Income Taxes

The significant components of income before income taxes and the consolidated income tax provision were as follows:



	Year Ended September 30
	2018		2017		2016
Income before income taxes:
Domestic	$	101.8	$	129.0	$	92.2
Foreign	95.4		54.0		46.1
Total	$	197.2	$	183.0	$	138.3



Income tax expense:
Current provision
U.S. Federal	$	5.9		$	61.6		$	4.7
State	3.5			8.6			2.2
Foreign	20.2			13.3			9.1
Total current provision	29.6			83.5			16.0
Deferred provision:
U.S. Federal	(83.4		)	(34.9		)	21.8
State	(2.8		)	1.3			1.2
Foreign	1.4			0.8			(23.5		)
Total deferred provision	(84.8		)	(32.8		)	(0.5		)
Income tax expense	$	(55.2	)	$	50.7		$	15.5

Differences between income tax expense reported for financial reporting purposes and that computed based upon the application of the statutory U.S. Federal tax rate to the reported income before income taxes were as follows:



	Year Ended September 30
	2018					2017					2016
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
U.S. Federal income tax (a)	$	48.4		24.5	%	$	64.1		35.0	%	$	48.4		35.0	%
State income tax (b)	2.9			1.5	%	4.1			2.2	%	2.9			2.1	%
Foreign income tax (c)	(23.3		)	(11.8	)%	(35.6		)	(19.4	)%	(14.0		)	(10.1	)%
Application of federal research tax credits	(5.6		)	(2.9	)%	(3.6		)	(2.0	)%	(5.6		)	(4.0	)%
Application of foreign tax credits	(1.0		)	(0.5	)%	(15.0		)	(8.2	)%	(0.5		)	(0.4	)%
Valuation of tax attributes	23.4			11.9	%	36.3			19.8	%	(14.4		)	(10.4	)%
Foreign inclusions	(0.9		)	(0.4	)%	11.5			6.3	%	0.9			0.6	%
Domestic manufacturer’s deduction	(0.9		)	(0.4	)%	(4.4		)	(2.4	)%	(1.8		)	(1.3	)%
Excess tax benefits from share based awards	(16.1		)	(8.2	)%	(8.9		)	(4.9	)%	—			—	%
U.S. tax benefit of foreign currency loss	(9.2		)	(4.7	)%	—			—	%	—			—	%
U.S. tax reform deferred tax remeasurement	(93.8		)	(47.6	)%	—			—	%	—			—	%
U.S. tax reform transition tax	22.9			11.6	%	—			—	%	—			—	%
Other, net	(2.0		)	(1.0	)%	2.2			1.3	%	(0.4		)	(0.3	)%
Income tax expense	$	(55.2	)	(28.0	)%	$	50.7		27.7	%	$	15.5		11.2	%


(a)	At statutory rate.


(b)	Net of U.S. Federal benefit.


(c)	U.S. Federal tax rate differential.

The tax effect of temporary differences that gave rise to the deferred tax balance sheet accounts were as follows:



	Year Ended September 30
	2018			2017
Deferred tax assets:
Employee benefit accruals	$	34.9		$	64.5
Inventory	12.7			16.6
Net operating loss carryforwards	84.5			70.7
Tax credit carryforwards	20.5			23.3
Other, net	26.4			41.4
	179.0			216.5
Less: Valuation allowance	(80.2		)	(58.2		)
Total deferred tax assets	98.8			158.3

Deferred tax liabilities:
Depreciation	(19.2		)	(28.6		)
Amortization	(216.8		)	(349.7		)
Other, net	(9.1		)	(5.3		)
Total deferred tax liabilities	(245.1		)	(383.6		)
Deferred tax asset (liability) - net	$	(146.3	)	$	(225.3	)

As of September 30, 2018, we had $83.4 million of deferred tax assets related to operating loss carryforwards in foreign jurisdictions that are subject to various carryforward periods with the majority eligible to be carried forward for an unlimited period. Additionally, we had $0.7 million of deferred tax assets related to U.S. Federal net operating loss (“NOL”) carryforwards which will expire between 2019 and 2033 and $0.4 million of deferred tax assets related to state NOL carryforwards, which expire between 2018 and 2037. We had $20.5 million of deferred tax assets related to state tax credits, some of which will be carried forward for an unlimited period and some of which will expire between 2018 and 2032. During fiscal 2018 we fully utilized all of our foreign tax credit carryforwards. We had $2.7 million of deferred tax assets related to capital loss carryforwards, which will expire in 2021.

The gross deferred tax assets as of September 30, 2018 were reduced by valuation allowances of $80.2 million primarily related to certain foreign deferred tax attributes and state tax credit carryforwards as it is more likely than not that some portion or all of these tax attributes will not be realized. In evaluating whether it is more likely than not that we would recover our deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies were considered. We believe that our estimates for the valuation allowances recorded against deferred tax assets are appropriate based on current facts and circumstances.

We operate under tax holidays in both Singapore and Puerto Rico. The Singapore tax holiday is effective through 2019 while the Puerto Rico tax holiday is effective through 2025. Both incentives are conditional on meeting certain employment and/or investment thresholds. The impact of these tax holidays decreased foreign taxes by $4.3 million in fiscal 2018, $3.6 million in fiscal 2017 and $4.1 million in fiscal 2016. The benefit of the tax holidays on net income per diluted share was $0.06, $0.05 and $0.06 in fiscal 2018, 2017 and 2016.

With regard to our non-U.S. subsidiaries, it is our practice and intention to reinvest the earnings in those businesses, to fund capital expenditures and other operating cash needs. Because the undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested, no U.S. deferred income taxes or foreign withholding taxes have been provided on earnings subsequent to the enactment of the Tax Act. As of September 30, 2018, we have approximately $193.0 million of undistributed earnings in our non-U.S. subsidiaries that are considered to be permanently reinvested. If such earnings were repatriated, we do not anticipate incurring a significant amount of additional tax expense.

We file a consolidated federal income tax return as well as multiple state, local and foreign jurisdiction tax returns. In the normal course of business, we are subject to examination by the taxing authorities in each of the jurisdictions where we file tax returns. In fiscal 2018, the U.S. Internal Revenue Service (“IRS”) concluded its audit of fiscal 2016 and initiated its post-filing examination of the fiscal 2017 consolidated federal return. We continue to participate in the IRS Compliance Assurance Program (“CAP”) in fiscal 2018 and 2019 and we are in the application process to remain in the CAP in fiscal 2020. The CAP provides the opportunity for the IRS to review certain tax matters prior to us filing our tax return for the year, thereby reducing the time it takes to complete the post-filing examination. We are also subject to state and local or foreign income tax examinations by taxing authorities for years back to fiscal 2013.

We also have on-going audits in various stages of completion in several state and foreign jurisdictions, one or more of which may conclude within the next 12 months. Such settlements could involve some or all of the following: the payment of additional taxes and related penalties, the adjustment of certain deferred taxes and/or the recognition of unrecognized tax benefits. The resolution of these matters, in combination with the expiration of certain statutes of limitations in various jurisdictions, make it reasonably possible that our unrecognized tax benefits may decrease as a result of either payment or recognition by approximately $0.5 million to $3.5 million in the next 12 months, excluding interest.

The total amount of gross unrecognized tax benefits as of September 30, 2018, 2017 and 2016 were $6.2 million, $4.5 million and $5.1 million, which includes $5.6 million, $3.3 million and $3.6 million that, if recognized, would impact the effective tax rate in future periods. The remaining amount relates to items which, if recognized, would not impact our effective tax rate.

A rollforward of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year Ended September 30
	2018			2017			2016
Balance as of October 1	$	4.5		$	5.1		$	5.8
Increases in tax position of prior years	2.3			0.1			0.8
Decreases in tax position of prior years	—			—			(0.1		)
Increases in tax position during the current year	0.3			—			—
Settlements with taxing authorities	—			—			(0.3		)
Lapse of applicable statute of limitations	(0.9		)	(0.8		)	(0.5		)
Change in positions due to acquisitions	—			—			(0.6		)
Foreign currency adjustments	—			0.1			—
Total change	1.7			(0.6		)	(0.7		)
Balance as of September 30	$	6.2		$	4.5		$	5.1

In fiscal 2018, we recorded a reserve of $2.6 million related to an unrecognized tax benefit in a non-US jurisdiction that we believe is not more likely than not of being sustained on audit.

We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties, which are not presented in the rollforward table above, were $2.1 million, $2.6 million and $3.0 million as of September 30, 2018, 2017 and 2016. Related to interest and penalties, we recognized an income tax benefit of $0.5 million in 2018 and $0.4 million in 2017. There was no income tax impact of interest or penalties in 2016.

A change in a tax accounting method was approved by the Internal Revenue Service in fiscal 2018 which resulted in a reduction in U.S. tax of $9.2 million for prior year currency exchange losses.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code which impacted fiscal 2018 including, but not limited to (1) reduced the U.S. Federal corporate tax rate, (2) required a one-time transition tax (“Transition Tax”) on certain unrepatriated earnings of foreign subsidiaries that may electively be paid over eight years, and (3) accelerated first year expensing of certain capital expenditures. The Tax Act reduces the U.S. Federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018 for calendar year tax filers. Internal Revenue Code Section 15 provides that for fiscal 2018 we will have a blended corporate tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after the effective date of the Tax Act. The statutory tax rate of 21.0% will apply for fiscal 2019 and beyond.

The Tax Act also puts in place new tax laws that will impact our taxable income beginning in fiscal 2019, which include, but are not limited to (1) creating a Base Erosion Anti-abuse Tax (“BEAT”), which is a tax on certain related-party payments that reduce the U.S. tax base, (2) generally eliminating U.S. Federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently global intangible low-taxed income (“GILTI”), which allows for the possibility of utilizing foreign tax credits and a deduction equal to 50.0% to offset the income tax liability (subject to some limitations), (4) a provision that could limit the amount of deductible interest expense, (5) the repeal of the domestic production activity deduction replaced with an additional deduction for foreign-derived intangible income ("FDII"), (6) limitations on the deductibility of certain executive compensation, and (7) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, the Company must complete the assessment of the income tax effects of the Tax Act in the first quarter of fiscal 2019.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a Company cannot determine a provisional estimate to be included in the financial statements, the Company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a Company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.

We initially recorded a provisional discrete net tax benefit of $61.4 million related to the Tax Act. We reduced our estimate of the Transition Tax by $9.5 million primarily related to true–ups to earnings and profits amounts and U.S. taxation of foreign credits and inclusions updated for the end of fiscal 2018. After this adjustment, we have recorded a provisional net tax benefit at year end of $70.9 million related to the Tax Act. This net benefit primarily consists of a net benefit of $93.8 million due to the remeasurement of our deferred tax accounts to reflect the corporate rate reduction impact to our net deferred tax balances and a net expense for the Transition Tax of $22.9 million.

Reduction in U.S. Corporate Rate: The Tax Act reduces the U.S. Federal statutory corporate tax rate to 24.5% for fiscal 2018 and 21.0% for fiscal 2019 and beyond. We have recorded a provisional adjustment to our net deferred tax balances, with a corresponding discrete net tax benefit of $93.8 million in fiscal 2018. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, the Company continues to gather additional information and perform analysis to complete the accounting within the measurement period.

Transition Tax: The Transition Tax is a fiscal 2018 tax on the previously untaxed accumulated and current earnings and profits (“E&P”) of our foreign subsidiaries. In order to determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional obligation of $22.9 million. However, proposed interpretative guidance has been provided and we are awaiting final interpretative guidance which the IRS and U.S. Treasury have indicated is anticipated by the end of the 2018 calendar year.

GILTI: The Tax Act includes a provision designed to currently tax global intangible low-taxed income starting in fiscal 2019. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act, the application of ASC 740, and are considering available accounting policy alternatives to adopt to either record the U.S. income tax effect of future GILTI inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions. Our accounting policies depend, in part, on analyzing our global income to determine whether we expect a tax liability resulting from the application of this provision, and, if so, whether and when to record related current and deferred income taxes. Whether we intend to recognize deferred tax liabilities related to the GILTI provisions is dependent, in part, on our assessment of the Company's future operating structure. In addition, the Company has reviewed proposed interpretative guidance issued and is awaiting additional interpretative guidance to assess the impact on the computation of the GILTI tax. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments relating to potential GILTI tax in our financial statements and have not made a policy decision regarding our accounting for GILTI.

Following the enactment of the Tax Act, we repatriated $105.2 million from outside the United States in fiscal 2018. We did not record any incremental U.S. taxes on the repatriation and paid related foreign withholding taxes of $0.5 million.

As of September 30, 2017, our practice and intention was to reinvest the earnings in our non-U.S. subsidiaries outside of the U.S., and no U.S. deferred income taxes or foreign withholding taxes were recorded. The Transition Tax noted above will result in the previously untaxed foreign earnings being included in the federal and state fiscal 2018 taxable income. We are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which include local country withholding tax and potential U.S. state taxation. Furthermore, the Transition Tax will close a majority of the outside basis differences in our foreign corporations and any remaining temporary difference will potentially have some interaction with the GILTI tax noted above. Because our analysis is not completed, we are not yet able to reasonably estimate the effect of this provision of the Tax Act and have not recorded any withholding or state tax liabilities, any deferred taxes attributable to GILTI (as noted above) or any deferred taxes attributable to our investment in our foreign subsidiaries.

We are also currently analyzing other provisions of the Tax Act that come into effect for tax years after September 30, 2018 to determine if these items would impact the effective tax rate. These provisions include BEAT, eliminating U.S. Federal income taxes on dividends from foreign subsidiaries, the treatment of amounts in accumulated other comprehensive income, the new provision that could limit the amount of deductible interest expense, the evaluation of the deduction for FDII which could represent an additional tax benefit that offsets the repeal of Domestic Production Activities Deduction, and the limitations on the deductibility of certain executive compensation.