Income Taxes

12 Months Ended

Mar. 31, 2020

The provision for income taxes consists of amounts for taxes currently payable, amounts for tax items deferred to future periods; as well as, adjustments relating to the Company’s determination of uncertain tax positions, including interest and penalties. The Company recognizes deferred tax assets and liabilities based on the future tax consequences attributable to tax net operating loss (“NOL”) carryforwards capital loss carryforwards, tax credit carryforwards and differences between the financial statement carrying amounts and the tax bases of applicable assets and liabilities. Deferred tax assets are regularly reviewed for recoverability and valuation allowances are established based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, the Company established a full valuation allowance against U.S. federal and state capital loss carryforwards, as well as certain state tax credit carryforwards, and continues to maintain a partial valuation allowance against certain foreign NOL carryforwards and other related foreign deferred tax assets, as well as certain U.S. state NOL carryforwards.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Reform”). U.S. Tax Reform incorporated significant changes to U.S. corporate income tax laws including, among other items, a reduction in the statutory federal corporate income tax rate from 35% to 21%, an exemption for dividends received from certain foreign subsidiaries, a one-time repatriation tax on deemed repatriated earnings from foreign subsidiaries, immediate taxation of deemed low-taxed

“intangible” income earned in foreign jurisdictions (referred to as global intangible low-taxed income or “GILTI”), immediate expensing of certain depreciable tangible assets, limitations on the deduction for net interest expense and certain executive compensation and the repeal of the Domestic Production Activities Deduction (“DPAD”).

In acknowledgment of the substantial and substantive changes incorporated in U.S. Tax Reform, in conjunction with the timing of the enactment being just weeks before the majority of the provisions became effective, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118 to provide certain guidance in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a measurement period (similar to that used when accounting for business combinations) within which to finalize and reflect such final effects associated with U.S. Tax Reform. Further, SAB 118 summarized a three-step approach to be applied each reporting period within the overall measurement period: (1) amounts should be reflected in the period including the date of enactment for those items which are deemed to be complete (i.e. all information is available and appropriately analyzed to determine the applicable financial statement impact), (2) to the extent the effects of certain changes due to U.S. Tax Reform for which the accounting is not deemed complete but for which a reasonable estimate can be determined, such provisional amount(s) should be reflected in the period so determined and adjusted in subsequent periods as such effects are finalized and (3) to the extent a reasonable estimate cannot be determined for a specific effect of the tax law change associated with U.S. Tax Reform, no provisional amount should be recorded but rather, continue to apply ASC 740, based upon the tax law in effect prior to the enactment of U.S. Tax Reform. Such measurement period is deemed to end when all necessary information has been obtained, prepared and analyzed such that a final accounting determination can be concluded, but in no event should the period extend beyond one year.

In consideration of this guidance, the Company obtained, prepared and analyzed various information associated with the enactment of U.S. Tax Reform (including subsequent Internal Revenue Service (“IRS”) Notices, etc.). Based upon this review, the Company recognized an estimated net income tax benefit with respect to U.S. Tax Reform for fiscal 2018 of $66.5 million (including amounts relating to the VAG business). This net income tax benefit reflects a $66.5 million net estimated income tax benefit associated with the remeasurement of the Company’s net U.S. deferred tax liability (including consideration of executive compensation limitations under U.S. Tax Reform), with no net tax impact associated with the one-time repatriation tax. Due to the timing and complexity of the various technical provisions provided for under U.S. Tax Reform, the financial statement impacts recorded for fiscal 2018 relating to U.S. Tax Reform were not deemed to be complete but rather were deemed to be reasonable, provisional estimates based upon the current available information and related interpretations. For example, the Company was required to use estimates for earnings and profits and taxes in conjunction with determining the impact of the one-time repatriation tax. In addition, in relation to the remeasurement of the Company’s net U.S. deferred tax liability (as well as numerous other aspects of U.S. Tax Reform), the Company had to use judgment based upon available guidance and interpretations of such guidance at that time. Future guidance could result in changes to the Company’s interpretation, and as such, result in changes to previously recorded amounts. Such changes were required to be reflected as discrete items in the applicable period. The Company had continued to review and analyze various IRS Notices, proposed regulations and other pertinent information that became available during fiscal 2019. Based upon that review and analysis as well as updates to certain financial information, the Company had determined the net impact of U.S. Tax Reform for fiscal 2018 to be a net income tax benefit of $65.9 million. The $0.6 million reduction from the $66.5 million net income tax benefit originally recorded in fiscal 2018 was recorded as a discrete item in the third quarter of fiscal 2019. This reduction consisted of a $0.8 million adjustment to the Company’s net U.S. deferred tax liability as of March 31, 2018, partially offset with a $0.2 million net income tax benefit associated with the one-time repatriation tax. The Company determined the adjusted net tax benefit recorded for U.S. Tax Reform to be complete as of December 31, 2018.

In addition, the Company had been evaluating the potential impact of the GILTI provisions of U.S. Tax Reform. In accordance with U.S. GAAP, any potential impacts of GILTI can either be treated as a period expense in the period incurred or considered in the determination of the Company’s deferred tax balances. The Company had not initially finalized its accounting policy for GILTI, and upon further analysis, including consideration of proposed regulations relating to the GILTI tax provisions and potential future changes to the Company’s existing legal structure, the Company had made the final accounting policy decision to report this item as a period expense in the year the tax is incurred. Although none of the Company’s material foreign subsidiaries operate within tax jurisdictions that would otherwise meet the definition of “low-taxed” as outlined in the GILTI tax rules, the Company is nevertheless subject to the GILTI tax as a result of one particular aspect of the U.S. foreign income tax credit limitation rules requiring the allocation of U.S. interest expense against GILTI. Such allocation effectively results in the allocated interest expense being non-deductible for U.S. federal income tax purposes. Were it not for this specific requirement, the Company would generally not recognize a significant GILTI tax liability.

Income Tax Provision (Benefit)

The components of the provision (benefit) for income taxes are as follows (in millions):


	Year ended March 31,
	2020		2019		2018
Current:
United States	$	31.3	$	55.7	$	29.9
Non-United States	18.6		21.6		23.1
State and local	5.8		8.0		4.1
Total current	55.7		85.3		57.1
Deferred:
United States	1.0		(23.0)		(71.5)
Non-United States	(3.3)		(5.2)		(3.1)
State and local	0.7		(3.7)		(2.0)
Total deferred	(1.6)		(31.9)		(76.6)
Provision (benefit) for income taxes	$	54.1	$	53.4	$	(19.5)

The provision (benefit) for income taxes differs from the United States statutory income tax rate due to the following items (in millions):


	Year ended March 31,
	2020		2019		2018
Provision for income taxes at U.S. federal statutory income tax rate	$	49.6	$	50.1	$	59.0
State and local income taxes, net of federal benefit	5.2		5.3		2.9
Net effects of foreign rate differential	2.6		1.8		(2.6)
Net effects of foreign operations	2.6		1.6		(7.4)
Net effect to deferred taxes for changes in tax rates	(1.1)		(2.6)		(0.3)
Net effect to deferred taxes for U.S. Tax Reform	—		0.8		(67.1)
Net effect of U.S. Tax Reform transition tax	—		(0.1)		0.2
Net effects of GILTI inclusion	6.4		6.5		—
Foreign derived intangible income deduction	(1.9)		(1.8)		—
Unrecognized tax benefits, net of federal benefit	(6.8)		(7.0)		1.1
Domestic production activities deduction	—		—		(3.2)
Research and development credit	(1.2)		(0.9)		(0.9)
Excess tax benefits related to equity compensation	(4.4)		(1.1)		(0.5)
§162(m) compensation limitation	2.7		1.9		1.0
Net changes in valuation allowance	—		(2.3)		(2.8)
Other	0.4		1.2		1.1
Provision (benefit) for income taxes	$	54.1	$	53.4	$	(19.5)

The provision (benefit) for income taxes was calculated based upon the following components of income from continuing operations before income taxes (in millions):


	Year ended March 31,
	2020		2019		2018
United States	$	159.1	$	174.8	$	117.1
Non-United States	77.2		64.0		70.0
Income before income taxes	$	236.3	$	238.8	$	187.1

Deferred Income Tax Assets and Liabilities

Deferred income taxes consist of the tax effects of the following temporary differences (in millions):


	March 31, 2020		March 31, 2019
Deferred tax assets:
Compensation and retirement benefits	$	63.5	$	55.7
General accruals and reserves	8.7		9.8
Lease liabilities	27.7		—
State tax net operating loss and credit carryforwards	22.5		21.9
Federal and state capital loss carryforwards	18.2		12.7
Foreign net operating loss and interest carryforwards	5.2		6.7
Other	—		0.3
Total deferred tax assets before valuation allowance	145.8		107.1
Valuation allowance	(39.4)		(32.4)
Total deferred tax assets	106.4		74.7
Deferred tax liabilities:
Property, plant and equipment	33.8		32.6
Lease ROU assets	26.2		—
Inventories	21.6		15.4
Intangible assets and goodwill	131.2		137.9
Other	1.0		—

Total deferred tax liabilities	213.8		185.9
Net deferred tax liabilities	$	107.4	$	111.2

Net amount on Consolidated Balance Sheets consists of:
Other assets	$	13.6	$	14.7
Deferred income taxes	(121.0)		(125.9)
Net long-term deferred tax liabilities	$	(107.4)	$	(111.2)

Management has reviewed its deferred tax assets and has analyzed the uncertainty with respect to ultimately realizing the related tax benefits associated with such assets. Based upon this analysis, management has determined that a valuation allowance should be established for the federal and state capital loss carryforwards, state credit carryforwards, certain foreign NOL carryforwards and related deferred tax assets, as well as certain state NOL carryforwards as of March 31, 2020. Significant factors considered by management in this determination included the historical operating results of the Company, as well as anticipated reversals of future taxable temporary differences. The increase in the valuation allowance presented above was generally due to the finalization of the federal and state capital loss carryforwards resulting from the sale of the VAG business, which management has deemed the realization of such assets as not being more-likely-than-not. Capital losses may generally only be used to offset available capital gains. Federal capital losses are allowed to be carried back three years and carried forward for five. The Company does not have any capital gains in the carryback period with which to offset any portion of the capital loss. States generally follow federal law with respect to capital losses; however, those that do have a modification, such modification (in most cases) is to deny any carryback period. The carryforward periods for the state NOLs range from five to twenty years. The state credit carryforwards expire over a period of ten years. The majority of the foreign NOL carryforwards are generally subject to an indefinite expiration period, with the remaining being subject to either a five, nine or twenty year expiration period.

At March 31, 2020, the Company had approximately $464.1 million of state NOL carryforwards, expiring over various years ending through March 31, 2034. The Company has a valuation allowance of $17.6 million recorded against the related deferred tax asset. In addition, at March 31, 2020, the Company had approximately $26.0 million of foreign NOL carryforwards in which the majority of these losses can be carried forward indefinitely. There exists a valuation allowance of $2.2 million against the foreign NOL carryforwards as well as certain related deferred tax assets.

The Company previously considered the earnings in all of its foreign subsidiaries as permanently reinvested; and as such, had not recorded deferred income taxes with respect to such earnings. However, in consideration of the current economic environment due to COVID-19 and in light of favorable changes incorporated in U.S. Tax Reform with respect to repatriation of foreign earnings, the Company has determined effective as of the fourth quarter ending March 31, 2020 that certain unremitted earnings of approximately $44.4 million existing in Germany, Italy, the Netherlands and the United Kingdom are no longer permanently reinvested. As a result of U.S. Tax Reform, unremitted earnings can generally be remitted to the U.S. without incurring additional U.S. federal income taxation. In addition, earnings repatriated from the jurisdictions noted above,

based upon our current legal structure, can generally be repatriated without incurring any withholding tax liability. Accordingly, the Company has determined that the deferred tax liability associated with the repatriation of the undistributed earnings from the applicable subsidiaries located in these tax jurisdictions would be minimal, if any. No provision has been made for United States federal income taxes related to approximately $98.8 million of the remaining undistributed earnings of foreign subsidiaries considered to be permanently reinvested. Due to U.S. Tax Reform, the additional income tax liability that would result if such earnings were repatriated to the U.S., other than potential out-of-pocket withholding taxes of approximately $5.5 million, would not be expected to be significant to the Company’s consolidated financial statements.

The Company’s total liability for net accrued income taxes as of March 31, 2020 and 2019 was $6.5 million and $17.0 million, respectively. This net amount was presented in the consolidated balance sheets as Income taxes payable (separately disclosed in Other current liabilities) of $9.9 million and $20.3 million as of March 31, 2020 and 2019, respectively; and as Income taxes receivable presented in Other current assets in the consolidated balance sheets of $3.4 million and $3.3 million as of March 31, 2020 and 2019, respectively. Net cash paid for income taxes to governmental tax authorities for the years ended March 31, 2020, 2019 and 2018 was $72.5 million, $64.7 million and $59.4 million, respectively.

Liability for Unrecognized Tax Benefits

The Company's total liability for net unrecognized tax benefits as of March 31, 2020 and March 31, 2019 was $14.8 million and $21.8 million, respectively.

The following table represents a reconciliation of the beginning and ending amount of the gross unrecognized tax benefits, excluding interest and penalties, for the fiscal years ended March 31, 2020 and March 31, 2019 (in millions):


	Year Ended March 31,
	2020		2019
Balance at beginning of period	$	18.3	$	15.6
Additions based on tax positions related to the current year	1.5		7.7
Additions for tax positions of prior years	—		4.7
Reductions for tax positions of prior years	—		—
Settlements	(1.4)		(2.3)
Reductions due to lapse of applicable statute of limitations	(4.5)		(7.1)
Cumulative translation adjustment	(0.3)		(0.3)
Balance at end of period	$	13.6	$	18.3

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2020 and March 31, 2019, the total amount of unrecognized tax benefits includes $1.5 million and $4.3 million of gross accrued interest and penalties, respectively. The amount of interest and penalties recorded as income tax (benefit) expense during the fiscal years ended March 31, 2020, 2019, and 2018 was $(1.2) million, $(1.0) million, and $1.0 million, respectively.

The Company conducts business in multiple locations within and outside the U.S. Consequently, the Company is subject to periodic income tax examinations by domestic and foreign income tax authorities. Currently, the Company is undergoing routine, periodic income tax examinations in both domestic and foreign jurisdictions. The Company is currently undergoing an income tax examination by the IRS of the Company’s U.S. consolidated federal income tax returns for the tax years ended March 31, 2016 and 2017. During the fourth quarter of fiscal 2020, the German tax authorities concluded an examination of the corporate income and trade tax returns for the Company’s CENTA German subsidiary for the tax years ended December 31, 2014 through December 31, 2017. The conclusion of the tax examination resulted in additional tax liabilities of approximately $1.7 million, all of which is subject to indemnification under the terms of the applicable purchase agreement or otherwise appropriately accrued in the financial statements. Also during the fourth quarter of fiscal 2020, the Italian tax authorities began conducting an income tax examination of one of the Company’s Italian subsidiary’s income tax returns for the tax year ended March 31, 2018. In addition, certain of the Company’s German subsidiaries were notified by the German tax authorities of their intention to conduct an income tax examination of such subsidiaries’ German corporate income and trade tax returns for the tax years or period ended March 31, 2015 through March 31, 2018. The Company anticipates the related fieldwork will begin during the quarter ending September 30, 2020. In addition, in accordance with the terms of the VAG sale agreement, the Company is required to indemnify the purchaser for any future income tax liabilities associated with all open tax years ending prior to, and including, the short period ended on the date of the Company's sale of VAG. VAG was notified by the German tax authorities of its intention to conduct an income tax examination of the VAG German entities’ corporate income and trade tax returns for the tax years ended March 31, 2014 through 2019. The Company anticipates the related fieldwork will begin during the quarter ending December 31, 2020. During the second quarter of fiscal 2019, the IRS completed an income tax examination of the Company’s amended U.S. consolidated federal income tax return for the tax year ended March 31, 2015 and the Company paid approximately $0.4 million upon conclusion of such examination. It appears reasonably possible that the amounts of unrecognized income tax benefits could change in the next twelve months upon

conclusion of the Company’s current ongoing examinations; however, any potential payments of income tax, interest and penalties are not expected to be significant to the Company's consolidated financial statements. With certain exceptions, the Company is no longer subject to U.S. federal income tax examinations for tax years ending prior to March 31, 2016, state and local income tax examinations for years ending prior to fiscal 2016 or significant foreign income tax examinations for years ending prior to fiscal 2015.