INCOME TAXES

The provision for income taxes on continuing operations, by tax jurisdiction, consisted of the following for the fiscal years ended June 30:



	2018			2017			2016
Current
Federal	$	177		$	291		$	254
State	34			36			31
Foreign	43			38			45
Total current	254			365			330
Deferred
Federal	(24		)	(29		)	11
State	3			(2		)	1
Foreign	(2		)	(4		)	(7		)
Total deferred	(23		)	(35		)	5
Total	$	231		$	330		$	335

The components of earnings from continuing operations before income taxes, by tax jurisdiction, consisted of the following for the fiscal years ended June 30:



	2018		2017		2016
United States	$	963	$	927	$	900
Foreign	91		106		83
Total	$	1,054	$	1,033	$	983

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate on continuing operations follows for the fiscal years ended June 30:



	2018		2017		2016
Statutory federal tax rate	28.1	%	35.0	%	35.0	%
State taxes (net of federal tax benefits)	2.4		2.2		2.1
Tax differential on foreign earnings	1.2		(0.6	)	0.5
Federal domestic manufacturing deduction	(1.8	)	(2.6	)	(2.4	)
Change in valuation allowance	0.3		0.2		0.5
Federal excess tax benefits	(1.7	)	(2.0	)	—
Reversals of deferred taxes related to foreign unremitted earnings	(2.6	)	—		—
Remeasurement of deferred taxes	(3.1	)	—		—
Other differences	(1.0	)	(0.3	)	(1.6	)
Effective tax rate	21.8	%	31.9	%	34.1	%

The Tax Act was signed into law by the President of the United States on December 22, 2017. The Tax Act makes significant changes to U.S. tax law, and includes a reduction of U.S. corporation statutory income tax rates from 35% to 21% effective January 1, 2018. Under the Tax Act, the Company is subject to an average federal statutory tax rate of 28.1% for its fiscal year ended June 30, 2018. The Company’s federal statutory tax rate will be 21.0% beginning in July 2018 for the fiscal year ending June 30, 2019. The Tax Act also includes, among other things, a one-time transition tax on accumulated foreign earnings and the adoption of a modified territorial approach to the taxation of future foreign earnings.

As of June 30, 2018, the Company continued to obtain, prepare and analyze information necessary to finalize the accounting for the impacts of the Tax Act. Consequently, reasonable estimates of the impacts of the Tax Act on the Company’s deferred tax balances and one-time transition tax have been reported as provisional, as defined in Staff Accounting Bulletin No. 118 and Accounting Standards Update No. 2018-05.

Under U.S. GAAP, deferred taxes must be adjusted for enacted changes in tax laws or rates during the period in which new tax legislation is enacted. Based on the provisions of the Tax Act, the Company provisionally remeasured its net deferred tax liabilities to incorporate the future lower corporate tax rate, resulting in a $33 reduction to net deferred tax liabilities in the second quarter of fiscal year 2018 (period of the Tax Act's enactment). In addition, remeasurements specifically related to the reversal of deferred tax liabilities for U.S. tax on foreign unremitted earnings, related deferred foreign tax credits and related unrealized foreign exchange gains and losses reduced the Company’s net deferred tax liability by a provisional amount of $27. The total provisional amounts related to the remeasurement of the Company’s deferred tax balances resulted in a $60 beneficial impact in the period of the Tax Act's enactment.

The Tax Act also includes a one-time transition tax on accumulated foreign earnings and the adoption of a modified territorial approach to the taxation of future foreign earnings. A provisional, one-time transition tax expense on accumulated foreign earnings, net of applicable foreign tax credits, of $7 was recognized in the Company’s provision for income taxes in the period of the Tax Act's enactment. This amount may change as the Company finalizes the calculation of post-1986 foreign earnings and profits previously deferred from U.S. federal taxation and the amounts held in cash or other specified assets. This amount may also change as new guidance and clarifications are issued by the Internal Revenue Service. The Company anticipates that it will be able to utilize existing foreign tax credit carryforwards to fully offset its one-time transition tax liability.

The impact recognized in the period of the Tax Act's enactment also included a provisional $28 benefit related to current year taxable income. Taken together, total benefits of $81 were recorded in the period of the Tax Act's enactment and were due to several provisional adjustments including net deferred tax liability reductions of $60, a beneficial current taxable income impact of $28 and a provisional one-time transition tax of $7. Measurement adjustments to the provisional amounts were not significant for the third and fourth quarters of fiscal year 2018.

Per U.S. GAAP, foreign withholding taxes are provided on unremitted foreign earnings that are not indefinitely reinvested at the time the earnings are generated. The Company regularly reviews and assesses whether there are any changes to its indefinite reinvestment assertion. Through the second quarter of fiscal year 2018, the Company had determined that the undistributed earnings of a number of its foreign subsidiaries were indefinitely reinvested. When the Tax Act was passed into law in December 2017, it significantly reduced the cost of U.S. repatriation. In the third quarter of fiscal year 2018, the Company concluded an analysis wherein it determined that none of the undistributed earnings of its foreign subsidiaries were indefinitely reinvested. As a result, the Company is providing foreign withholding taxes on the undistributed earnings of all foreign subsidiaries where applicable. These withholding taxes had no significant impact on the Company’s consolidated results.

Beginning with the adoption of ASU 2016-09 in the first quarter of fiscal year 2017 (See Note 1), excess tax benefits resulting from stock-based payment arrangements are recognized as income tax benefits in the consolidated statements of earnings. Prior to this adoption, such excess tax benefits were recorded as increases to Additional paid-in capital. Excess tax benefits of approximately $19 and $22 were realized and recorded to Income tax expense for fiscal years 2018 and 2017, respectively. Excess tax benefits of $51 were realized and recorded to Additional paid-in capital for fiscal year 2016.

The components of net deferred tax assets (liabilities) as of June 30 are shown below:



	2018			2017
Deferred tax assets
Compensation and benefit programs	$	103		$	182
Net operating loss and tax credit carryforwards	86			52
Accruals and reserves	28			41
Basis difference related to Venture Agreement	19			30
Inventory costs	16			25
Other	25			54
Subtotal	277			384
Valuation allowance	(43		)	(40		)
Total deferred tax assets	234			344
Deferred tax liabilities
Fixed and intangible assets	(232		)	(311		)
Low-income housing partnerships	(17		)	(25		)
Unremitted foreign earnings	—			(7		)
Other	(19		)	(24		)
Total deferred tax liabilities	(268		)	(367		)
Net deferred tax assets (liabilities)	$	(34	)	$	(23	)

The Company reviews its deferred tax assets for recoverability on a quarterly basis. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. Details of the valuation allowance were as follows as of June 30:



	2018			2017
Valuation allowance at beginning of year	$	(40	)	$	(37	)
Net decrease/(increase) for other foreign deferred tax assets	—			—
Net decrease/(increase) for foreign net operating loss carryforwards and tax credits	(3		)	(3		)
Valuation allowance at end of year	$	(43	)	$	(40	)

As of June 30, 2018, the Company had foreign tax credit carryforwards of $27 for U.S. income tax purposes with expiration dates between fiscal years 2024 and 2028. Tax credit carryforwards in foreign jurisdictions of $23 have expiration dates in fiscal years 2019 and 2020. Tax credit carryforwards in foreign jurisdictions of $1 can be carried forward indefinitely. Tax benefits from foreign net operating loss carryforwards of $25 have expiration dates between fiscal years 2019 and 2035. Tax benefits from foreign net operating loss carryforwards of $11 can be carried forward indefinitely.

The Company files income tax returns in the U.S. federal and various state, local and foreign jurisdictions. The federal statute of limitations has expired for all tax years through June 30, 2014. Various income tax returns in state and foreign jurisdictions are currently in the process of examination.

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of June 30, 2018 and 2017, the total balance of accrued interest and penalties related to uncertain tax positions was $5 and $3, respectively. Interest and penalties related to uncertain tax positions included in income tax expense resulted in a net expense of $1 in fiscal year 2018 and a net benefit of $1 in fiscal years 2017 and 2016.

The following is a reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax benefits:



	2018			2017			2016
Unrecognized tax benefits at beginning of year	$	40		$	37		$	38
Gross increases - tax positions in prior periods	2			1			3
Gross decreases - tax positions in prior periods	(1		)	(6		)	(3		)
Gross increases - current period tax positions	8			9			8
Gross decreases - current period tax positions	—			—			—
Lapse of applicable statute of limitations	(2		)	(1		)	(4		)
Settlements	—			—			(5		)
Unrecognized tax benefits at end of year	$	47		$	40		$	37

Included in the balance of unrecognized tax benefits as of June 30, 2018, 2017 and 2016, were potential benefits of $33, $28 and $27, respectively, which if recognized, would affect the effective tax rate. Recognition of these previously disclosed tax benefits had no impact on the Company’s cash flow or earnings from continuing operations for each of the fiscal years ended June 30, 2018, 2017 and 2016. Unrecognized tax benefits are not expected to significantly increase or decrease within the next 12 months.