Income Taxes

Income (loss) from continuing operations before income taxes was as follows for the years ended August 31 (in thousands):



	2013			2012			2011
United States	$	(196,289	)	$	54,304		$	171,329
Foreign	(141,160		)	(11,348		)	9,476
Total	$	(337,449	)	$	42,956		$	180,805

Income tax expense (benefit) from continuing operations consisted of the following for the years ended August 31 (in thousands):



	2013			2012			2011
Current:
Federal	$	556		$	5,267		$	33,499
State	356			453			2,583
Foreign	764			(2		)	82
Total current tax expense (benefit)	$	1,676		$	5,718		$	36,164
Deferred:
Federal	$	(58,194	)	$	13,166		$	19,164
State	(264		)	(2,748		)	383
Foreign	(644		)	(2,097		)	1,457
Total deferred tax expense (benefit)	(59,102		)	8,321			21,004
Total income tax expense (benefit)	$	(57,426	)	$	14,039		$	57,168

A reconciliation of the difference between the federal statutory rate and the Company’s effective tax rate for the years ended August 31 is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of credits	1.2		(5.7	)	0.7
Foreign income taxed at different rates	(3.5	)	4.2		(0.6	)
Section 199 deduction	0.5		(0.3	)	(1.0	)
Non-deductible officers’ compensation	(0.1	)	1.5		0.3
Noncontrolling interests	0.2		(2.2	)	(1.0	)
Research and development credits	0.2		(2.0	)	(0.5	)
Valuation allowance on deferred tax assets	(8.6	)	—		—
Non-deductible goodwill	(7.1	)	—		—
Foreign interest income	—		0.7		—
Other	(0.8	)	1.5		(1.3	)
Effective tax rate	17.0	%	32.7	%	31.6	%

In fiscal 2013, the effective tax rate differed from the U.S. federal statutory rate of 35% primarily due to the recognition of a valuation allowance of $29 million on deferred tax assets mainly related to a foreign subsidiary, the impact of the non-deductible portion of the goodwill impairment charge and the impact of the foreign tax rate differential on operating losses recorded by our foreign subsidiaries. The deferred tax assets at the foreign subsidiary for which a valuation allowance was recorded were related primarily to deductible temporary differences created in fiscal 2013 by the impairment charge of goodwill and by net operating losses at the subsidiary. The valuation allowance was recognized as a result of negative evidence, including recent losses at the subsidiary, outweighing the more subjective positive evidence, indicating that it is more likely than not that the associated tax benefit will not be realized. Realization of the foreign subsidiary’s deferred tax assets is dependent upon the Company generating a consistent trend of profitability to objectively forecast sufficient taxable income in the foreign tax jurisdiction in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses. Management believes that it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of valuation allowances, as of August 31, 2013.

In fiscal 2012 the effective tax rate differed from the U.S. federal statutory rate of 35% primarily due to state tax benefits and research and development credits, partially offset by the adverse impact of foreign subsidiaries’ results taxed at different tax rates.

During the fourth quarter of fiscal 2011, the Company recorded an adjustment to correct an error that originated in a prior period pertaining to deferred tax liabilities related to the Company’s investment in a subsidiary. The correction of this error resulted in a reduction of income tax expense and an increase to net income of $3 million for the year ended August 31, 2011. Management determined that this error was not material to any previously reported consolidated financial statements and the resulting correction was not material to the Consolidated Financial Statements for the year ended August 31, 2011.

Deferred tax assets and liabilities were comprised of the following as of August 31 (in thousands):



	2013			2012
Deferred tax assets:
Environmental liabilities	$	12,390		$	11,165
Employee benefit accruals	9,378			9,784
State income tax and other	2,478			5,384
Net operating loss carryforwards	11,758			5,699
State credit carryforwards	5,360			4,374
Inventory valuation methods	1,390			1,560
Amortizable goodwill and other intangibles	38,820			—
Valuation allowances	(29,696		)	(795		)
Total deferred tax assets	$	51,878		$	37,171
Deferred tax liabilities:
Amortizable goodwill and other intangibles	$	—		$	20,452
Accelerated depreciation and other basis differences	68,609			90,544
Prepaid expense acceleration	2,418			2,365
Foreign currency translation adjustment	30			1,987
Total deferred tax liabilities	71,057			115,348
Net deferred tax liability	$	19,179		$	78,177

As of August 31, 2013, foreign operating loss carryforwards were $48 million, which expire if not used between 2014 and 2033. State credit carryforwards will expire if not used between 2014 and 2025.

Accounting for Uncertainty in Income Taxes

The following table summarizes the activity related to the Company’s reserve for unrecognized tax benefits, excluding interest and penalties, for the years ended August 31 (in thousands):



	2013			2012			2011
Unrecognized tax benefits, as of the beginning of the year	$	491		$	303		$	1,631
Reductions for tax positions of prior years	(31		)	(143		)	(75		)
Settlements with tax authorities	—			—			(875		)
Additions for tax positions of the current year	66			331			160
Reductions for lapse of statutes	—			—			(538		)
Unrecognized tax benefits, as of the end of the year	$	526		$	491		$	303

The Company does not anticipate any material changes to the reserve in the next 12 months.

The recognized amounts of tax-related penalties and interest were not material for all periods presented.

The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. The federal statute of limitations has expired for fiscal 2009 and prior years. Canadian and multiple state tax authorities are currently examining the Company’s income tax returns for fiscal years 2005 to 2012.