INCOME TAX

12 Months Ended

Aug. 31, 2019

NOTE 14. INCOME TAX

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act ("TCJA") which, among other provisions, reduced the federal corporate tax rate to 21.0% effective January 1, 2018. In connection with the enactment of the TCJA, the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 118 provided a one-year measurement period to complete the accounting under ASC 740. For the year ended August 31, 2018, the Company included provisional estimates of the impact of the TCJA. The Company completed its analysis of the impact of the TCJA during the second quarter of 2019.

Beginning in 2019, the Company is subject to the following provisions of the TCJA: (i) a new tax on global intangible low-taxed income ("GILTI"); (ii) a new deduction for foreign-derived intangible income ("FDII"); (iii) deductibility limitations on compensation for covered employees; and (iv) deductibility limitations on business interest expense. The U.S. Department of Treasury continues to release new and clarifying guidance with regard to interpretation of certain provisions of the TCJA, which the Company evaluates during the period of enactment. Based on enacted legislation through August 31, 2019, the Company has included in the effective tax rate estimates of the tax impacts related to GILTI and the deductibility limitation on compensation for covered employees. The Company has elected to treat the new GILTI tax as a current period cost in the year in which the tax is incurred. The Company's current assessment of FDII and the deductibility limitations on business interest expense did not result in an impact to the effective tax rate.

The components of earnings from continuing operations before income taxes were as follows:



	Year Ended August 31,
(in thousands)	2019		2018		2017
United States	$	194,986	$	86,731	$	25,506
Foreign	73,474		78,653		39,945
Total	$	268,460	$	165,384	$	65,451

The income taxes (benefit) included in the consolidated statements of earnings were as follows:



	Year Ended August 31,
(in thousands)	2019		2018			2017
Current:
United States	$	621	$	20,210		$	11,345
Foreign	14,006		18,308			9,464
State and local	2,892		2,263			2,654
Current taxes	17,519		40,781			23,463
Deferred:
United States	46,922		(11,501		)	(13,548		)
Foreign	490		(169		)	(917		)
State and local	4,908		1,002			281
Deferred taxes	52,320		(10,668		)	(14,184		)
Total income taxes on income	69,839		30,113			9,279
Income taxes (benefit) on discontinued operations	158		(34		)	(5,997		)
Income taxes on continuing operations	$	69,681	$	30,147		$	15,276

A reconciliation of the federal statutory rate to the Company's effective income tax rate from continuing operations, including material items impacting the effective income tax rate is as follows:



	Year Ended August 31,
(in thousands)	2019			2018			2017
Federal statutory rate	21.0		%	25.7		%	35.0		%
Income tax expense at statutory rate	$	56,377		$	42,471		$	22,908
TCJA - Toll charge and related foreign tax credits	7,410			29,466			—
TCJA - Remeasurement of deferred tax balances	(586		)	(25,515		)	—
Foreign tax impairment on valuation of subsidiaries (1)	(29,697		)	22,315			(92,321		)
Gain on international restructure (1)	—			18,926			—
Change in valuation allowance	36,167			(20,839		)	113,135
Nontaxable foreign interest (1)	(9,799		)	(17,414		)	(19,259		)
Worthless stock deduction (2)	—			(6,084		)	—
Foreign rate differential (3)	(1,466		)	(5,973		)	(7,518		)
Research and experimentation credits	(580		)	(4,707		)	(1,034		)
Audit settlement (4)	120			(3,187		)	(659		)
State and local taxes	6,085			2,317			1,490
Deferred compensation (5)	(395		)	(2,036		)	(2,101		)
Section 199 manufacturing deduction	—			—			(1,407		)
Other	6,045			407			2,042
Income tax expense on continuing operations	$	69,681		$	30,147		$	15,276
Effective income tax rate from continuing operations	26.0		%	18.2		%	23.3		%

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(1)	Fully offset by a valuation allowance.


(2)	Permanent tax benefit related to a worthless stock deduction from the reorganization and exit of the Company's steel trading business headquartered in the United Kingdom.


(3)	The impact of global income from operations in jurisdictions with lower statutory tax rates than the U.S., including Poland, which has a statutory income tax rate of 19.0%.


(4)	Includes the release of certain unrecognized tax benefits for which the accruals were greater than the amount assessed.


(5)	Nontaxable gain on assets related to the Company’s nonqualified Benefit Restoration Plan ("BRP").

In general, it has been the practice and intention of the Company to indefinitely reinvest earnings of non-U.S. subsidiaries. As a result of the deemed repatriation provisions of TCJA, our foreign earnings through December 31, 2017 were subject to U.S. taxation. As of August 31, 2019, the Company had undistributed earnings of its non-U.S. subsidiaries of approximately $623.5 million. The Company considers these undistributed earnings to be indefinitely reinvested in its foreign subsidiaries. However, as a result of the changes in U.S. taxation of dividends from foreign affiliates, the Company plans to repatriate future earnings from the International Mill segment. We expect that any incremental taxes associated with the future distribution of these earnings will be immaterial.

The Company’s income tax benefit from discontinued operations of $6.0 million for 2017 was largely due to tax benefits from net operating losses related to the exit of the International Marketing and Distribution segment.

The income tax effects of significant temporary differences giving rise to deferred tax assets and liabilities were as follows:



	Year Ended August 31,
(in thousands)	2019			2018
Deferred tax assets:
Net operating losses and credits	$	295,241		$	285,847
Deferred compensation and employee benefits	24,432			21,333
Reserves and other accrued expenses	40,296			12,704
Allowance for doubtful accounts	2,537			2,258
Inventory	8,446			974
Intangibles	480			906
Other	10,600			469
Total deferred tax assets	382,032			324,491
Valuation allowance for deferred tax assets	(283,560		)	(268,554		)
Deferred tax assets, net	98,472			55,937
Deferred tax liabilities:
Property, plant and equipment	168,701			83,879
Other	1,182			1,053
Total deferred tax liabilities	169,883			84,932
Net deferred tax liabilities	$	(71,411	)	$	(28,995	)

Net operating losses giving rise to deferred tax assets consist of $491.5 million of state net operating losses that expire during the tax years ending from 2020 to 2039 and foreign net operating losses of $820.8 million that expire in varying amounts beginning in 2020 (with certain amounts having indefinite carryforward periods). These assets will be reduced as income tax expense is recognized in future periods.

The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. The Company's valuation allowances primarily relate to net operating loss carryforwards in certain state and foreign jurisdictions and certain credit carryforwards for which utilization is uncertain.

A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows:



	Year Ended August 31,
(in thousands)	2019		2018			2017
Balance at September 1	$	3,121	$	9,283		$	9,522
Change for tax positions of prior years	5,531		3,121			—
Reductions due to settlements with taxing authorities	—		(8,028		)	(239		)
Reductions due to lapse of statute of limitations	—		(1,255		)	—
Balance at August 31 (1)	$	8,652	$	3,121		$	9,283

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(1)	The full balance of unrecognized income tax benefits in each year, if recognized, would have impacted the Company’s effective income tax rate at the end of each respective year.

The Company's policy classifies interest and any statutory penalties recognized on a tax position as income tax expense. At August 31, 2019 and 2018, accrued interest and penalties related to uncertain tax positions was not material.

The Company files income tax returns in the U.S. and multiple foreign jurisdictions with varying statutes of limitations. In the normal course of business, the Company and its subsidiaries are subject to examination by various taxing authorities. The Company is currently under examination with certain state revenue authorities for fiscal years 2015 through 2017. The following is a summary of all tax years that are open to examination.

U.S. Federal — 2016 and forward

U.S. States — 2015 and forward

Foreign — 2012 and forward