Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the United States. The effects of the Act included the reduction of the federal corporate income tax rate from 35 percent to 21 percent and a new participation exemption system of taxation on foreign earnings, among other provisions.

Effective January 1, 2018 the federal income tax rate was reduced from 35 percent to 21 percent. For fiscal tax payers a full year federal income tax rate is calculated based upon the number of days in the year subject to the 35 percent and the 21 percent tax rates. As a result, the company’s statutory federal tax rate for the fiscal year ended June 2, 2018 was 29.1 percent.

Securities and Exchange Commission Staff Accounting Bulletin No. 118 allows the use of provisional amounts if accounting for certain income tax effects of the Act has not been completed by the time the company’s financial statements are issued. A measurement period is provided beginning December 22, 2017 and shall not last longer than one year. Provisional amounts must be adjusted during the measurement period as accounting for the income tax effects of the Act is completed. For the fiscal year ended June 2, 2018, the company has not completed its accounting for all of the effects of the Act.

The Act is comprehensive and further guidance is expected from the Internal Revenue Service and the U.S. Treasury Department. Based on our analysis of the Act to date, we have provided the following reasonable estimates. The fiscal year ended June 2, 2018 included a provisional amount of $3 million in reduced income tax expense resulting from the reduced federal income tax rate. Additionally, as part of the transition towards the participation exemption system, in the fiscal period ended June 2, 2018, the company recorded a provisional U.S. tax liability of $9 million on certain undistributed foreign earnings, which is payable over eight years. The one-time tax is based in part on the amount of foreign earnings held in cash and other specified assets as of June 2, 2018. Finally, a favorable impact totaling $8.9 million was recognized as a result of applying the lower federal income tax rates to the company’s net deferred tax liabilities.

Upon enactment of the new law in our three-month period ended March 3, 2018, we had disclosed an initial favorable impact of $8.7 million applying lower federal income tax rates to the company’s net deferred tax liabilities and an initial $9.2 million U.S. tax liability on certain undistributed foreign earnings. These amounts, as noted above, were adjusted as of June 2, 2018 due to an analysis of additional available information as well as further clarification with respect to the new laws. The company will continue to refine its calculations as additional analysis is completed and further guidance is issued. These changes could be material to the consolidated financial statements.

For tax years beginning after December 31, 2017, the Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy.

The components of earnings before income taxes are as follows:



(In millions)	2018		2017		2016
Domestic	$	121.6	$	131.4	$	154.9
Foreign	46.5		46.2		41.7
Total	$	168.1	$	177.6	$	196.6

The provision (benefit) for income taxes consists of the following:



(In millions)	2018			2017		2016
Current: Domestic - Federal	$	30.2		$	28.7	$	36.4
Domestic - State	4.3			2.3		6.4
Foreign	10.7			11.1		6.3
	45.2			42.1		49.1
Deferred: Domestic - Federal	(4.1		)	9.2		7.5
Domestic - State	0.1			2.8		0.2
Foreign	1.2			1.0		2.7
	(2.8		)	13.0		10.4
Total income tax provision	$	42.4		$	55.1	$	59.5

The following table represents a reconciliation of income taxes at the United States blended statutory rate of 29.1 percent for 2018 and 35.0 percent for 2017 and 2016 with the effective tax rate as follows:



(In millions)	2018			2017			2016
Income taxes computed at the United States Statutory rate	$	49.0		$	62.2		$	68.8
Increase (decrease) in taxes resulting from:
Remeasurement of U.S. deferred tax assets and liabilities due to the Tax Act	(8.9		)	—			—
U.S. tax liability on undistributed foreign earnings due to the Tax Act	9.0			—			—
Foreign statutory rate differences	(4.0		)	(5.7		)	(4.3		)
Manufacturing deduction under the American Jobs Creation Act of 2004	(2.7		)	(3.4		)	(4.8		)
State taxes	3.3			3.8			5.2
United Kingdom patent box deduction for research and development	(1.8		)	(2.6		)	(1.7		)
Research and development credit	(2.4		)	(1.4		)	(1.4		)
Sale of manufacturing facility in the United Kingdom	—			—			(1.6		)
Other, net	0.9			2.2			(0.7		)
Income tax expense	$	42.4		$	55.1		$	59.5
Effective tax rate	25.2		%	31.1		%	30.3		%

The tax effects and types of temporary differences that give rise to significant components of the deferred tax assets and liabilities at June 2, 2018 and June 3, 2017, are as follows:



(In millions)	2018			2017
Deferred tax assets:
Compensation-related accruals	$	15.3		$	22.7
Accrued pension and post-retirement benefit obligations	6.6			10.9
Deferred revenue	5.6			5.3
Inventory related	1.0			4.1
Reserves for uncollectible accounts and notes receivable	0.6			1.0
Other reserves and accruals	5.2			6.1
Warranty	11.9			17.0
State and local tax net operating loss carryforwards and credits	2.3			2.7
Federal net operating loss carryforward	1.7			5.0
Foreign tax net operating loss carryforwards and credits	10.0			10.0
Accrued step rent and tenant reimbursements	3.8			4.7
Other	3.9			4.2
Subtotal	67.9			93.7
Valuation allowance	(10.3		)	(10.0		)
Total	$	57.6		$	83.7

Deferred tax liabilities:
Book basis in property in excess of tax basis	$	(25.5	)	$	(37.4	)
Intangible assets	(32.3		)	(47.3		)
Other	(6.9		)	(3.2		)
Total	$	(64.7	)	$	(87.9	)

The future tax benefits of net operating loss (NOL) carry-forwards and foreign tax credits are recognized to the extent that realization of these benefits is considered more likely than not. The company bases this determination on the expectation that related operations will be sufficiently profitable or various tax planning strategies will enable the company to utilize the NOL carry-forwards and/or foreign tax credits. To the extent that available evidence about the future raises doubt about the realization of these tax benefits, a valuation allowance is established.

At June 2, 2018, the company had state and local tax NOL carry-forwards of $29.4 million, the state tax benefit of which is $1.6 million, which have various expiration periods from 1 to 21 years. The company also had state credits with a state tax benefit of $0.7 million, which expire in 2 to 6 years. For financial statement purposes, the NOL carry-forwards and state tax credits have been recognized as deferred tax assets, subject to a valuation allowance of $1.1 million.

At June 2, 2018, the company had federal NOL carry-forwards of $8.1 million, the tax benefit of which is $1.7 million, which expire in 11 years. For financial statement purposes, the NOL carry-forwards have been recognized as deferred tax assets.

At June 2, 2018, the company had federal deferred assets of $2.0 million, the tax benefit of which is $0.4 million, which is related to investments in various foreign joint ventures. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.4 million.

At June 2, 2018, the company had foreign net operating loss carry-forwards of $43.8 million, the tax benefit of which is $10.0 million, which have expiration periods from 6 years to an unlimited term. The company also had foreign tax credits with a tax benefit of $0.1 million which expire in 2 years. For financial statement purposes, NOL carry-forwards and foreign tax credits have been recognized as deferred tax assets, subject to a valuation allowance of $8.1 million.

At June 2, 2018, the company had foreign deferred assets of $3.4 million, the tax benefit of which is $0.6 million, which is related to various deferred taxes in Hong Kong and Brazil as well as buildings in the United Kingdom. For financial statement purposes, the assets have been recognized as deferred tax assets, subject to a valuation allowance of $0.6 million.

The company has recorded transition tax on undistributed foreign earnings as required by the Act. No other provision was made for income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which was $181.3 million on June 2, 2018. Determination of the total amount of unrecognized deferred income tax on undistributed earnings of foreign subsidiaries is not practicable.

The components of the company's unrecognized tax benefits are as follows:



(In millions)
Balance at May 28, 2016	$	1.7
Increases related to current year income tax positions	0.3
Increases related to prior year income tax positions	1.1
Decreases related to prior year income tax positions	(0.1		)
Decreases related to lapse of applicable statute of limitations	(0.1		)
Decreases related to settlements	(0.1		)
Balance at June 3, 2017	2.8
Increases related to current year income tax positions	0.3
Increases related to prior year income tax positions	0.4
Decreases related to lapse of applicable statute of limitations	(0.3		)
Balance at June 2, 2018	$	3.2

The company's effective tax rate would have been affected by the total amount of unrecognized tax benefits had this amount been recognized as a reduction to income tax expense.

The company recognizes interest and penalties related to unrecognized tax benefits through Income tax expense in its Consolidated Statements of Comprehensive Income. Interest and penalties and the related liability, which are excluded from the table above, were as follows for the periods indicated:



(In millions)	June 2, 2018		June 3, 2017		May 28, 2016
Interest and penalty expense (income)	$	0.1	$	0.2	$	(0.1	)

Liability for interest and penalties	$	1.0	$	0.8

The company is subject to periodic audits by domestic and foreign tax authorities. Currently, the company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of new positions that may be taken on income tax returns, settlement of tax positions and the closing of statutes of limitation. It is not expected that any of the changes will be material to the company's Consolidated Statements of Comprehensive Income.

During the year, the company has closed the audit of fiscal year 2017 with the Internal Revenue Service under the Compliance Assurance Process (CAP). For the majority of the remaining tax jurisdictions, the company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before 2015.