Note 18 - Income Taxes

Components of income tax expense were as follows:


	Years ended August 31,
(In thousands)	2017			2016			2015
Current
Federal	$	22,710		$	66,455		$	92,525
State		305			4,595			6,349
Foreign		35,893			50,299			32,748

		58,908			121,349			131,622
Deferred
Federal		9,418			(6,199	)		(13,565	)
State		(1,467	)		(1,174	)		(1,112	)
Foreign		(2,732	)		(1,644	)		(4,423	)

		5,219			(9,017	)		(19,100	)

Change in valuation allowance		(113	)		(10	)		(362	)

Income tax expense	$	64,014		$	112,322		$	112,160

Income tax expense is computed at rates different from statutory rates. The reconciliation between effective and statutory tax rates on operations is as follows:


	Years ended August 31,
	2017			2016			2015
Federal statutory rate		35.0%			35.0%			35.0%
State income taxes, net of federal benefit		0.1			0.7			1.0
Impact of foreign operations		(3.4	)		0.1			(0.5	)
Change in valuation allowance		–			–			(0.1	)
Noncontrolling interest in flow-through entity		(6.0	)		(7.4	)		(5.7	)
Permanent differences and other		1.4			–			0.2

Effective tax rate		27.1%			28.4%			29.9%

Earnings before income tax and earnings from unconsolidated affiliates for the years ended August 31, 2017, 2016 and 2015 were $123.2 million, $264.8 million and $292.6 million, respectively, for our domestic U.S. operations and $113.0 million, $130.3 million and $83.1 million, respectively, for our foreign operations.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities were as follows:


	As of August 31,
(In thousands)	2017			2016
Deferred tax assets:
Accrued payroll and related liabilities	$	28,761		$	26,384
Deferred revenue		7,547			18,533
Maintenance and warranty accruals		10,988			10,604
Inventories and other		13,641			7,599
Derivative instruments and translation adjustment		371			1,153
Investment and asset tax credits		1,840			511
Net operating losses		320			429

		63,468			65,213
Deferred tax liabilities:
Fixed assets		110,429			97,490
Investment in GBW Joint Venture		14,066			16,144
Original issue discount		11,086			–
Intangibles		3,605			3,212
Deferred gain on redemption of debt		859			1,718
Other		(1,319	)		(2,344	)

		138,726			116,220

Valuation allowance		533			612

Net deferred tax liability	$	75,791		$	51,619

As of August 31, 2017 the Company had $1.0 million of state net operating loss (NOL) carryforwards that will begin to expire in 2020, $2.0 million of state credit carryforwards that will begin to expire in 2021, and $3.9 million of foreign NOL carryforwards that will begin to expire in 2020. The Company has placed valuation allowances against any deferred tax assets for which no benefit is anticipated, including those for loss and credit carryforwards likely to expire before their expiration dates. The Company uses tax law ordering for purposes of determining when excess tax benefits have been realized. During the current year the tax deduction realized in connection with the vesting of restricted stock awards was less than the cumulative stock compensation recorded in the financial statements. The stock price at the date of grant was higher than the stock price at the vesting date. As a result, the Company realized a $2.4 million short-fall (debit) to Additional paid in capital for the tax-effected amount the book compensation exceeded the tax deduction.

The net decrease in the total valuation allowance on deferred taxes for which no benefit is anticipated was approximately $0.1 million for the year ended August 31, 2017.

No provision has been made for U.S. income taxes on approximately $199.8 million of cumulative undistributed earnings of certain foreign subsidiaries because the Company plans to reinvest these earnings indefinitely in operations outside the U.S. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in foreign subsidiaries.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:


	Years ended August 31,
(In thousands)	2017			2016			2015
Unrecognized Tax Benefit – Opening Balance	$	942		$	1,019		$	1,030
Gross increases – tax positions in prior period		1,368			–			–
Gross decreases – tax positions in prior period		(53	)		–			–
Settlements		–			–			–
Lapse of statute of limitations		(437	)		(77	)		(11	)

Unrecognized Tax Benefit – Ending Balance	$	1,820		$	942		$	1,019

The Company is subject to taxation in the U.S. and in various states and foreign jurisdictions. The Company is no longer subject to U.S. Federal examination for fiscal years ending before 2014, to state and local examinations before 2013, or to foreign examinations before 2012.

Unrecognized tax benefits, excluding interest, at August 31, 2017 were $1.8 million, of which $0.9 million, if recognized, would affect the effective tax rate. The unrecognized tax benefits at August 31, 2016 were $0.9 million. Accrued interest on unrecognized tax benefits as of August 31, 2017 was minimal and as of August 31, 2016 was $0.2 million. The Company recorded annual interest benefits of less than $0.1 million for changes in the reserves during each of the years ended August 31, 2017 and 2016. The Company has not accrued any penalties on the reserves. Interest and penalties related to income taxes are not classified as a component of income tax expense. Benefits from the realization of unrecognized tax benefits for deductible differences attributable to ordinary operations will be recognized as a reduction of income tax expense. The Company does not anticipate a significant decrease in the reserves for uncertain tax positions during the next twelve months.