INCOME TAXES

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



(in thousands)	2019			2018			2017
Income (loss) before income taxes:
United States	$	60,756		$	57,109		$	(23,055	)
International	250,479			217,932			104,930
Total income before income taxes	$	311,235		$	275,041		$	81,875
Current income taxes:
Federal	$	5,679		$	3,755		$	(1,455	)
State	321			(816		)	172
International	54,553			44,127			24,911
Total current income taxes	60,553			47,066			23,628
Deferred income taxes:
Federal	$	(3,606	)	$	1,121		$	298
State	45			3,552			(867		)
International	6,367			18,242			6,836
Total deferred income taxes:	2,806			22,915			6,267
Provision for income taxes	$	63,359		$	69,981		$	29,895
Effective tax rate	20.4		%	25.4		%	36.5		%

Tax Cuts and Jobs Act of 2017 (TCJA)

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 reduced the federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and eliminated U.S. federal taxes on most future foreign earnings. TCJA also added 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). The three primary items from TCJA that effected the Company for fiscal 2019 are the reduction in the statutory tax rate, the one-time tax that was imposed on our unremitted foreign earnings (toll tax) and the tax on global intangible low-taxed income (GILTI) which we elected to record as a period cost. BEAT and FDII did not have an impact on our 2019 income tax provision.

The U.S. federal tax rate reduction was effective January 1, 2018. As a June 30 fiscal year-end taxpayer, our 2018 fiscal year U.S. federal statutory tax rate was a blended rate of 28.1 percent, and our 2019 U.S. federal statutory tax rate was 21.0 percent.

The finalized total toll tax charge is $71.2 million as of June 30, 2019. Based on regulations issued by the U.S. Department of the Treasury and the Internal Revenue Service and other relevant guidance issued through June 30, 2019, we recorded a net benefit of $9.3 million during the year ended June 30, 2019 to adjust the toll tax charge. We did not make a cash payment associated with the toll tax.

In accordance with the SEC Staff Accounting Bulletin 118, in the December quarter of fiscal 2019 we finalized our accounting for the impacts of the TCJA provisions enacted in fiscal 2018, including the remeasurement of deferred tax assets and liabilities at the reduced U.S. federal rate of 21.0 percent.

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)	2019			2018			2017
Income taxes at U.S. statutory rate	$	65,359		$	77,286		$	28,656
State income taxes, net of federal tax benefit	289			2,975			(306		)
U.S. income taxes provided on international income	7,347			1,010			10,273
Combined tax effects of international income	162			(9,333		)	(11,530		)
Change in valuation allowance and other uncertain tax positions	(1,473		)	(90,817		)	5,163
U.S. research and development credit	(3,911		)	(3,141		)	(1,895		)
Change in permanent reinvestment assertion	6,093			—			—
Combined effects of U.S. tax reform	(9,280		)	86,044			—
Adjustment to deferred tax charges on intra-entity transfers	—			5,297			—
Other	(1,227		)	660			(466		)
Provision for income taxes	$	63,359		$	69,981		$	29,895

During 2019, we recorded a net tax benefit of $9.3 million associated with the finalization of our toll tax charge which included a benefit of $15.0 million for the toll tax charge and a $5.3 million charge for an unrecognized tax benefit. The impact of these items is included in the tax reconciliation table under the caption “Combined effects of U.S. tax reform.”

During 2019, we recorded a charge of $6.1 million related to a change in assertion with respect to a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates. The impact of this item is included in the tax reconciliation table under the caption “Change in permanent reinvestment assertion.”

During 2019, we released a $1.1 million valuation allowance that was previously recorded against the net deferred tax assets of our Australian subsidiary. The impact of this item is included in the tax reconciliation table under the caption “Change in valuation allowance and other uncertain tax positions.”

During 2018, we recorded a charge for the combined effects of tax reform of $86.0 million, which included $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 was 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."

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



(in thousands)	2019			2018
Deferred tax assets:
Net operating loss (NOL) carryforwards	$	28,886		$	39,884
Inventory valuation and reserves	8,230			10,023
Pension benefits	21,445			15,750
Other postretirement benefits	4,752			3,996
Accrued employee benefits	16,029			15,697
Other accrued liabilities	7,758			9,386
Tax credits and other carryforwards	4,733			644
Total	91,833			95,380
Valuation allowance	(14,614		)	(21,629		)
Total deferred tax assets	$	77,219		$	73,751
Deferred tax liabilities:
Tax depreciation in excess of book	$	74,645		$	77,106
Intangible assets	4,259			537
Other	1,130			6,084
Total deferred tax liabilities	$	80,034		$	83,727
Total net deferred tax liabilities	$	(2,815	)	$	(9,976	)

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 as of June 30, 2019 and 2018.

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. 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 $9.7 million remains recorded on our U.S. deferred tax assets.

Included in deferred tax assets at June 30, 2019 is $4.7 million associated with tax credits and other carryforward items primarily in federal and state jurisdictions. Of that amount, $0.1 million expires through 2024, $4.4 million expires through 2039 and $0.2 million does not expire.

Included in deferred tax assets at June 30, 2019 is $28.9 million associated with NOL carryforwards in state and foreign jurisdictions. Of that amount, $7.4 million expires through 2024, $1.7 million expires through 2029, $1.3 million expires through 2034, $3.0 million expires through 2039, and the remaining $15.5 million does not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.

A valuation allowance of $14.6 million has been placed against deferred tax assets primarily in the U.S., Brazil and the Netherlands, 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 2019, the valuation allowance related to these deferred tax assets decreased by $7.0 million.

As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which among other provisions allows for a 100 percent dividends received deduction from controlled foreign subsidiaries, we re-evaluated our assertion with respect to permanent reinvestment in all jurisdictions during the current year and concluded that a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates will no longer be permanently reinvested. These changes in assertion required the recognition of a tax charge of $6.1 million recorded in the current year primarily for foreign withholding and U.S. state income taxes. The remaining amount of approximately $1.4 billion is substantially all of the unremitted earnings of our non-U.S. subsidiaries which continues to be indefinitely reinvested. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $3.9 million as of June 30, 2019. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the unremitted earnings which remain indefinitely reinvested, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

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



(in thousands)	2019			2018			2017
Balance at beginning of year	$	5,775		$	2,632		$	3,106
Increases for tax positions of prior years	7,384			3,409			—
Decreases related to settlement with taxing authority	(3,765		)	—			(231		)
Decreases related to lapse of statute of limitations	(324		)	(289		)	(184		)
Foreign currency translation	(118		)	23			(59		)
Balance at end of year	$	8,952		$	5,775		$	2,632

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2019, 2018 and 2017 is $9.0 million, $5.8 million and $2.6 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 a decrease of $0.4 million in 2019 and increases of $0.7 million and $0.2 million in 2018 and 2017, respectively. As of June 30, 2019 and 2018 the amount of interest accrued was $0.7 million and $1.1 million, respectively. As of June 30, 2019 and 2018, the amount of penalty accrued was $0.1 million.

With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2013. The Internal Revenue Service has audited or the statute of limitations has expired for all U.S. tax years prior to 2016. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 2013 to 2016. 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 $0.4 million within the next twelve months.