INCOME TAXES

The Tax Cuts and Jobs Act of 2017 ("Tax Act") was enacted into law on December 22, 2017. The changes to U.S. tax law include, but are not limited to:

•reducing the federal statutory income tax rate from 35% to 21%, effective January 1, 2018;

•eliminating the deduction for domestic manufacturing activities, which impacts us beginning in fiscal 2019;

•requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;


•	repealing the exception for deductibility of performance-based compensation to covered employees, along with expanding the number of covered employees;

•allowing immediate expensing of machinery and equipment contracted for purchase after September 27, 2017; and


•	changing taxation of multinational companies, including a new minimum tax on Global Intangible Low-Taxed Income ("GILTI"), a new Base Erosion Anti-Abuse Tax ("BEAT"), and a new U.S. corporate deduction for Foreign-Derived Intangible Income ("FDII"), all of which are effective for us beginning in 2019.

As a result of our fiscal year end, the lower U.S. statutory federal income tax rate will result in a blended U.S. federal statutory rate of 29.3% for the fiscal year ending May 27, 2018. The U.S. federal statutory rate is expected to be 21% for fiscal years beginning after May 27, 2018.

In December 2017, the U.S. Securities and Exchange Commission released Staff Accounting Bulletin (SAB) 118, which allows for a measurement period up to one year after the enactment date of the Tax Act to finalize related income tax impacts. SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts for the effects of the tax law where accounting is not complete, but that a reasonable estimate can be determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Act.

During the third quarter of fiscal 2018, we remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse and recorded a provisional net benefit of $241.6 million. In addition, as a result of the Tax Act we recorded a provisional benefit of $2.6 million related to the release of a valuation allowance against certain deferred tax assets that are more likely than not to be realized.

The Tax Act includes a one-time mandatory deemed repatriation transition tax on the net accumulated post-1986 earning and profits of a U.S. taxpayer's foreign subsidiaries. We have computed a provisional transition tax of approximately $15.3 million. As a result of the transition tax, we revised our U.S. deferred tax liability on unremitted earnings and income tax payable on current year repatriations. This resulted in a provisional net benefit of $7.6 million.

The Tax Act includes a provision to tax GILTI of foreign subsidiaries, which will be effective for us beginning May 28, 2018. We have not yet determined an accounting policy to treat the taxes due on GILTI as a period cost or include them in the determination of deferred taxes.

Income tax expense from continuing operations for the third quarter of fiscal 2018 and 2017 was a benefit of $91.4 million and expense of $67.9 million, respectively. Income tax expense from continuing operations for the first three quarters of fiscal 2018 and 2017 was $138.1 million and $315.5 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income from continuing operations, inclusive of equity method investment earnings) from continuing operations was (35.5)% and 27.4% for the third quarter of fiscal 2018 and 2017, respectively. The effective tax rate from continuing operations was 16.0% and 44.6% for the first three quarters of fiscal 2018 and 2017, respectively.

The effective tax rate in the third quarter of fiscal 2018 reflects the following:


•	the impact of U.S. tax reform, as noted above,


•	an adjustment of valuation allowance associated with the termination of the agreement for the proposed sale of our Wesson^® oil business,


•	an indirect cost of the pension contribution made on February 26, 2018,


•	a reserve for the effect of a law change in Mexico, and


•	an income tax benefit allowed upon the vesting/exercise of employee stock compensation awards by our employees, beyond that which is attributable to the original fair value of the awards upon the date of grant.

The effective tax rate for the first three quarters of fiscal 2018 reflects the above-cited items, as well as additional expense related to undistributed foreign earnings for which the indefinite reinvestment assertion is no longer made.

The effective tax rate in the third quarter of fiscal 2017 reflects the following:


•	an income tax benefit related to the receipt of foreign tax incentives and


•	an income tax benefit allowed upon the vesting/exercise of employee stock compensation awards by our employees, beyond that which is attributable to the original fair value of the awards upon the date of grant.

The effective tax rate for the first three quarters of fiscal 2017 reflects the above-cited items, as well as the following:


•	additional tax expense associated with non-deductible goodwill sold in connection with the dispositions of the Spicetec and JM Swank businesses,


•	additional tax expense associated with non-deductible goodwill in our Canadian and Mexican business, for which an impairment charge was recognized, and


•	an income tax benefit associated with a tax planning strategy that allowed us to utilize certain state tax attributes.

The amount of gross unrecognized tax benefits for uncertain tax positions was $44.5 million as of February 25, 2018 and $39.3 million as of May 28, 2017. There were no balances included as of either February 25, 2018 or May 28, 2017, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The gross unrecognized tax benefits excluded related liabilities for gross interest and penalties of $7.6 million and $6.0 million as of February 25, 2018 and May 28, 2017, respectively.

The net amount of unrecognized tax benefits at February 25, 2018 and May 28, 2017 that, if recognized, would impact the Company's effective tax rate was $39.2 million and $31.6 million, respectively. Included in those amounts is $6.7 million and $15.6 million, respectively, that would be reported in discontinued operations. Recognition of these tax benefits would have a favorable impact on the Company's effective tax rate.

We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $19.0 million over the next twelve months due to various federal, state, and foreign audit settlements and the expiration of statutes of limitations.

As of February 25, 2018 and May 28, 2017, we had a deferred tax asset of $721.2 million and $1.08 billion, respectively, that was generated from the capital loss realized on the sale of the Private Brands operations with corresponding valuation allowances of $721.2 million and $990.9 million, respectively, to reflect the uncertainty regarding the ultimate realization of the tax asset. During the first three quarters of fiscal 2018, the balance of the deferred tax asset was adjusted for remeasurement due to tax reform, the impact of state law changes, realization of certain tax attributes, and the settlement of certain tax indemnity claims under the contract terms of the Private Brands sale. Additionally, during the third quarter of fiscal 2018, the valuation allowance was adjusted by $78.6 million due to the termination of the agreement for the proposed sale of our Wesson^® oil business.

Historically, we have not provided U.S. deferred taxes on the cumulative undistributed earnings of our foreign subsidiaries. During the first quarter of fiscal 2018, we decided to repatriate certain cash balances then held in Italy, Canada, Mexico, the Netherlands, and Luxembourg due to the timing of cash flows in connection with certain business acquisition and divestiture activity, as well as forecasted levels of short-term borrowings. We repatriated $151.3 million during the second quarter of fiscal 2018. The cash repatriation resulted in the repatriation of $115.0 million in previously undistributed earnings of our foreign subsidiaries. As a result of the repatriation, we recognized $11.8 million of income tax expense in the first half of fiscal 2018. As a result of the Tax Act, we revised the income tax expense from the repatriation to be $4.7 million, resulting in an income tax benefit in the third quarter of fiscal 2018 of $7.1 million.

We have determined that additional previously undistributed earnings of certain foreign subsidiaries no longer meet the requirements for indefinite reinvestment under applicable accounting guidance and, therefore, recognized an additional $6.8 million of income tax expense in the first three quarters of fiscal 2018. We continue to believe the remaining undistributed earnings of our foreign subsidiaries, after taking into account the above transactions, are indefinitely reinvested and therefore have not provided any additional U.S. deferred taxes.