Note L – Income Taxes

Earnings before income taxes for the fiscal years ended May 31 include the following components:


(in thousands)	2017		2016		2015
United States based operations	$	266,222	$	180,467	$	104,732
Non – United States based operations		30,905		36,148		8,296

Earnings before income taxes		297,127		216,615		113,028
Less: Net earnings attributable to noncontrolling interests*		13,422		13,913		10,471

Earnings before income taxes attributable to controlling interest	$	283,705	$	202,702	$	102,557

*	Net earnings attributable to noncontrolling interests are not taxable to Worthington.

Significant components of income tax expense (benefit) for the fiscal years ended May 31 were as follows:


(in thousands)	2017			2016			2015
Current
Federal	$	50,200		$	42,837		$	57,511
State and local		2,954			2,157			2,731
Foreign		7,593			6,639			5,490

		60,747			51,633			65,732

Deferred
Federal		18,177			7,584			(37,839	)
State and local		476			934			(754	)
Foreign		(210	)		(1,164	)		(1,367	)

		18,443			7,354			(39,960	)

	$	79,190		$	58,987		$	25,772

Due to the adoption of amended accounting guidance related to the accounting for share-based payments in fiscal 2016, as described in “Note A – Summary of Significant Accounting Policies – Recently Adopted Accounting Standards,” no tax benefits related to stock-based compensation were credited to additional paid-in capital in fiscal 2017 or fiscal 2016. The tax benefit related to stock-based compensation that was credited to additional paid-in capital was $6,179,000 for fiscal 2015. The tax benefit related to the purchase of noncontrolling interest in dHybrid credited to additional paid-in capital was $539,000 for fiscal 2017. Tax benefits (expense) related to defined benefit pension liability that were credited to (deducted from) OCI were $(1,158,000), $1,175,000, and $1,914,000 for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Tax benefits (expenses) related to cash flow hedges that were credited to (deducted from) OCI were $1,700,000, $(13,316,000), and $6,952,000 for fiscal 2017, fiscal 2016 and fiscal 2015, respectively.

A reconciliation of the 35% federal statutory tax rate to total tax provision follows:


	2017			2016			2015
Federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		1.8			2.6			3.0
Change in state and local valuation allowances		(0.3	)		(1.1	)		(1.1	)
Non-U.S. income taxes at other than 35%		(2.1	)		(3.5	)		(0.7	)
Change in Non-U.S. valuation allowances		0.7			0.5			1.2
Qualified production activities deduction		(1.9	)		(2.2	)		(5.9	)
Research & development credits		(0.1	)		(0.2	)		(0.2	)
Benefit related to foreign tax credits		(0.5	)		-			(5.3	)
Excess benefit related to share-based payment awards		(5.7	)		(1.6	)		-
Other		1.0			(0.4	)		(0.9	)

Effective tax rate attributable to controlling interest		27.9	%		29.1	%		25.1	%

The above effective tax rate attributable to controlling interest excludes any impact from the inclusion of net earnings attributable to noncontrolling interests in our consolidated statements of earnings. The effective tax rates upon inclusion of net earnings attributable to noncontrolling interests were 26.7%, 27.2% and 22.8% for fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Net earnings attributable to noncontrolling interests are primarily a result of our WSP, Spartan, Worthington Aritas, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in WSP, Spartan and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in WSP, Spartan and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of Worthington Aritas (a foreign corporation), and TWB’s wholly-owned foreign corporations, is reported in our consolidated tax expense.

Under applicable accounting guidance, a tax benefit may be recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Any tax benefits recognized in our financial statements from such a position were measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

The total amount of unrecognized tax benefits were $2,975,000, $2,827,000, and $3,530,000 as of May 31, 2017, 2016 and 2015, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate attributable to controlling interest was $2,225,000 as of May 31, 2017. Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. Accrued amounts of interest and penalties related to unrecognized tax benefits are recognized as part of income tax expense within our consolidated statements of earnings. As of May 31, 2017, 2016 and 2015, we had accrued liabilities of $307,000, $538,000 and $947,000, respectively, for interest and penalties related to unrecognized tax benefits.

A tabular reconciliation of unrecognized tax benefits follows:


(In thousands)
Balance at May 31, 2016	$	2,827
Decreases – tax positions taken in prior years		(206	)
Increases – current tax positions		617
Settlements		(227	)
Lapse of statutes of limitations		(36	)

Balance at May 31, 2017	$	2,975

Approximately $673,000 of the liability for unrecognized tax benefits is expected to be settled in the next twelve months due to the expiration of statutes of limitations in various tax jurisdictions and as a result of expected settlements with various tax jurisdictions. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, any change is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

The following is a summary of the tax years open to examination by major tax jurisdiction:

U.S. Federal –2014 and forward

U.S. State and Local – 2013 and forward Austria – 2013 and forward

Canada – 2013 and forward

Mexico – 2011 and forward

Earnings before income taxes attributable to foreign sources for fiscal 2017, fiscal 2016 and fiscal 2015 were as noted above. As of May 31, 2017, and based on the tax laws in effect at that time, it remains our intention to continue to indefinitely reinvest our undistributed foreign earnings, except for the foreign earnings of our TWB joint venture. Accordingly, no deferred tax liability has been recorded for our foreign earnings, except those that pertain to TWB. Excluding TWB, the undistributed earnings of our foreign subsidiaries at May 31, 2017 were approximately $241,000,000. If such earnings were not permanently reinvested, a deferred tax liability of approximately $12,000,000 would have been required.

The components of our deferred tax assets and liabilities as of May 31 were as follows:


(in thousands)	2017			2016
Deferred tax assets
Accounts receivable	$	2,157		$	2,786
Inventories		6,624			6,418
Accrued expenses		30,065			34,035
Net operating loss carry forwards		13,256			12,756
Tax credit carry forwards		3,206			3,127
Stock-based compensation		17,668			22,452
Other		205			210

Total deferred tax assets		73,181			81,784
Valuation allowance for deferred tax assets		(12,987	)		(11,796	)

Net deferred tax assets		60,194			69,988

Deferred tax liabilities
Property, plant and equipment		(42,599	)		(35,521	)
Investment in affiliated companies, principally due to undistributed earnings		(46,001	)		(42,967	)
Derivative contracts		(1,745	)		(6,395	)
Other		(4,149	)		(2,484	)

Total deferred tax liabilities		(94,494	)		(87,367	)

Net deferred tax liability	$	(34,300	)	$	(17,379	)

During fiscal 2016, the Company adopted amended accounting guidance that requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The above net deferred tax liability amounts are classified in the consolidated balance sheets as noncurrent liabilities as of May 31, 2017 and May 31, 2016. At May 31, 2017, we had tax benefits for state net operating loss carry forwards of $8,470,000 that expire from fiscal 2018 to the fiscal year ending May 31, 2037, tax benefits for foreign net operating loss carry forwards of $4,786,000 that expire from fiscal 2018 to the fiscal year ending May 31, 2036, and a tax benefit for foreign income tax credit carry forwards of $3,206,000, that expires in the fiscal year ending May 31, 2025.

The valuation allowance for deferred tax assets of $12,987,000 at May 31, 2017 is associated primarily with the net operating loss carry forwards. The valuation allowance includes $8,548,000 for state and $4,439,000 for foreign deferred tax assets. The majority of the state valuation allowance relates to our facility in Decatur, Alabama. The foreign valuation allowance relates to the Company’s operations in Turkey. Based on our history of profitability, the scheduled reversal of deferred tax liabilities, and taxable income projections, we have determined that it is more likely than not that the remaining deferred tax assets are otherwise realizable.