Note 18 - Income Taxes

Components of income tax expense were as follows:


	Years ended August 31,
(In thousands)	2018			2017			2016
Current
Federal	$	28,357		$	22,710		$	66,455
State		3,244			305			4,595
Foreign		38,628			35,893			50,299

		70,229			58,908			121,349
Deferred
Federal		(33,459	)		9,418			(6,199	)
State		(344	)		(1,467	)		(1,174	)
Foreign		(3,690	)		(2,732	)		(1,644	)

		(37,493	)		5,219			(9,017	)

Change in valuation allowance		157			(113	)		(10	)

Income tax expense	$	32,893		$	64,014		$	112,322

Income tax expense is computed at rates different from statutory rates. The U.S. federal corporate statutory rate was significantly reduced from 35% to 21% effective January 1, 2018 by the Tax Act enacted on December 22, 2017. As a result of the Company’s fiscal year, the Company’s statutory federal corporate rate is a blended rate of 25.7% in 2018, which will be reduced to 21% in 2019 and thereafter.

Deferred income taxes were remeasured as a result of the new statutory rate resulting in a tax benefit of $33.6 million. The Tax Act also required the Company to accrue a transition tax on foreign earnings not previously subject to U.S. taxation, which resulted in $6.9 million of tax expense in 2018.

The Company recognized the income tax effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118 (SAB 118) which required the financial results to reflect effects for which the accounting is complete and those for which it is provisional. Provisional effects will be adjusted during the measurement period determined under SAB 118 based on ongoing analysis of data, tax positions and regulatory guidance. The effect of the transition tax is provisional, in particular the calculation of prior year foreign earnings and profits. The effect of the remeasurement of domestic deferred taxes is provisional primarily because temporary differences that have been estimated as of August 31, 2018 could change the remeasurement once they are finalized with the filing of our fiscal 2018 income tax return. Since many of the deferred tax balances include estimates of future events, the Company is unable to determine the final impact of the tax rate change at this time.

The Tax Act also imposed a global intangible low-taxed income (GILTI) tax, which does not apply to the Company until 2019. The Company has made an accounting policy election to treat the GILTI tax as a current period expense.

The reconciliation between effective and statutory tax rates on operations is as follows:


	Years ended August 31,
	2018			2017			2016
Federal statutory rate		25.7	%		35.0	%		35.0	%
State income taxes, net of federal benefit		0.8			0.1			0.7
Foreign operations, excluding transition tax		1.8			(3.4	)		0.1
Transition tax on foreign earnings		3.1			–			–
Remeasurement of domestic deferred taxes		(15.0	)		–			–
Change in valuation allowance		0.1			–			–
Noncontrolling interest in flow-through entity		(2.4	)		(6.0	)		(7.4	)
Permanent differences and other		0.6			1.4			–

Effective tax rate		14.7	%		27.1	%		28.4	%

Earnings before income tax and earnings from unconsolidated affiliates for the years ended August 31, 2018, 2017 and 2016 were $110.8 million, $123.2 million and $264.8 million, respectively, for our domestic U.S. operations and $112.8 million, $113.0 million and $130.3 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)	2018		2017
Deferred tax assets:
Accrued payroll and related liabilities	$	18,461	$	28,761
Deferred revenue		10,642		7,547
Inventories and other		10,518		13,641
Maintenance and warranty accruals		7,201		10,988
Net operating losses		2,002		320
Investment and asset tax credits		1,439		1,840

		50,263		63,097
Deferred tax liabilities:
Fixed assets		70,942		110,429
Original issue discount		6,099		11,086
Intangibles		2,474		3,605
Other		1,831		(831	)
Investment in GBW Joint Venture		–		14,066

		81,346		138,355

Valuation allowance		657		533

Net deferred tax liability	$	31,740	$	75,791

As of August 31, 2018 the Company had $1.5 million of state credit carryforwards that will begin to expire in 2021 and $8.5 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 not likely to be used before their expiration dates. The net increase 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, 2018.

Prior to 2018 no provision had been made for U.S. income taxes on the Company’s cumulative undistributed earnings from foreign subsidiaries. In 2018, however, these earnings were subject to the one-time transition tax on the deemed repatriation of undistributed foreign earnings, a tax which the Company intends to pay over eight years as permitted by the Tax Act. Notwithstanding this deemed repatriation, any actual repatriation would be accompanied by foreign withholding taxes. The Company does not intend to repatriate these foreign earnings and continues to assert that its foreign earnings are indefinitely reinvested.

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


	Years ended August 31,
(In thousands)	2018			2017			2016
Unrecognized Tax Benefit – Opening Balance	$	1,820		$	942		$	1,019
Gross increases – tax positions in prior period		237			1,368			–
Gross decreases – tax positions in prior period		(449	)		(53	)		–
Settlements		–			–			–
Lapse of statute of limitations		–			(437	)		(77	)

Unrecognized Tax Benefit – Ending Balance	$	1,608		$	1,820		$	942

The Company is subject to taxation in the U.S. and in various states and foreign jurisdictions. The Company is effectively no longer subject to U.S. Federal examination for fiscal years ending before 2015, to state and local examinations before 2014, or to foreign examinations before 2013.

Unrecognized tax benefits, excluding interest, at August 31, 2018 were $1.6 million, all of which would affect the effective tax rate if recognized. The unrecognized tax benefits at August 31, 2017 were $1.8 million. Accrued interest on unrecognized tax benefits was $0.2 million as of August 31, 2018 and was minimal as of August 31, 2017. The Company recorded annual interest benefits of approximately $0.2 million for changes in the reserves during each of the years ended August 31, 2018 and 2017. 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 year.