Income Taxes

12 Months Ended

Mar. 31, 2020

INCOME TAXES

The Company operates in the United States and many foreign countries and is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of pending and contested tax issues. The Company's consolidated effective income tax rate is affected by a number of factors, including the mix of domestic and foreign earnings and the effect of exchange rate changes on local taxable income and deferred taxes in foreign countries.

In December 2017, the Tax Cuts and Jobs Act of 2017 was passed by the United States Congress and signed into law by the President. This new law made significant changes to income taxation at the federal level for individuals, pass-through entities, and corporations. For corporations, the changes included a reduction in the statutory rate on taxable income from 35% to 21%, and a move from a worldwide tax system to a system that is more territorial-based for companies with foreign operations. To accommodate the move from the previous worldwide tax system, the new law provided for a one-time transition tax on the undistributed post-1986 earnings of foreign subsidiaries as of either November 2, 2017 or December 31, 2017, whichever undistributed earnings amount was greater. Other provisions of the new law allow for immediate expensing of investments in property, plant, and equipment, and impose limitations on the deductibility of interest, executive compensation, and meals and entertainment expense. For tax years beginning after the date of enactment, the new law requires that certain income earned by foreign subsidiaries, referred to in the law as global intangible low-taxed income ("GILTI"), be included in the U.S. taxable income of the parent company. The Company has made an accounting policy election to account for any additional tax resulting from the GILTI provisions in the year in which it is incurred and has not recorded any deferred taxes on temporary book-tax differences related to this income. For fiscal years ended March 31, 2020 and 2019, the Company's U.S. federal statutory tax rate is the 21.0% rate under the new law. For the fiscal year ended March 31, 2018, the Company's U.S. federal statutory tax rate was 31.5%, reflecting a portion of the year at the 35% rate under the old law and a portion at the 21% rate under the new law. The Company continues to assume repatriation of all undistributed earnings of its consolidated foreign subsidiaries and has therefore provided for expected foreign withholding taxes on the distribution of those earnings where applicable, net of any U.S. tax credit attributable to those withholding taxes. The Company has asserted permanent reinvestment of the book basis of certain foreign subsidiaries, and accordingly, no deferred income tax liability has been recorded for any potential taxable gain that may be realized on a future disposition or liquidation of any of those subsidiaries. It is not practicable for the Company to quantify any deferred income tax liability that would be attributable to those events.

Under the applicable accounting guidance, the Company accounted for the effects of the changes in the U.S. tax law in the period in which they were enacted, which was the third quarter of fiscal year 2018. Due to the complexities associated with understanding and applying various aspects of the new law and quantifying or estimating amounts upon which calculations required to account for new law were based, the U.S. Securities and Exchange Commission (“SEC”) issued guidance permitting corporations to record and report specific items impacted by the new law on a provisional basis using reasonable estimates where final amounts had not been determined. The guidance allowed a measurement period of no more than one year from the date of enactment of the new law to complete all adjustments to amounts recorded on a provisional basis. The new tax law resulted in a one-time reduction of income tax expense of $4.5 million for fiscal year 2018, reflecting provisional amounts initially recorded in the third quarter upon enactment, followed by subsequent adjustments to those provisional amounts in the fourth quarter. The reduction of income tax expense from the enactment of the new law was primarily attributable to the adjustment of recorded deferred tax assets and liabilities to the tax rates at which they are expected to reverse in the future, as well as the reduction of the liability previously recorded for U.S. income taxes on the undistributed earnings of foreign subsidiaries to the amounts to be paid under the one-time transition tax provisions of the new law. Adjustments to the amounts recorded for the enactment of the new law were not material after the fourth quarter of fiscal year 2018, and all effects that were previously accounted for on a provisional basis were designated as final during the third quarter of fiscal year 2019.

The effect of the new law in fiscal year 2018 included a $7.8 million net increase in income tax expense from remeasuring net deferred tax assets to the new lower rates at which they are expected to reverse, generally the 21% U.S. federal statutory tax rate. That net increase included approximately $12.4 million of net tax expense from remeasuring net deferred tax assets attributable to pension and other postretirement benefit plans, foreign currency translation adjustments, and other amounts that were recorded through other comprehensive income to the new lower rates, which initially left disproportionate tax effects recorded on the pretax amounts in accumulated other comprehensive income (loss). As discussed in Note 1, the FASB issued ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" to address this issue by allowing companies to reclassify the disproportionate tax effects from accumulated other comprehensive income (loss) to retained earnings. The Company elected to early-adopt ASU 2018-02 in the fourth quarter of fiscal year 2018 and chose to reclassify the disproportionate tax effects. The reclassification increased accumulated other comprehensive loss and increased retained earnings by approximately $12.4 million in fiscal year 2018.

Income Tax Expense

Income taxes for the fiscal years ended March 31, 2020, 2019, and 2018 consisted of the following:



	Fiscal Year Ended March 31,
	2020			2019			2018
Current
United States	$	2,001		$	(2,639	)	$	1,110
State and local	92			377			175
Foreign	41,892			39,578			60,356
	43,985			37,316			61,641
Deferred
United States	3,735			5,713			(20,052		)
State and local	(16		)	(4		)	68
Foreign	(12,416		)	(1,837		)	8,852
	(8,697		)	3,872			(11,132		)
Total	$	35,288		$	41,188		$	50,509

Foreign taxes include any applicable U.S. tax expense on the earnings of foreign subsidiaries.

Consolidated Effective Income Tax Rate

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:



	Fiscal Year Ended March 31,
	2020		2019		2018
U.S. federal statutory tax rate	21.0	%	21.0	%	31.5	%
State income taxes, net of federal benefit	0.1		0.2		0.1
Dividends received from deconsolidated operations	—		—		(1.4	)
Foreign earnings taxed at rates other than the U.S. federal statutory tax rate	(2.0	)	7.1		2.8
Foreign dividend withholding taxes	5.1		3.7		(0.2	)
Reversal of dividend withholding tax due to foreign subsidiary tax holiday	—		(5.1	)	—
Effects of new tax law:
Adjustment of deferred tax assets and liabilities to lower tax rate	—		—		4.6
Reduction of U.S. tax liability on undistributed foreign earnings to amounts payable under one-time transition tax	—		—		(8.3	)
Changes in uncertain tax positions	5.6		1.4		0.8
Other	1.3		(1.1	)	0.4
Effective income tax rate	31.1	%	27.2	%	30.3	%

During fiscal year 2020, the Company resolved a transfer pricing matter related to a foreign subsidiary. The resolution of the uncertainty with the local country taxing authorities resulted in net additional current income tax expense of $2.8 million. The additional income tax expense for fiscal year 2020 increased the effective tax rate for the year by 2.4%

During fiscal year 2019, the Company reversed amounts previously recorded for dividend withholding taxes on distributed and undistributed retained earnings of a foreign subsidiary. The reversal followed the resolution of uncertainties with the local country taxing authorities with respect to the inclusion of the tax under a tax holiday applicable to the subsidiary and was attributable to cumulative retained earnings amounts previously distributed or expected to be distributed prior to the expiration of the tax holiday. The reversal reduced income tax expense for fiscal year 2019 by approximately $7.8 million, which decreased the effective tax rate for the year by 5.1%, as noted in the above rate reconciliation.

Components of Income Before Income Taxes

The U.S. and foreign components of income before income taxes were as follows:



	Fiscal Year Ended March 31,
	2020		2019		2018
United States	$	22,916	$	37,478	$	10,442
Foreign	90,375		113,844		156,235
Total	$	113,291	$	151,322	$	166,677

Deferred Income Tax Liabilities and Assets

Significant components of deferred tax liabilities and assets were as follows:



	March 31,
	2020			2019
Liabilities
Foreign withholding taxes	$	19,870		$	20,659
Property, plant and equipment	10,078			4,627
Undistributed earnings	7,298			6,579
Operating lease right-of-use assets	9,877			—
Goodwill and other intangible assets	23,435			19,529
All other	4,813			2,461
Total deferred tax liabilities	$	75,371		$	53,855

Assets
Employee benefit plans	$	22,773		$	20,467
Reserves and accruals	7,708			7,898
Deferred income	4,833			3,829
Operating lease right-of-use liabilities	9,650			—
Currency translation losses of foreign subsidiaries	2,173			1,993
Local currency exchange losses of foreign subsidiaries	8,360			1,252
Interest rate swap	7,284			248
All other	7,464			4,739
Total deferred tax assets	70,245			40,426
Valuation allowance	(3,394		)	(1,798		)
Net deferred tax assets	$	66,851		$	38,628

At March 31, 2020, the Company had no material net operating loss carryforwards in either its domestic or foreign operations.

Combined Income Tax Expense (Benefit)

The combined income tax expense (benefit) allocable to continuing operations and other comprehensive income was as follows:



	Fiscal Year Ended March 31,
	2020			2019			2018
Continuing operations	$	35,288		$	41,188		$	50,509
Other comprehensive income (loss)	(14,392		)	(5,390		)	23,471
Total	$	20,896		$	35,798		$	73,980

Uncertain Tax Positions

A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions is as follows:



	Fiscal Year Ended March 31,
	2020			2019			2018
Liability for uncertain tax positions, beginning of year	$	5,625		$	3,673		$	2,426
Additions:
Related to tax positions for the current year	1,746			85			107
Related to tax positions for prior years	4,369			2,169			1,310
Reductions:
Due to lapses of statutes of limitations	(81		)	(90		)	(104		)
Due to tax settlements	(8,948		)	—			—
Effect of currency rate changes	(334		)	(212		)	(66		)
Liability for uncertain tax positions, end of year	$	2,377		$	5,625		$	3,673

Of the total liability for uncertain tax positions at March 31, 2020, approximately $2.3 million could have an effect on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $0.1 million related to tax positions for which it is reasonably possible that the amounts could change significantly before March 31, 2021. This amount reflects a possible decrease in the liability for uncertain tax positions that could result from the completion and resolution of tax audits and the expiration of open tax years in various tax jurisdictions. During fiscal year 2020, the Company resolved a transfer pricing matter related to a foreign subsidiary. The settlement in fiscal year 2020 represents the resolution of a tax matter with a local country taxing authority that resulted in a $8.9 million settlement of which $4.5 million was accrued in prior fiscal years.

The Company recognizes accrued interest related to uncertain tax positions as interest expense, and it recognizes penalties as a component of income tax expense. Amounts accrued or reversed for interest and penalties were not material for any of the fiscal years 2018 through 2020, and liabilities recorded for interest and penalties at March 31, 2020 and 2019 also were not material.

Universal and its subsidiaries file a U.S. federal consolidated income tax return, as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2020, the Company's earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2016. Open tax years in U.S. federal, state and foreign jurisdictions range from 3 to 6 years.