Income Taxes

12 Months Ended

Sep. 30, 2018

The components of income before income taxes from continuing operations are presented below.



	2018			2017			2016
	(in millions)
U.S.	$	97.3		$	82.7		$	69.7
Non-U.S.	(1.6		)	(4.2		)	(0.4		)
Income before income taxes	$	95.7		$	78.5		$	69.3

On December 22, 2017, HR-1, commonly referred to as the Tax Cuts and Jobs Act (“Act”), was enacted, which made significant revisions to federal income tax laws, including lowering the corporate income tax rate to 21% from 35% effective January 1, 2018, overhauling the taxation of income earned outside the United States and eliminating or limiting certain

deductions. Our deferred tax assets and liabilities are recorded at the enacted tax rates in effect when we expect to recognize the related tax expenses or benefits. The average of these rates varies slightly from year to year but historically has been approximately 39%. With the legislation changing rates taking place in the quarter ended December 31, 2017, we remeasured our deferred tax items at an average rate of approximately 25% and recorded an income tax benefit of $42.5 million.

The Act also imposes a one-time transition tax on the undistributed, previously-untaxed, post-1986 foreign “earnings and profits” (as defined by the IRS) of certain U.S.-owned corporations. Determination of our transition tax liability requires us to calculate foreign earnings and profits going back to 1992 and then to assess our historical overall foreign loss position and the applicability of certain foreign tax credits. In March 2018, we recorded a provisional transition tax of $7.5 million for the one-time deemed repatriation tax on accumulated foreign earnings of our foreign subsidiaries and will finalize the transition tax in December 2018. We have not provided income taxes for unrepatriated foreign earnings that may be subject to withholding tax or any outside basis differences inherent in our foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. The Company has a foreign tax credit carryforward of $4.5 million that is not expected to be utilized prior to expiration.

The components of income tax (benefit) expense from continuing operations are presented below.



	2018			2017			2016
	(in millions)
Current:
U.S. federal	$	25.7		$	25.4		$	28.9
U.S. state and local	7.1			4.0			2.0
Non-U.S.	0.6			0.5			(0.1		)
	33.4			29.9			30.8
Deferred:
U.S. federal	(42.6		)	(4.3		)	(9.8		)
U.S. state and local	(1.0		)	(0.2		)	3.4
Non-U.S.	0.3			(1.2		)	(0.2		)
	(43.3		)	(5.7		)	(6.6		)
Income tax (benefit) expense	$	(9.9	)	$	24.2		$	24.2

The reconciliation between income tax expense at the U.S. federal statutory income tax rate and reported income tax expense from continuing operations is presented below.



	2018			2017			2016
	(in millions)
Expense at U.S. federal statutory income tax rates of 24.5%, 35% and 35%, respectively	$	23.4		$	27.5		$	24.3
Adjustments to reconcile to income tax expense:
State income taxes, net of federal benefit	4.8			2.7			3.1
Domestic production activities deduction	(2.4		)	(4.5		)	(3.0		)
Tax credits	(1.7		)	(1.4		)	(2.0		)
Nondeductible expenses, other than compensation	0.5			0.6			0.7
Valuation allowances	0.5			0.4			—
Foreign income taxes	—			0.3			0.2
Nondeductible compensation	0.2			0.5			0.4
Excess tax benefits related to stock compensation	(0.6		)	(2.1		)	(0.5		)
Federal tax rate change	(42.5		)	(0.4		)	0.4
Federal transition tax	7.5			—			—
Other	0.4			0.6			0.6
Income tax (benefit) expense	$	(9.9	)	$	24.2		$	24.2

Deferred income tax balances are presented below.



	September 30,
	2018			2017
	(in millions)
Deferred income tax assets:
Inventory reserves	$	10.4		$	12.0
Accrued expenses	13.3			14.9
Pension	—			6.0
Stock-based compensation	3.3			6.2
State net operating losses	3.2			3.2
Federal credit carryovers	2.1			0.9
Other	1.0			2.7
	33.3			45.9
Valuation allowance	(1.9		)	(1.5		)
Total deferred income tax assets, net of valuation allowance	31.4			44.4
Deferred income tax liabilities:
Intangible assets	95.7			151.2
Pension	2.3			—
Other	11.4			7.2
Total deferred income tax liabilities	109.4			158.4
Net deferred income tax liabilities	$	78.0		$	114.0

Balance sheet presentation:
Deferred income taxes	$	79.2		$	115.1
Less deferred tax assets included in other noncurrent assets	1.2			1.1
Net deferred income tax liabilities	$	78.0		$	114.0

We reevaluate the need for a valuation allowance against our deferred tax assets each quarter, considering results to date, projections of taxable income, tax planning strategies and reversing taxable temporary differences.

Our state net operating loss carryforwards, which expire between calendar years 2020 and 2033, remain available to offset future taxable earnings.

The following table summarizes information concerning our gross unrecognized tax benefits.



	2018			2017
	(in millions)
Balance at beginning of year	$	3.0		$	2.8
Increases related to prior year positions	0.1			0.1
Increases related to current year positions	0.3			0.2
Decreases due to lapse in statute of limitations	(0.1		)	(0.1		)
Balance at end of year	$	3.3		$	3.0

Substantially all unrecognized tax benefits would, if recognized, impact the effective tax rate. We recognize interest related to uncertain tax positions as interest expense and recognize any penalties incurred as a component of selling, general and administrative expenses. At September 30, 2018 and 2017, we had $0.6 million and $0.7 million, respectively, of accrued interest expense related to unrecognized tax benefits.

We expect to settle certain state income tax audits within the next 12 months and believe it is reasonably possible that these audit settlements will reduce the gross unrecognized tax benefits by $0.8 million.

The federal income tax returns for Mueller Co. and Anvil are closed for years prior to 2005 and for Mueller Water Products, Inc. for 2007 and 2008. Our 2009 through 2012 returns are closed except to the extent net operating losses from those years have been utilized on subsequent years’ returns. We also remain liable for any taxes related to periods prior to the sale of U.S. Pipe in 2012 pursuant to the terms of the sale agreement with the purchaser of the segment.

Certain tax years remain open for our predecessor company, U.S. Pipe, which was a subsidiary of Walter Energy in those years. See Note 17.

Our state income tax returns are generally closed for years prior to 2014, except to the extent of our state net operating loss carryforwards. Our Canadian income tax returns are generally closed for years prior to 2011. We are currently under audit by several jurisdictions at various levels of completion. We do not have any material unpaid assessments.