INCOME TAXES

Income (loss) before income taxes consisted of the following for the years ended June 30:



(in thousands)	2018			2017			2016
Income (loss) before income taxes:
United States	$	57,109		$	(23,055	)	$	(228,667	)
International	217,932			104,930			30,096
Total income (loss) before income taxes	$	275,041		$	81,875		$	(198,571	)
Current income taxes:
Federal	$	3,755		$	(1,455	)	$	(15,039	)
State	(816		)	172			454
International	44,127			24,911			31,570
Total current income taxes	47,066			23,628			16,985
Deferred income taxes:
Federal	$	1,121		$	298		$	6,786
State	3,552			(867		)	8,407
International	18,242			6,836			(6,865		)
Total deferred income taxes:	22,915			6,267			8,328
Provision for income taxes	$	69,981		$	29,895		$	25,313
Effective tax rate	25.4		%	36.5		%	(12.7		)%

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law in the U.S. TCJA amends the Internal Revenue Code of 1986 to reduce tax rates and modify policies, credits and deductions for individuals and corporations. For corporations, TCJA reduces the federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and eliminates U.S. federal taxes on most future foreign earnings. TCJA also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). We are assessing the impact of certain provisions, including the tax on GILTI, the BEAT and the deduction for FDII, which do not apply to the Company until fiscal 2019. This assessment includes the evaluation of our accounting election relative to GILTI as either a period cost or an adjustment to deferred tax assets or liabilities of our foreign subsidiaries for the new tax. The two material items that effect the Company for fiscal 2018 are the reduction in the tax rate and a one-time tax that is imposed on our unremitted foreign earnings (toll tax).

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118) that includes additional guidance allowing companies to use a measurement period, similar to that used in business combinations, to account for the impacts of TCJA in their financial statements. We have accounted for the impacts of TCJA to the extent a reasonable estimate could be made during the year ended June 30, 2018. We will continue to refine our estimates throughout the measurement period, which will not extend beyond 12 months from the enactment of TCJA, or until the accounting is complete.

The U.S. federal tax rate reduction is effective as of January 1, 2018. As a June 30 fiscal year-end taxpayer, our 2018 fiscal year U.S. federal statutory tax rate is a blended rate of 28.1 percent. We expect our U.S. federal statutory tax rate to be 21.0 percent in 2019.

During 2018, we estimated the toll tax charge to be $80.9 million after available foreign tax credits. The toll tax charge consumed our entire U.S. federal net operating loss carryforward and other credit carryforwards, which represent a significant portion of our previously available deferred tax assets, and was offset by the release of the valuation allowance associated with these assets. We estimate a cash payment of $3.5 million associated with the toll charge which will be paid over eight years, of which $3.2 million is classified as long-term accrued income taxes in our consolidated balance sheet as of June 30, 2018. The toll tax charge is preliminary, and subject to finalization of the 2018 U.S. federal income tax return and applying any additional regulatory guidance issued after June 30, 2018.

The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows for the years ended June 30:



(in thousands)	2018			2017			2016
Income taxes at U.S. statutory rate	$	77,286		$	28,656		$	(69,500	)
State income taxes, net of federal tax benefits	2,975			(306		)	859
U.S. income taxes provided on international income	1,010			10,273			2,364
Combined tax effects of international income	(9,333		)	(11,530		)	(25,469		)
Impact of goodwill impairment charges	—			—			6,439
Impact of divestiture	—			—			27,790
Change in valuation allowance and other uncertain tax positions	(90,817		)	5,163			84,530
Impact of domestic production activities deduction	—			—			(2,072		)
Research and development credit	(3,141		)	(1,895		)	(4,351		)
Change in permanent reinvestment assertion	—			—			3,659
Combined effects of tax reform	86,044			—			—
Adjustment to deferred tax charges on intra-entity transfers	5,297			—			—
Other	660			(466		)	1,064
Provision for income taxes	$	69,981		$	29,895		$	25,313

During 2018, we recorded a charge for the combined effects of tax reform of $86.0 million, which includes $80.9 million for the toll tax charge and a net charge in our U.S. provision of $5.1 million for revaluation of U.S. net deferred taxes. The impact of these items is included in the tax reconciliation table under the caption “Combined effects of tax reform.” The revaluation of U.S. net deferred taxes is preliminary and subject to finalization of the 2018 U.S. federal income tax return.

During 2018, we released $91.3 million of the U.S. valuation allowance that was previously recorded against our net deferred tax assets in the U.S., including deferred tax assets related to items of Other Comprehensive Income. The valuation allowance release was triggered by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision in TCJA.

During 2017, we recorded a valuation allowance against the net deferred tax assets of our Australian subsidiary. The impact of the valuation allowance was approximately $1.3 million and is included in the tax reconciliation table under the caption "change in valuation allowance and other uncertain tax positions."

During 2016, we recorded a valuation allowance against our net domestic deferred tax assets of $105.9 million, as discussed below. Of this amount, $81.2 million impacted the effective tax rate and is included in the income tax reconciliation table under the caption "change in valuation allowance and other uncertain tax positions," and $24.7 million was recorded in other comprehensive income.

During 2016, we recorded goodwill impairment charges related to our Infrastructure segment for which there was no tax benefit for a portion of the charges. The federal effect of these permanent differences is included in the income tax reconciliation table under the caption "impact of goodwill impairment charges."

During 2016, we divested certain non-core businesses as described in Note 4. A portion of the loss from this divestiture was not deductible for tax purposes. The Federal effect of this permanent difference is included in the income tax reconciliation table under the caption "impact of divestiture."

During 2016 we recorded an adjustment of $3.7 million related to a change in assertion of certain foreign subsidiaries' undistributed earnings primarily related to the transaction described in Note 4, which are no longer considered permanently reinvested. The effect of this charge is included in the income tax reconciliation table under the caption "change in permanent reinvestment assertion."

The components of net deferred tax assets and (liabilities) were as follows at June 30:



(in thousands)	2018			2017
Deferred tax assets:
Net operating loss (NOL) carryforwards	$	39,884		$	81,920
Inventory valuation and reserves	10,023			20,428
Pension benefits	15,750			24,824
Other postretirement benefits	3,996			5,959
Accrued employee benefits	15,697			18,409
Other accrued liabilities	9,386			8,609
Hedging activities	1,477			5,409
Tax credits and other carryforwards	644			37,603
Intangible assets	—			14,947
Total	96,857			218,108
Valuation allowance	(21,629		)	(116,770		)
Total deferred tax assets	$	75,228		$	101,338
Deferred tax liabilities:
Tax depreciation in excess of book	$	77,106		$	83,258
Intangible assets	537			—
Other	7,561			4,614
Total deferred tax liabilities	$	85,204		$	87,872
Total net deferred tax assets	$	(9,976	)	$	13,466

As noted previously, TCJA reduced the statutory Federal income tax rate from 35.0 percent to 21.0 percent. The table above reflects deferred taxes calculated using the U.S. Federal rates, which was at the 21.0 percent rate and at 35.0 percent rate as of June 30, 2018 and 2017, respectively.

We revised NOL carryforwards, tax credits and other carryforwards and accrued employee benefits in our components of net deferred tax assets as of June 30, 2017 to correct a prior period classification error. This correction resulted in a decrease to NOL carryforwards and to tax credits and other carryforwards of $3.7 million and $3.4 million, respectively, and an increase to accrued employee benefits of $7.1 million. This misstatement was not material to our current or any prior period financial statements.

During 2018, we identified an error related to the tax rate that had historically been used to calculate the deferred tax charge on intra-entity product transfers. This resulted in an overstatement of deferred tax assets of $8.2 million as of June 30, 2017. During 2018, $2.9 million of this amount was corrected in connection with the release of the U.S. valuation allowance. Therefore, the out of period adjustment recorded resulted in a further increase of $5.3 million to the provision for income taxes during 2018. The remaining balance related to this item was reclassified and included in other current assets. The impact to the effective tax rate was 1.9 percent in 2018. After evaluation, we determined that the impact of the adjustment was not material to the previously issued financial statements, nor are the out of period adjustments material to the 2018 results.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50 percent) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, we consider all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, and projections of future profitability within the carry forward period, including taxable income from tax planning strategies. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of the deferred tax asset based on existing projections of income. Upon changes in facts and circumstances, we may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released.

In 2016, we recorded a valuation allowance of $105.9 million against our net deferred tax assets in the U.S. Of this amount, $81.2 million was recorded in the provision for income taxes and $24.7 million was recorded in other comprehensive income. After weighing all available positive and negative evidence, as previously described, we determined that it was no longer more likely than not that we will realize the tax benefit of these deferred tax assets. This was driven by cumulative pre-tax domestic losses from charges related to asset impairment, restructuring and loss on divestiture, as well as an overall decrease in demand in U.S. operations. During 2018, we released $91.3 million of the valuation allowance, which was triggered by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision in TCJA. A valuation allowance on certain state NOLs in the amount of $13.4 million remains recorded on our U.S. deferred tax assets.

Included in deferred tax assets at June 30, 2018 is $0.6 million associated with tax credits and other carryforward items primarily in federal and state jurisdictions. Of that amount, $0.3 million expires through 2023 and $0.3 million expires through 2028.

Included in deferred tax assets at June 30, 2018 is $39.9 million associated with NOL carryforwards in state and foreign jurisdictions. Of that amount, $11.0 million expires through 2023, $2.9 million expires through 2028, $2.9 million expires through 2033, $4.6 million expires through 2038, and the remaining $18.5 million does not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.

A valuation allowance of $21.6 million has been placed against deferred tax assets in the U.S., Brazil, the Netherlands, Hong Kong and Australia, all of which would be allocated to income tax expense upon realization of the deferred tax assets. As the respective operations generate sufficient income, the valuation allowances will be partially or fully reversed at such time we believe it will be more likely than not that the deferred tax assets will be realized. In 2018, the valuation allowance related to these deferred tax assets decreased by $95.1 million, due primarily to the release of the valuation allowance against most of our U.S. deferred tax assets.

We consider substantially all of the unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. As a result of TCJA, which among other provisions allows for a 100 percent dividends received deduction from controlled foreign subsidiaries, we are in the process of re-evaluating our assertion with respect to permanent reinvestment. As part of this evaluation, we are considering our global working capital and capital investment requirements, among other considerations, including the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent. If we determine that an entity should no longer remain subject to the permanent reinvestment assertion, we will accrue additional tax charges, including but not limited to state income taxes, withholding taxes, U.S. tax on foreign currency gains and losses and other relevant foreign taxes in the period the conclusion is determined. As of June 30, 2018, the unremitted earnings and profits of our non-U.S. subsidiaries and affiliates is approximately $1.3 billion. This amount has been subject to U.S. federal income tax, but may remain subject to state and foreign taxes if repatriated. In accordance with SAB 118, we expect to complete our evaluation by December 22, 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest) is as follows as of June 30:



(in thousands)	2018			2017			2016
Balance at beginning of year	$	2,632		$	3,106		$	14,619
Increases for tax positions of prior years	3,409			—			1,197
Decreases related to settlement with taxing authority	—			(231		)	(11,942		)
Decreases related to lapse of statute of limitations	(289		)	(184		)	(667		)
Foreign currency translation	23			(59		)	(101		)
Balance at end of year	$	5,775		$	2,632		$	3,106

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2018, 2017 and 2016 is $5.8 million, $2.6 million and $3.1 million, respectively. Our policy is to recognize interest and penalties related to income taxes as a component of the provision for income taxes in the consolidated statement of income. We recognized increases in interest of $0.7 million and $0.2 million in 2018 and 2017, respectively, and a reduction in interest of $0.2 million in 2016. As of June 30, 2018 and 2017 the amount of interest accrued was $1.1 million and $0.5 million, respectively. As of June 30, 2018 and 2017, the amount of penalty accrued was $0.1 million.

In 2016, decreases for tax positions primarily relate to one foreign tax position. We settled this position with the foreign authority. A corresponding deferred tax asset in the amount of $11.9 million was released for the position in the U.S. and in the prior year this amount was included in the components of net deferred tax liabilities and assets table under the caption "other."

With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2011. The Internal Revenue Service has audited all U.S. tax years prior to 2015. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 2011 to 2015. We continue to execute our pan-European business model. As a result of this and other matters, we continuously review our uncertain tax positions and evaluate any potential issues that may lead to an increase or decrease in the total amount of unrecognized tax benefits recorded.

We believe that it is reasonably possible that the amount of unrecognized tax benefits could decrease by approximately $3.1 million within the next twelve months.