Income Taxes

9 Months Ended

Mar. 03, 2018

The company recognizes interest and penalties related to uncertain tax benefits through income tax expense in its Condensed Consolidated Statement of Comprehensive Income. Interest and penalties recognized in the company's Condensed Consolidated Statement of Comprehensive Income were negligible for the three and nine months ended March 3, 2018 and March 4, 2017.

The company's recorded liability for potential interest and penalties related to uncertain tax benefits was:



(In millions)	March 3, 2018		June 3, 2017
Liability for interest and penalties	$	1.0	$	0.8
Liability for uncertain tax positions, current	3.0		2.8

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law in the United States. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118, the results of operations for the three-month period ended March 3, 2018 included the provisional amounts of the effect of the reduction of the federal corporate income tax rate as well as the effect of the 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 ending June 2, 2018 is 29.1 percent. The three-month and nine-month periods ended March 3, 2018 include a provisional, discrete amount of $3 million in reduced income tax expense resulting from the reduced federal income tax rate. Also, a provisional, discrete favorable impact totaling $8.7 million was triggered as a result of applying the lower federal income tax rates to the company’s net deferred tax liabilities.

As part of the transition towards the participation exemption system, in the three-month period ended March 3, 2018, the company recorded a provisional discrete U.S. tax liability of $9.2 million on certain undistributed foreign earnings. The one-time tax is based in part on the amount of earnings held in cash and other specified assets as of June 2, 2018. No other provision was made for income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries as these amounts continue to be indefinitely reinvested in foreign operations and determining the amount of unrecognized deferred tax liability is not practicable. The company will continue to refine its calculations as additional analysis is completed and 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.

In determining the provision for income taxes for the three-month period ended March 3, 2018, the company used an estimated annual effective tax rate which was based on expected annual income and statutory tax rates across the various jurisdictions in which it operates, which included effects of the Act. The effective tax rates were 19.0 percent and 29.8 percent, respectively, for the three-month periods ended March 3, 2018 and March 4, 2017. The effective tax rates were 27.3 percent and 31.5 percent, respectively, for the nine-month periods ended March 3, 2018 and March 4, 2017. The year over year decrease in the effective tax rate for the three and nine-month periods ended March 3, 2018 was the result of the Act and an increase in the mix of earnings in tax jurisdictions that had rates that were lower than the United States federal statutory rate. The effective tax rates for the three and nine-month periods ended March 3, 2018 and March 4, 2017 are lower than the United States federal statutory rate due to the mix of earnings in taxing jurisdictions that had rates that were lower than the United States federal statutory rate, along with the manufacturing deduction under the American Jobs Creation Act of 2004 (“AJCA”) and the research and development tax credit under the Protecting Americans from Tax Hikes ("PATH") Act of 2015.

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 twelve months as a result of the audits. Tax payments related to these audits, if any, are not expected to be material to the company's Condensed Consolidated Statements of Comprehensive Income.

For the majority of tax jurisdictions, the company is no longer subject to state, local, or non-United States income tax examinations by tax authorities for fiscal years before 2012.