9. INCOME TAXES

The Company determined the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, the Company looked to the future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. The need for a valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

As of January 31, 2018, the Company has recorded a tax indemnity payable to B/E Aerospace totaling $6.4, of which $1.8 is classified in other current liabilities and $4.6 is classified in other long‑term liabilities.

Components of earnings (loss) before incomes taxes were:

Income tax expense (benefit) consists of the following:

The difference between income tax expense (benefit) and the amount computed by applying the statutory U.S. federal income tax rate (33.8% for the year ended January 31, 2018 and 35% for the years ended January 31, 2017 and 2016) to the pre‑tax earnings consists of the following:

The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consist of the following:

 

A reconciliation of the beginning and ending amounts of gross uncertain tax positions is presented below:

Included in the balance of unrecognized tax benefits as of January 31, 2018, 2017 and 2016 are $5.6,  $4.4 and $9.0, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within twelve months of this reporting date. The Company classifies interest and penalties related to income tax as income tax expense. The amount included in the Company’s liability for unrecognized tax benefits for interest and penalties was immaterial as of January 31, 2018, 2017 and 2016.

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States, the United Kingdom, France and Germany. Tax years that remain subject to examinations by major tax jurisdictions vary by legal entity but are generally open for the U.S. for tax years ending in 2014 and after and outside the U.S. for the tax years ending after 2007.

As of January 31, 2018, the Company has federal net operating loss carryforwards of $157.4 expiring beginning in 2035 and state net operating loss carryforwards of $134.6 expiring between 2020 and 2035 with the majority expiring in 2035. The Company has $117.8 of foreign net operating loss carryforwards as of January 31, 2018 for which a valuation allowance of $95.2 has been recognized.

All of the Company’s foreign net operating losses have an indefinite carryforward period. The Company’s future tax provision will reflect any favorable or unfavorable adjustments to its estimated tax liabilities when resolved. The Company is unable to predict the outcome of these matters. However, the Company believes that none of these matters will have a material effect on the results of operations or financial condition of the Company.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the statement of earnings, rather than equity, and requires excess tax benefits from stock-based compensation to be classified in cash flow from operations. The Company adopted the new standard during the first quarter of 2017 in compliance with the effective date, which resulted in the recognition of a $0.5 long-term deferred tax asset with the offset recorded to accumulated deficit. Prior periods have been adjusted to conform to the current year presentation. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited upon award issuance.

Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to $101.0 at January 31, 2018. Those earnings are considered to be permanently reinvested, and no provision for U.S. federal and state income taxes has been made. Distribution of these earnings in the form of dividends or otherwise could result in U.S. federal taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in various foreign countries. It is not currently practical to determine the amount of U.S. income and foreign withholding tax payable in the event all such foreign earnings are repatriated.

The Company’s effective tax rate can fluctuate as operations and the local country tax rates fluctuate due to the number of tax jurisdictions in which the Company operates.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which eliminates a current exception in U.S. GAAP to the recognition of the income tax effects of temporary differences that result from intra-entity transfers of non-inventory assets. The intra-entity exception is being eliminated under the ASU. The standard is required to be applied on a modified retrospective basis and will be effective beginning with the first quarter of 2018. Early adoption is permitted, and the Company adopted the new standard during the first quarter of 2017, which resulted in the elimination of a $7.7 long-term prepaid tax balance and the recognition of a $8.8 long term deferred tax asset with the offset recorded to the accumulated deficit.

The Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cut and Jobs Act of 2017 (the “2017 Tax Act”). SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting relating to the 2017 Tax Act under the Income Taxes Topic of the FASB ASC. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under the Income Taxes Topic of the FASB ASC is complete. To the extent that a company's accounting for certain income tax effects of the 2017 Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the Income Taxes Topic of the FASB ASC on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act. The ultimate impact of the 2017 Tax Act in the Company's financial statements is provisional with regard to certain foreign tax provisions and may differ from its estimates due to changes in the interpretations and assumptions made by the Company as well as additional regulatory guidance that may be issued.

On December 22, 2017, President Trump signed into law the legislation generally known as the Tax Cut and Jobs Act of 2017. The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward and a deemed repatriation transition tax. In accordance with ASC 740, “Income Taxes”, the impact of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a material, non-cash, change in its net deferred income tax balances of approximately $43.3 related to the federal and state tax rate changes. The Company estimates that its deemed repatriation liability will not be material.

Under the tax sharing and indemnity agreement between the Company and B/E Aerospace, B/E Aerospace generally assumes liability for all federal and state income taxes for all tax periods ending on or prior to December 31, 2014. B/E Aerospace assumes the liability for all federal and state income taxes of KLX’s U.S. operations through the distribution date. KLX assumes all other federal taxes, foreign income tax/non‑income taxes and state/local non‑income taxes related to its business for all periods and B/E Aerospace assumes all other federal taxes, foreign income tax/non‑income taxes and state/local non‑income taxes related to their business for all periods. Additional taxes incurred related to the internal restructuring to separate the businesses to complete the spin‑off shall be shared equally between B/E Aerospace and KLX. Taxes incurred related to certain international tax initiatives for the KLX business shall be assumed by KLX subject to the calculation provisions of the tax sharing and indemnity agreement. In addition, B/E Aerospace transferred to KLX all the deferred tax assets and liabilities related to the KLX business as of December 16, 2014.