Income Taxes

The components of earnings before income taxes are as follows (in millions):



	Year Ended July 31,
	2019		2018		2017
Earnings before income taxes:
United States	$	127.4	$	103.2	$	109.8
Foreign	247.8		260.4		212.2
Total	$	375.2	$	363.6	$	322.0

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



	Year Ended July 31,
	2019		2018		2017
Income tax provision (benefit):
Current
Federal	$	21.3	$	100.0	$	38.9
State	4.0		5.3		4.3
Foreign	72.5		71.0		56.6
	97.8		176.3		99.8
Deferred
Federal	7.4		6.5		(7.7		)
State	1.4		0.2		(0.4		)
Foreign	1.4		0.3		(2.5		)
	10.2		7.0		(10.6		)
Total	$	108.0	$	183.3	$	89.2

The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:



	Year Ended July 31,
	2019		2018		2017
Statutory U.S. federal rate	21.0	%	26.9	%	35.0	%
State income taxes	1.3	%	0.9	%	0.9	%
Foreign operations	4.7	%	1.7	%	(8.3	)%
Global Intangible Low Tax Income (GILTI)	1.3	%	N/A		N/A
Foreign Derived Intangible Income (FDII)	(1.4	)%	N/A		N/A
Export, manufacturing and research credits	(0.8	)%	(1.0	)%	(1.1	)%
Change in unrecognized tax benefits	(0.8	)%	(0.3	)%	1.0	%
Tax benefits on stock-based compensation	(1.6	)%	(1.2	)%	N/A
Impact of U.S. Tax Cuts and Jobs Act	5.0	%	23.2	%	N/A
Other	0.1	%	0.2	%	0.2	%
Effective income tax rate	28.8	%	50.4	%	27.7	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in millions):



	July 31,
	2019			2018
Deferred tax assets:
Accrued expenses	$	10.1		$	13.2
Compensation and retirement plans	27.9			29.6
NOL and tax credit carryforwards	4.4			7.2
LIFO and inventory reserves	3.0			2.3
Other	4.5			3.6
Gross deferred tax assets	49.9			55.9
Valuation allowance	(4.4		)	(6.2		)
Deferred tax assets, net of valuation allowance	45.5			49.7
Deferred tax liabilities:
Depreciation and amortization	(43.2		)	(33.6		)
Other	(1.4		)	(1.1		)
Deferred tax liabilities	(44.6		)	(34.7		)
Net deferred tax asset	$	0.9		$	15.0

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (TCJA) was enacted into law. The TCJA significantly reforms the Internal Revenue Code of 1986, including but not limited to reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent and moving toward a territorial tax system with a one-time transition tax imposed on previously unremitted foreign earnings and profits. TCJA also added many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on Global Intangible Low-Taxed Income (GILTI), the base-erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII).

The most significant impacts of the enacted legislation for the Company include lowering of the U.S. federal corporate income tax rate, the one-time transition tax imposed on deemed repatriated earnings in fiscal year 2018, and the GILTI and FDII provisions. The U.S. federal tax rate reduction was effective January 1, 2018, and thus the Company’s U.S. federal statutory tax rate was a rate of 21.0 percent for fiscal 2019 and a blended rate 26.9 percent for fiscal 2018. The changes to the interest expense deduction and BEAT did not have an impact on the Company’s fiscal 2019 income tax provision.

Staff Accounting Bulletin 118 (SAB 118) includes additional guidance allowing companies to use a measurement period that should not extend beyond one year from the TCJA enactment date to account for the impacts of the law in their financial statements. The Company completed its accounting for the income tax effects of the TCJA in accordance with SAB 118 during the second quarter of fiscal 2019. As a result, no material measurement period adjustments were made during the six months ended January 31, 2019 from those amounts recorded and disclosed in the Company’s Annual Report on Form 10-K for the year ended July 31, 2018. The Company considers its provisional accounting for the effects of the TCJA as being complete.

The Company’s finalized discrete tax charge for the one-time transition tax on deemed repatriated earnings of its non-U.S. subsidiaries is $111.9 million. For the year ended July 31, 2018, the Company recorded a net discrete charge for this tax of $94.5 million. For the year ended July 31, 2019, the Company recorded additional one-time transition tax charges of $17.2 million due to the issuance of final regulations by the U.S. Department of the Treasury and the Internal Revenue Service, and of $0.3 million in accordance with the SAB 118 measurement period. The transition tax is payable over an eight-year period, and the portion not due within 12 months of July 31, 2019, which the amount is $93.8 million, is classified within non-current income taxes payable in the Consolidated Balance Sheet as of July 31, 2019.

Additionally, for the year ended July 31, 2019 the Company recorded a net tax charge of $1.2 million related to TCJA-based global cash optimization initiatives, consisting of a tax benefit of $2.2 million related to actions taken in fiscal 2019 and a tax charge of $3.4 million due to the issuance of final regulations by the U.S. Department of the Treasury and the Internal Revenue Service.

The Company has made the accounting policy election to treat taxes related to the GILTI provision of the TCJA as a current period expense when incurred.

The TCJA moved toward a territorial tax system through the provision of a 100% dividends received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries. As a result, the Company re-evaluated its indefinite reinvestment assertions with respect to unremitted earnings for certain of its foreign subsidiaries for the year ended July 31, 2018 and concluded that the majority of these earnings are no longer subject to the indefinite reinvestment assertion. As of July 31, 2019, the total undistributed earnings of the Company’s non-U.S. subsidiaries is approximately $1.2 billion, of which approximately $930 million are not considered indefinitely reinvested. The Company has recognized a tax charge of $6.4 million in the current year on these undistributed earnings primarily for foreign withholding taxes on current year earnings. We previously accrued the transition tax and foreign withholding taxes on the prior year earnings not considered indefinitely reinvested in fiscal 2018. The remaining $280 million of earnings are considered indefinitely reinvested, and it is not practicable to estimate, within any reasonable range, the additional taxes that may be payable on the potential distribution of the portion of the undistributed earnings considered indefinitely reinvested.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):



	Year Ended July 31,
	2019			2018			2017
Gross unrecognized tax benefits at beginning of fiscal year	$	18.5		$	18.8		$	15.7
Additions for tax positions of the current year	2.5			4.4			3.9
Additions for tax positions of prior years	0.7			0.2			0.1
Reductions for tax positions of prior years	(4.9		)	(3.1		)	(0.1		)
Settlements	—			(0.4		)	0.3
Reductions due to lapse of applicable statute of limitations	(1.3		)	(1.4		)	(1.1		)
Gross unrecognized tax benefits at end of fiscal year	$	15.5		$	18.5		$	18.8

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended July 31, 2019, the Company recognized interest expense, net of tax benefit, of approximately $0.5 million. At July 31, 2019 and 2018, accrued interest and penalties on a gross basis were $1.6 million and $1.7 million, respectively. If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of approximately five years, up to $1.7 million of the unrecognized tax benefits could potentially expire in the next 12-month period, unless extended by an audit.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2009. On May 29, 2018, as part of its examination of fiscal years 2015 and 2016, the IRS proposed an adjustment related to the Company’s foreign legal entity restructuring which was completed in fiscal 2015. The Company protested the adjustment, and the issue was eventually resolved with no adjustment during the current year at the IRS Appellate level. Thus, the Company’s U.S. federal income tax returns through 2016 are no longer subject to IRS examination.

The Company believes that it is remote that any adjustment necessary to the reserve for income taxes over the next 12-month period will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to our reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.