Note L – Income Taxes

On December 22, 2017, the TCJA was enacted into federal law. The TCJA significantly revised the U.S. corporate income tax system by lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA added several new provisions including changes to bonus depreciation, the deduction for executive compensation, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign-derived intangible income (“FDII”). Many of these provisions, including the tax on GILTI, the BEAT and the deduction for FDII, do not apply to the Company until June 1, 2018. The Company has elected to account for the tax on GILTI as a period cost and thus has not adjusted any of the deferred tax assets and liabilities of its foreign subsidiaries for the new tax. The two material items that impacted the Company for fiscal 2018 were the reduction in the tax rate and a one-time mandatory deemed repatriation tax imposed on the Company’s unremitted foreign earnings. Due to the Company’s fiscal year, the Company’s fiscal 2018 U.S. federal blended statutory income tax rate is 29.2%. The Company’s U.S. federal statutory income tax rate will be 21.0% starting June 1, 2018.

Consistent with applicable Securities and Exchange Commission guidance in Staff Accounting Bulletin 118 (“SAB118”), the Company has made a reasonable estimate of the one-time mandatory deemed repatriation tax required by the TCJA. As such, the Company recognized a provisional income tax expense of $6.9 million for the one-time mandatory deemed repatriation tax for fiscal 2018. SAB118 allows companies to use a measurement period, similar to that used in business combinations, to account for the impacts of the TCJA in their consolidated financial statements. The Company considers key estimates on the deemed repatriation tax to be incomplete due to our continuing analysis of final year-end data and the impact of expected further authoritative guidance and interpretations. We expect to complete our analysis of the amount recorded within the measurement period of one year from the enactment of the TCJA.

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

(in thousands)	2018		2017		2016
United States based operations	$	177,088	$	266,222	$	180,467
Non – United States based operations		31,982		30,905		36,148
Earnings before income taxes		209,070		297,127		216,615
Less: Net earnings attributable to noncontrolling interests*		6,056		13,422		13,913
Earnings before income taxes attributable to controlling interest	$	203,014	$	283,705	$	202,702

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)	2018			2017			2016
Current
Federal	$	33,261		$	50,200		$	42,837
State and local		3,292			2,954			2,157
Foreign		9,904			7,593			6,639
		46,457			60,747			51,633
Deferred
Federal		(34,442	)		18,177			7,584
State and local		388			476			934
Foreign		(4,183	)		(210	)		(1,164	)
		(38,237	)		18,443			7,354
	$	8,220		$	79,190		$	58,987

The tax benefit related to the purchase of noncontrolling interest in dHybrid Systems, LLC 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 $(309,000), $(1,158,000), and $1,175,000 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Tax benefits (expenses) related to cash flow hedges that were credited to (deducted from) OCI were $(392,000), $1,700,000, and $(13,316,000) for fiscal 2018, fiscal 2017 and fiscal 2016, respectively.

A reconciliation of the federal statutory corporate income tax rate to total tax provision follows:

	2018			2017			2016
Federal statutory corporate income tax rate		29.2	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		2.3			1.5			1.5
Non-U.S. income taxes at other than federal statutory rate		(1.4	)		(1.4	)		(3.0	)
Qualified production activities deduction		(2.3	)		(1.9	)		(2.2	)
Impact of tax reform (1)		(15.4	)		-			-
Worthington Aritas write down		(4.8	)		-			-
Excess benefit related to share-based payment awards		(2.0	)		(5.7	)		(1.6	)
AMTROL acquisition		(1.9	)		-			-
Other		0.3			0.4			(0.6	)
Effective tax rate attributable to controlling interest		4.0	%		27.9	%		29.1	%

(1)

Amount reflects the impact of the re-measurement of the Company’s deferred tax balances at the lower federal statutory corporate income tax rate, net of the mandatory deemed repatriation tax on unremitted foreign earnings.

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 3.9%, 26.7% and 27.2% for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Net earnings attributable to noncontrolling interests are primarily a result of our WSP, Spartan, and TWB consolidated joint ventures and Worthington Aritas through May 23, 2018, which is the date we purchased the remaining 25% ownership interest. 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 $2,638,000, $2,975,000, and $2,827,000 as of May 31, 2018, 2017 and 2016, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate attributable to controlling interest was $2,235,000 as of May 31, 2018. 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, 2018, 2017 and 2016, we had accrued liabilities of $271,000, $307,000 and $538,000, respectively, for interest and penalties related to unrecognized tax benefits.

A tabular reconciliation of unrecognized tax benefits follows:

(In thousands)
Balance at May 31, 2017	$	2,975
Decreases - tax positions taken in prior years		(107	)
Increases - tax positions taken in prior years		81
Increases - current tax positions		12
Settlements		(184	)
Lapse of statutes of limitations		(139	)
Balance at May 31, 2018	$	2,638

Approximately $753,000 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 –2015 and forward

U.S. State and Local –2013 and forward

Austria – 2013 and forward

Canada –2014 and forward

Mexico – 2013 and forward

Portugal – 2014 and forward

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

(in thousands)	2018			2017
Deferred tax assets
Accounts receivable	$	1,455		$	2,157
Inventories		5,004			6,624
Accrued expenses		23,219			30,065
Net operating loss carry forwards		14,201			13,256
Tax credit carry forwards		811			3,206
Stock-based compensation		10,588			17,668
Other		502			205
Total deferred tax assets		55,780			73,181
Valuation allowance for deferred tax assets		(14,006	)		(12,987	)
Net deferred tax assets		41,774			60,194
Deferred tax liabilities
Property, plant and equipment		(74,512	)		(42,599	)
Investment in affiliated companies, principally due to undistributed earnings		(22,918	)		(46,001	)
Derivative contracts		(2,653	)		(1,745	)
Other		(1,879	)		(4,149	)
Total deferred tax liability		(101,962	)		(94,494	)
Net deferred tax liability	$	(60,188	)	$	(34,300	)

At May 31, 2018, we had tax benefits for state net operating loss carry forwards of $9,363,000 that expire from fiscal 2019 to the fiscal year ending May 31, 2038, tax benefits for foreign net operating loss carry forwards of $4,837,000 that expire from fiscal 2019 to the fiscal year ending May 31, 2023, tax benefits for foreign investment tax credit carry forwards of $649,000, that expire in the fiscal year ending May 31, 2025, and tax benefits for foreign income tax credit carry forwards of $162,000, that expire in the fiscal year ending May 31, 2028.

The valuation allowance for deferred tax assets of $14,006,000 at May 31, 2018 is associated primarily with the net operating loss carry forwards. The valuation allowance includes $9,537,000 for state and $4,469,000 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.