Income Taxes

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



(In thousands)	2016		2015		2014
Domestic	$	6,196	$	13,076	$	10,951
Foreign	38,353		36,295		30,567
	$	44,549	$	49,371	$	41,518

The components of the provision for income taxes from continuing operations are as follows:



(In thousands)	2016			2015			2014
Current Provision:
Federal	$	535		$	4,693		$	1,080
Foreign	11,323			10,623			7,703
State	838			1,152			713
	12,696			16,468			9,496
Deferred (Benefit) Provision:
Federal	1,738			45			2,179
Foreign	(1,818		)	(1,378		)	418
State	(533		)	(373		)	354
	(613		)	(1,706		)	2,951
	$	12,083		$	14,762		$	12,447

The provision for income taxes included in the accompanying consolidated statement of income is as follows:



(In thousands)	2016		2015		2014
Continuing Operations	$	12,083	$	14,762	$	12,447
Discontinued Operation	2		43		(14		)
	$	12,085	$	14,805	$	12,433

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 and $771,000 of such excess tax benefits in 2015 and 2014, respectively, from the exercise of stock options and vesting of RSUs. In March 2016, the FASB issued ASU No. 2016-09, which the Company early adopted at the beginning of fiscal 2016. 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. As a result of the adoption of this ASU, the Company recognized an income tax benefit of $582,000 in the Company's accompanying consolidated statement of income in 2016.

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)	2016			2015			2014
Provision for Income Taxes at Statutory Rate	$	15,592		$	17,279		$	14,531
Increases (Decreases) Resulting From:
State income taxes, net of federal tax	189			506			694
U.S. tax cost of foreign earnings	192			455			206
Foreign tax rate differential	(3,921		)	(3,852		)	(3,026		)
(Reversal of) provision for tax benefit reserves, net	(76		)	33			(1,017		)
Change in valuation allowance	(131		)	99			125
Nondeductible expenses	1,090			704			1,398
Research and development tax credits	(229		)	(210		)	(274		)
Excess tax benefit related to share-based compensation	(553		)	—			—
Other	(70		)	(252		)	(190		)
	$	12,083		$	14,762		$	12,447

Net deferred tax liability in the accompanying consolidated balance sheet consists of the following:



(In thousands)	2016			2015
Deferred Tax Asset:
Foreign, state, and alternative minimum tax credit carryforwards	$	161		$	23
Reserves and accruals	4,842			5,003
Net operating loss carryforwards	13,694			12,306
Inventory basis difference	3,005			3,253
Research and development	75			246
Employee compensation	4,966			5,427
Allowance for doubtful accounts	488			405
Revenue recognition	636			525
Other	249			151
Deferred tax asset, gross	28,116			27,339
Less: valuation allowance	(10,863		)	(11,493		)
Deferred tax asset, net	17,253			15,846
Deferred Tax Liability:
Goodwill and intangible assets	(21,853		)	(17,450		)
Fixed asset basis difference	(4,325		)	(3,234		)
Reserves and accruals	—			(32		)
Other	(1,199		)	(284		)
Deferred tax liability	(27,377		)	(21,000		)
Net deferred tax liability	$	(10,124	)	$	(5,154	)

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes as it requires that deferred tax assets and liabilities be classified as non-current in the consolidated balance sheet. The Company early adopted this ASU for the year ended January 2, 2016, which resulted in all deferred taxes being reported as non-current in its accompanying consolidated balance sheet. In both 2016 and 2015, the deferred tax assets and liabilities are presented in the accompanying consolidated balance sheet within other assets and long-term deferred income taxes, respectively, on a net basis by tax jurisdiction.

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 2016 was $10,863,000, consisting of $835,000 in the United States and $10,028,000 in foreign jurisdictions. The decrease in the valuation allowance in 2016 of $630,000 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 2016, the Company continued to maintain a valuation allowance in the United States against a large portion of its state operating loss carryforwards due to the uncertainty of future profitability in state jurisdictions. As of year-end 2016, the Company maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability.

At year-end 2016, the Company had domestic state and foreign net operating loss carryforwards of $34,087,000 and $43,773,000, respectively. The domestic state loss carryforwards will expire in the years 2017 through 2036. Their utilization is limited to future taxable income from the Company's domestic subsidiaries. Of the foreign net operating loss carryforwards, $34,000 will expire in the years 2017 through 2021, and the remainder do not expire.

The Company has not recognized a deferred tax liability for the difference between the book basis and the tax basis of its investment in the stock of its domestic subsidiaries, related primarily to unremitted earnings of subsidiaries, because it does not expect this basis difference to become subject to tax at the parent level. It is the Company's intention 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. Through year-end 2016, the Company has not provided for U.S. income taxes on approximately $182,166,000 of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact that it is not practicable to estimate at this time. 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 $3,951,000.

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 2016, the Company had $5,467,000 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 2016 and 2015 is as follows:



(In thousands)	2016			2015
Unrecognized Tax Benefits, Beginning of Year	$	5,052		$	5,006
Gross Increases—Tax Positions in Prior Periods	403			—
Gross Decreases—Tax Positions in Prior Periods	(23		)	(28		)
Gross Increases—Current-period Tax Positions	480			476
Lapses of Statutes of Limitations	(359		)	(253		)
Currency Translation	(86		)	(149		)
Unrecognized Tax Benefits, End of Year	$	5,467		$	5,052

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company has accrued $1,321,000 and $1,246,000 for the potential payment of interest and penalties at year-end 2016 and 2015, respectively. The interest and penalties included in the accompanying consolidated statement of income was an expense of $69,000 and $103,000 in 2016 and 2015, respectively.

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 $188,000 primarily from the expiration of tax statutes of limitations.

The Company remains subject to U.S. Federal income tax examinations for the tax years 2004 through 2016, and to non-U.S. income tax examinations for the tax years 2004 through 2016. In addition, the Company remains subject to state and local income tax examinations in the United States for the tax years 2001 through 2016.