Income Taxes

The domestic and foreign components of income (loss) before income tax expense for fiscal 2018, 2017 and 2016 were as follows (in thousands):



	2018			2017			2016
U.S.	$	(53,243	)	$	(35,209	)	$	(26,796	)
Foreign	160,853			157,032			114,190
	$	107,610		$	121,823		$	87,394

Income tax expense (benefit) for fiscal 2018, 2017 and 2016 were as follows (in thousands):



	2018			2017			2016
Current:
Federal	$	63,814		$	78		$	—
State	234			33			(15		)
Foreign	10,134			10,016			11,312
	74,182			10,127			11,297
Deferred:
Federal	(2,958		)	77			—
State	(447		)	38			24
Foreign	23,793			(481		)	(354		)
	20,388			(366		)	(330		)
	$	94,570		$	9,761		$	10,967

The following is a reconciliation of the federal statutory income tax rate to the effective income tax rates reflected in the Consolidated Statements of Comprehensive Income for fiscal 2018, 2017 and 2016:



	2018		2017		2016
Federal statutory income tax rate	24.5	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Permanent differences	1.0		3.2		1.6
Foreign tax rate differences	(30.2	)	(39.9	)	(36.3	)
Excess tax benefits related to share-based compensation	(2.7	)	(2.0	)	—
Disregarded entity benefit	(0.5	)	(0.9	)	(1.8	)
Dividend repatriation	—		—		32.9
Valuation allowances	(30.6	)	12.2		(18.7	)
Deemed repatriation tax	92.2		—		—
Change in permanent reinvested assertion	23.7		—		—
Rate changes	9.0		—		—
Other, net	1.5		0.4		(0.1	)
Effective income tax rate	87.9	%	8.0	%	12.6	%

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted ("Tax Reform"). Tax Reform made significant changes to U.S. corporate income tax, including transitioning the U.S. to a dividend exemption system and requiring a deemed dividend on historical undistributed earnings of foreign subsidiaries at a reduced tax rate. The Company recorded income tax expense of $94.6 million, $9.8 million and $11.0 million for fiscal 2018, 2017 and 2016, respectively.

The $94.6 million of tax expense recorded during fiscal 2018 includes a provisional tax expense of $85.9 million related to Tax Reform. The components of the provisional tax expense include $61.2 million of U.S. federal and states taxes on deemed repatriation of historical undistributed foreign earnings, which are payable over an eight year period beginning in fiscal 2019, $21.8 million of foreign withholding taxes due to a change in the Company’s permanently reinvested assertion on foreign earnings that are payable upon repatriation to the U.S. and $2.9 million for unrecognized tax benefits related to the implementation of Tax Reform. The Company considers the tax expense recorded for Tax Reform to be complete at this time. However, it is possible that additional legislation, regulations and/or guidance may be issued within the provisional reporting period that may result in additional adjustments to the tax expense recorded related to Tax Reform.

The effective tax rate for fiscal 2018 was higher than the effective tax rate for fiscal 2017 primarily due to expenses related to Tax Reform. The effective tax rate for fiscal 2017 is lower than that of fiscal 2016 primarily due to an increase in income before taxes in lower tax-rate jurisdictions and a tax benefit related to incremental deductible expenses in a jurisdiction where the Company pays income tax.

During fiscal 2018, the Company recorded a $32.9 million reduction to its valuation allowance which includes $9.7 million related to the U.S. federal tax rate change as part of Tax Reform from 35% to 21%, $21.0 million of carryforward credits and net operating losses utilized against the deemed repatriation of undistributed foreign earnings and $3.6 million for the release of the U.S. valuation allowance due to the expected future U.S. taxable income related to the Global Intangible Low-Taxed Income provisions of Tax Reform. These benefits were partially offset by a $1.4 million increase in foreign valuation allowances in the EMEA segment.

During fiscal 2017, the Company recorded a $14.9 million addition to its valuation allowance relating to continuing losses in certain jurisdictions within the AMER and EMEA segments.

During fiscal 2016, the Company repatriated $100.0 million of current year foreign earnings from the APAC segment to the U.S., which had no income statement impact due to U.S. net operating losses, the use of U.S. tax credits and the reversal of the related valuation allowance. At that time, the repatriation did not impact the permanently reinvested assertions made by the Company regarding prior period foreign earnings as the remittance was distributed exclusively from fiscal 2016 foreign earnings.

The components of the net deferred income tax assets as of September 29, 2018 and September 30, 2017, were as follows (in thousands):



	2018			2017
Deferred income tax assets:
Loss/credit carryforwards	$	27,915		$	44,831
Inventories	6,459			7,710
Accrued benefits	14,459			25,811
Other	3,450			3,051
Total gross deferred income tax assets	52,283			81,403
Less valuation allowances	(28,369		)	(61,668		)
Deferred income tax assets	23,914			19,735
Deferred income tax liabilities:
Property, plant and equipment	12,530			14,443
Tax on unremitted earnings	14,935			—
Deferred income tax liabilities	27,465			14,443
Net deferred income tax assets/(liabilities)	$	(3,551	)	$	5,292

During fiscal 2018, the Company’s valuation allowance decreased by $33.3 million primarily due to the change in the U.S. federal tax rate from 35% to 21% and the U.S. valuation allowance being released due to the utilization of net operating losses against the deemed repatriation of undistributed foreign earnings and the expected future taxable income as a result of the Global Intangible Low-Taxed Income provisions of Tax Reform. This decrease is the result of a reduction to the valuation allowances against the net deferred tax assets in the AMER segment of $34.4 million and an increase in the EMEA segment of $1.1 million.

As of September 29, 2018, the Company had approximately $174.7 million of pre-tax state net operating loss carryforwards that expire between fiscal 2019 and 2039. Certain state net operating losses have a full valuation allowance against them. The Company also had approximately $80.5 million of pre-tax foreign net operating loss carryforwards that expire between fiscal 2019 and 2024 or are indefinitely carried forward. These foreign net operating losses have a full valuation allowance against them.

During fiscal 2018, tax legislation was adopted in various jurisdictions. The impacts of U.S. Tax Reform on the Company’s consolidated financial condition, results of operations and cash flows have been discussed above. No other legislative changes are expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

The Company has been granted a tax holiday for a foreign subsidiary in the APAC segment. This tax holiday will expire on December 31, 2024, and is subject to certain conditions with which the Company expects to continue to comply. During fiscal 2018, 2017 and 2016, the tax holiday resulted in tax reductions of approximately $39.1 million ($1.19 per basic share, $1.15 per diluted share), $37.5 million ($1.11 per basic share, $1.08 per diluted share) and $27.1 million ($0.81 per basic share, $0.79 per diluted share), respectively.

The Company has approximately $5.8 million of uncertain tax benefits as of September 29, 2018. The Company has classified these amounts in the Consolidated Balance Sheets as "Other liabilities" (noncurrent) in the amount of $4.6 million and an offset to "Deferred income taxes" (noncurrent asset) in the amount of $1.2 million. The Company has classified these amounts as "Other liabilities" (noncurrent) and "Deferred income taxes" (noncurrent asset) to the extent that payment is not anticipated within one year.

The following is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits (in thousands):



	2018			2017			2016
Balance at beginning of fiscal year	$	3,115		$	2,799		$	2,353
Gross increases for tax positions of prior years	21			184			534
Gross increases for tax positions of the current year	2,893			163			—
Gross decreases for tax positions of prior years	(188		)	(31		)	(88		)
Balance at end of fiscal year	$	5,841		$	3,115		$	2,799

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $4.6 million and $0.8 million for the fiscal years ended September 29, 2018 and September 30, 2017, respectively.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total accrued penalties and net accrued interest with respect to income taxes was approximately $0.2 million for each of the fiscal years ended September 29, 2018, September 30, 2017 and October 1, 2016. The Company recognized less than $0.1 million of expense for accrued penalties and net accrued interest in the Consolidated Statements of Comprehensive Income for each of the fiscal years ended September 29, 2018, September 30, 2017 and October 1, 2016.

It is possible that a number of uncertain tax positions may be settled within the next 12 months. Settlement of these matters is not expected to have a material effect on the Company’s consolidated results of operations, financial position and cash flows.

The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign taxing jurisdictions. The following tax years remain subject to examination by the respective major tax jurisdictions:



Jurisdiction		Fiscal Years
China		2013-2018
Germany		2014-2018
Mexico		2013-2018
Romania		2012-2018
United Kingdom		2015-2018
United States
Federal		2011, 2013-2018
State		2003-2018