Income Taxes

In December 2017, an Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Act”) was enacted. The Act includes provisions that reduce the federal statutory income tax rate from 35 percent to 21 percent, create a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and change certain business deductions including allowing for immediate expensing of certain qualified capital expenditures and limitation on deductions of interest expense. Given the Company’s fiscal year ends on June 30, the lower U.S. statutory federal income tax rate is a blended U.S. federal statutory rate of 28.1 percent for our fiscal year ending June 30, 2018.

Income before income taxes for the Company’s domestic and foreign operations was as follows:



	Years Ended June 30,
($ in millions)	2018		2017		2016
Domestic	$	140.3	$	56.0	$	17.3
Foreign	19.9		14.2		4.2
Income before income taxes	$	160.2	$	70.2	$	21.5

The (benefit) provision for income taxes from continuing operations consisted of the following:



	Years Ended June 30,
($ in millions)	2018			2017			2016
Current:
Federal	$	22.6		$	(24.5	)	$	4.7
State	3.5			(1.1		)	0.4
Foreign	6.7			7.2			4.3
Total current	32.8			(18.4		)	9.4
Deferred:
Federal	(66.0		)	38.7			0.1
State	4.8			3.5			0.5
Foreign	0.1			(0.6		)	0.2
Total deferred	(61.1		)	41.6			0.8
Total income tax (benefit) expense	$	(28.3	)	$	23.2		$	10.2

The following is a reconciliation of income taxes computed at the U.S. Federal income tax rate to the Company’s effective income tax rates:



	Years Ended June 30,
(% of pre-tax income)	2018		2017		2016
Statutory federal income tax rate	28.1	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	2.6		2.0		2.2
Foreign tax rate differential	(0.1	)	(1.5	)	5.5
Domestic manufacturing deduction	(1.5	)	(3.0	)	(7.0	)
Research and development tax credit	(1.4	)	(3.9	)	(8.4	)
Law changes	0.1		0.9		(3.8	)
Increases in valuation allowances	0.8		1.1		2.1
Adjustments of prior years' income taxes	0.2		3.3		1.3
Unremitted earnings of foreign subsidiaries	(0.2	)	(1.2	)	12.7
Non-deductible goodwill impairment	—		—		5.1
Re-measurement of U.S. deferred taxes	(49.3	)	—		—
Transition tax on foreign earnings	3.1		—		—
Other, net	(0.1	)	0.3		2.7
Effective income tax rate	(17.7	)%	33.0	%	47.4	%

Deferred taxes are recorded for temporary differences between the carrying amounts of assets and liabilities and their tax bases. In connection with the Act, during fiscal year 2018 the Company recorded a provisional net benefit of $78.9 million for the re-measurement of deferred tax assets and liabilities at the lower U.S. federal tax rate. Although the Company believes the net benefit recorded is a reasonable estimate of the deferred tax impact of the Act, the re-measurement of deferred tax assets and liabilities at the lower federal corporate income tax rate is provisional until such time that the underlying temporary differences are known rather than estimated. The significant components of deferred tax assets and liabilities that are recorded in the consolidated balance sheets are summarized in the table below.



	June 30,
($ in millions)	2018			2017
Deferred tax assets:
Pensions	$	66.8		$	139.8
Postretirement provisions	33.7			54.4
Net operating loss carryforwards	26.5			23.1
Derivatives and hedging activities	—			2.4
Other	29.4			44.8
Gross deferred tax assets	156.4			264.5
Valuation allowances	(23.9		)	(18.5		)
Total deferred tax assets	132.5			246.0
Deferred tax liabilities:
Depreciation	(235.2		)	(347.5		)
Intangible assets	(11.9		)	(19.4		)
Inventories	(30.5		)	(50.1		)
Derivatives and hedging activities	(8.7		)	—
Other	(3.5		)	(6.2		)
Total deferred tax liabilities	(289.8		)	(423.2		)
Deferred tax liabilities, net	$	(157.3	)	$	(177.2	)

A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. As of June 30, 2018, the Company had state net operating loss carryforwards of $339.9 million expiring between 2019 and 2038. A significant portion of the state net operating loss carryforwards are subject to an annual limitation that under current law is likely to limit future tax benefits to approximately $3 million. Valuation allowances increased by $5.4 million during fiscal year 2018 primarily due to the re-measurement of deferred tax assets and corresponding valuation allowances due to the Act as well as the impact of a state tax law change that will limit the Company's ability to utilize the state net operating loss carryforwards in future years.

Prior to the Act, undistributed earnings of foreign subsidiaries, totaling $93.8 million were considered permanently reinvested. Upon enactment of the provisions of the Act, the Company recorded a $5.0 million accrual for the anticipated one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax). The Company is still in the process of evaluating our assertion for indefinite reinvestment. The amounts recorded for the transition tax are provisional due to various components of the computation not yet finalized as of June 30, 2018, including the following significant items: (i.) the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of June 30, 2018, (ii.) the interpretation and identification of cash positions as of June 30, 2018, and (iii.) computations of accumulated earnings and profits balances as of November 2, 2017 and December 31, 2017. Under the Act, the transition tax will be paid over an eight year period beginning in fiscal year 2019.

The Act also established new tax provisions that become effective in future periods, including but not limited to eliminating the corporate alternative minimum tax, creating the base erosion anti-abuse tax (“BEAT”), establishing new limitations on deductible interest expense and certain executive compensation, creating a new provision designed to tax global intangible low-tax income (“GILTI”) and generally eliminating U.S. Federal income taxes on dividends from foreign subsidiaries.

Regarding the new GILTI tax rules, which apply to fiscal years beginning after December 31, 2017, an accounting policy election must be made to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred or reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in the Company’s current measurement of deferred taxes. The Company’s analysis of the new GILTI rules and its impacts is currently incomplete. Accordingly, the Company has not yet made a policy election regarding the treatment of the GILTI tax.

The Company does not have unrecognized tax benefits as of June 30, 2018, 2017 and 2016. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as of a component of income tax expense.

All years prior to fiscal year 2013 have been settled with the Internal Revenue Service and with most significant state, local and foreign tax jurisdictions.