Tax Positions in Prior Periods
 
(22
)
 
(23
)
Gross Increases—Current-period Tax Positions
 
2,229

 
480

Lapses of Statutes of Limitations
 
(11
)
 
(359
)
Currency Translation
 
176

 
(86
)
Unrecognized Tax Benefits, End of Year
 
$
7,843

 
$
5,467



The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company has accrued $1,523,000 at year-end 2017 and $1,321,000 at year-end 2016 for the potential payment of interest and penalties. The interest and penalties included in the accompanying consolidated statement of income was an expense of $199,000 in 2017 and $69,000 in 2016.
The Company is currently under audit in certain non-U.S. taxing jurisdictions. It is reasonably possible that over the next fiscal year the amount of liability for unrecognized tax benefits may be reduced by up to $1,585,000 primarily from the expiration of tax statutes of limitations.
The Company remains subject to U.S. Federal income tax examinations for the tax years 2008 through 2017, and to non-U.S. income tax examinations for the tax years 2004 through 2017. In addition, the Company remains subject to state and local income tax examinations in the United States for the tax years 2001 through 2017.