Income Taxes
The components of earnings before income taxes are as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Earnings before income taxes: | | | | | | |
United States | | $ | 109.8 |
| | $ | 90.7 |
| | $ | 92.4 |
|
Foreign | | 212.2 |
| | 166.7 |
| | 196.2 |
|
Total | | $ | 322.0 |
| | $ | 257.4 |
| | $ | 288.6 |
|
The components of the provision for income taxes are as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Income tax provision (benefit): | | | | | | |
Current | | | | | | |
Federal | | $ | 38.9 |
| | $ | 19.9 |
| | $ | 28.5 |
|
State | | 4.3 |
| | 3.1 |
| | 2.9 |
|
Foreign | | 56.6 |
| | 46.9 |
| | 54.7 |
|
| | 99.8 |
| | 69.9 |
| | 86.1 |
|
Deferred | | | | | | |
Federal | | (7.7 | ) | | (0.3 | ) | | (4.2 | ) |
State | | (0.4 | ) | | (0.2 | ) | | 0.1 |
|
Foreign | | (2.5 | ) | | (2.8 | ) | | (1.5 | ) |
| | (10.6 | ) | | (3.3 | ) | | (5.6 | ) |
Total | | $ | 89.2 |
| | $ | 66.6 |
| | $ | 80.5 |
|
The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:
|
| | | | | | | | | |
| | Year Ended July 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Statutory U.S. federal rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes | | 0.9 | % | | 0.8 | % | | 0.9 | % |
Foreign operations | | (8.3 | )% | | (8.1 | )% | | (7.9 | )% |
Export, manufacturing and research credits | | (1.1 | )% | | (1.6 | )% | | (1.1 | )% |
Change in unrecognized tax benefits | | 1.0 | % | | (1.0 | )% | | 1.3 | % |
Other | | 0.2 | % | | 0.8 | % | | (0.3 | )% |
Effective income tax rate | | 27.7 | % | | 25.9 | % | | 27.9 | % |
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in millions):
|
| | | | | | | | |
| | July 31, |
| | 2017 |
| | 2016 |
|
Deferred tax assets: | | | | |
Accrued expenses | | $ | 16.5 |
| | $ | 12.1 |
|
Compensation and retirement plans | | 56.2 |
| | 59.5 |
|
NOL and tax credit carryforwards | | 8.5 |
| | 6.5 |
|
LIFO and inventory reserves | | 3.0 |
| | 5.4 |
|
Other | | 6.9 |
| | 4.0 |
|
Gross deferred tax assets | | 91.1 |
| | 87.5 |
|
Valuation allowance | | (5.2 | ) | | (3.3 | ) |
Net deferred tax assets | | 85.9 |
| | 84.2 |
|
Deferred tax liabilities: | | | | |
Depreciation and amortization | | (58.8 | ) | | (57.5 | ) |
Other | | (0.4 | ) | | (1.2 | ) |
Deferred tax liabilities | | (59.2 | ) | | (58.7 | ) |
Net tax asset | | $ | 26.7 |
| | $ | 25.5 |
|
The Company has not provided for U.S. income taxes on undistributed earnings of its non-U.S. subsidiaries of approximately $1.1 billion. The Company currently intends to indefinitely reinvest these undistributed earnings as there are significant investment opportunities outside the U.S. If any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable. In fiscal 2017, the Company repatriated $67.1 million of cash held by its foreign subsidiaries in the form of a cash dividend, which represented total planned dividends for the current year and which consisted entirely of current year earnings.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
|
| | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Gross unrecognized tax benefits at beginning of fiscal year | | $ | 15.7 |
| | $ | 18.2 |
| | $ | 15.0 |
|
Additions for tax positions of the current year | | 3.9 |
| | 3.4 |
| | 4.7 |
|
Additions for tax positions of prior years | | 0.1 |
| | 0.1 |
| | 0.1 |
|
Reductions for tax positions of prior years | | (0.1 | ) | | (4.9 | ) | | (0.6 | ) |
Settlements | | 0.3 |
| | (0.1 | ) | | — |
|
Reductions due to lapse of applicable statute of limitations | | (1.1 | ) | | (1.0 | ) | | (1.0 | ) |
Gross unrecognized tax benefits at end of fiscal year | | $ | 18.8 |
| | $ | 15.7 |
| | $ | 18.2 |
|
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended July 31, 2017, the Company recognized interest expense, net of tax benefit, of approximately $0.4 million. At July 31, 2017 and 2016, accrued interest and penalties on a gross basis were $2.3 million and $1.8 million, respectively.
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 2008. The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2013. Currently, the Company is under examination by the IRS for fiscal years 2015 and 2016, and while there are not any significant adjustments proposed, the overall examination is still ongoing. At this time, the Company has not received direct information on any matters for which the Company does not believe it is already adequately reserved or for which it believes its tax positions are not supportable.
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 5 years, up to $2.6 million of the unrecognized tax benefits could potentially expire in the next 12-month period, unless extended by audit. It is possible that quicker-than-expected settlement of either current or future audits and disputes would cause additional reversals of previously recorded reserves in the next 12-month period. Quantification of an estimated range and timing of future audit settlements cannot be made at this time.