SCHN 2017 Annual Report

SCHNITZER STEEL INDUSTRIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 87 / Schnitzer Steel Industries, Inc. Form 10-K 2017 The Company's effective tax rate from continuing operations in fiscal 2016 was an expense of 4.7%, which was lower than the U.S. federal statutory rate of 35%. The effective tax rate was reduced for valuation allowances on deferred tax assets and the aggregate impact of foreign income taxed at different rates. Those reductions were partially offset by the realization of deductible foreign investment basis for tax purposes. The Company’s income tax expense is comprised primarily of the increase in deferred tax liabilities from indefinite-lived assets plus certain state cash tax expenses. The increase in valuation allowance on deferred tax assets was recognized as a result of negative evidence, including recent losses in all tax jurisdictions, outweighing the more subjective positive evidence, indicating that it is more likely than not that the associated tax benefit will not be realized. Realization of the deferred tax assets is dependent upon generating sufficient taxable income in the associated tax jurisdictions in future years to benefit from the reversal of net deductible temporary differences and from the utilization of net operating losses. The Company's effective tax rate from continuing operations in fiscal 2015 was a benefit of 6.3% which was lower than the U.S. federal statutory rate of 35%. The effective tax rate was reduced by 33% for valuation allowances on deferred tax assets and the aggregate impact of excluding foreign income taxed at different rates. Those expenses were partially offset by the recognition of a $13 million benefit related to the realization of deductible foreign investment basis for tax purposes. The increase in valuation allowance on deferred tax assets was recognized as a result of negative evidence, including recent losses in all tax jurisdictions, outweighing the more subjective positive evidence, indicating that it is more likely than not that the associated tax benefit will not be realized. Deferred tax assets and liabilities were comprised of the following as of August 31 (in thousands): 2017 2016 Deferred tax assets: Environmental liabilities $ 11,187 $ 11,048 Employee benefit accruals 13,692 12,620 State income tax and other 7,608 8,518 Net operating loss carryforwards 9,243 19,723 State credit carryforwards 6,678 6,352 Inventory valuation methods 690 — Amortizable goodwill and other intangibles 41,793 47,023 Valuation allowances (70,374) (86,917) Total deferred tax assets $ 20,517 $ 18,367 Deferred tax liabilities: Accelerated depreciation and other basis differences $ 37,096 $ 32,528 Prepaid expense acceleration 2,568 2,402 Inventory valuation methods — 119 Total deferred tax liabilities 39,664 35,049 Net deferred tax liability $ 19,147 $ 16,682 As of August 31, 2017, the Company had federal net operating loss carryforwards of $12 million, which will expire if not used by 2036. Foreign operating loss carryforwards were $27 million, which expire if not used between 2024 and 2037. State credit carryforwards will expire if not used between 2018 and 2025.