Note K – Income Taxes

Earnings (loss) before income taxes for the years ended May 31 include the following components:


(in thousands)	2011		2010		2009
United States based operations	$	166,137	$	73,122	$	(170,405	)
Non - United States based operations		16,393		5,035		28,966

Earnings (loss) before income taxes		182,530		78,157		(141,439	)

Less: Net earnings attributable to noncontrolling interests*		8,968		6,266		4,529

Earnings (loss) before income taxes attributable to controlling interest	$	173,562	$	71,891	$	(145,968	)

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

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


(in thousands)	2011			2010			2009
Current:
Federal	$	47,698		$	30,080		$	(21,609	)
State and local		1,246			1,333			3,146
Foreign		2,070			1,347			6,188

		51,014			32,760			(12,275	)
Deferred:
Federal		3,950			(6,804	)		(19,393	)
State		3,599			1,399			(4,359	)
Foreign		(67	)		(705	)		(1,727	)

		7,482			(6,110	)		(25,479	)

	$	58,496		$	26,650		$	(37,754	)

Tax benefits related to stock-based compensation that were credited to additional paid-in capital were $835,000, $6,000, and $433,000 for fiscal 2011, fiscal 2010 and fiscal 2009, respectively. Tax benefits (expenses) related to defined benefit pension liability that were credited to (deducted from) other comprehensive income (loss) ("OCI") were ($760,000), $1,163,000, and $14,000 for fiscal 2011, fiscal 2010 and fiscal 2009, respectively. Tax benefits (expenses) related to cash flow hedges that were credited to (deducted from) OCI were $563,000, $854,000, and $3,187,000 for fiscal 2011, fiscal 2010 and fiscal 2009, respectively.

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


	2011			2010			2009
Federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		1.8			(1.5	)		2.3
Change in state and local valuation allowances		1.0			5.0			(0.7	)
Change in income tax accruals for resolution of tax audits and change in estimate of deferred tax		0.2			1.6			(0.1	)
Non-U.S. income taxes at other than 35%		(2.2	)		(1.6	)		3.9
Qualified production activities deduction		(1.9	)		(2.1	)		-
Goodwill impairment non-deductible		-			-			(13.9	)
Other		(0.2	)		0.7			(0.6	)

Effective tax rate attributable to controlling interest		33.7	%		37.1	%		25.9	%

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 32.0%, 34.1% and 26.7% for fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The change in effective income tax rates, upon inclusion of net earnings attributable to noncontrolling interests, is primarily a result of our Spartan consolidated joint venture. The earnings attributable to the noncontrolling interest in Spartan do not generate tax expense to Worthington since the investors in Spartan are taxed directly based on the earnings attributable to them.

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 $5,381,000, $5,933,000, and $3,897,000 as of May 31, 2011, May 31, 2010 and May 31, 2009, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate attributable to controlling interest was $3,361,000 as of May 31, 2011. 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, 2011, May 31, 2010 and May 31, 2009, we had accrued liabilities of $1,184,000, $1,232,000 and $1,143,000, respectively, for interest and penalties related to unrecognized tax benefits.

A tabular reconciliation of unrecognized tax benefits follows:


(in thousands)
Balance at June 1, 2010	$	5,933
Increases – tax positions taken in prior years		584
Decreases – tax positions taken in prior years		(505	)
Increases – current tax positions		745
Settlements		(934	)
Lapse of statutes of limitations		(442	)

Balance at May 31, 2011	$	5,381

Approximately $620,000 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.

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

U.S. Federal – 2007 and forward

U.S. State and Local – 2003 and forward

Austria – 2004 and forward

Canada – 2007 and forward

Earnings before income taxes attributable to foreign sources for fiscal 2011, fiscal 2010 and fiscal 2009 were as noted above. As of May 31, 2011, 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 those foreign earnings. Undistributed earnings of our consolidated foreign subsidiaries at May 31, 2011 were approximately $265,000,000. If such earnings were not permanently reinvested, a deferred tax liability of approximately $23,000,000 would have been required.

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


(in thousands)	2011			2010
Deferred tax assets:
Accounts receivable	$	1,870		$	2,938
Inventories		5,932			4,005
Accrued expenses		29,227			21,712
Net operating and capital loss carryforwards		22,501			22,418
Tax credit carryforwards		1,265			2,127
Stock-based compensation		7,187			5,761
Derivative contracts		3,761			3,410
Other		7			58

Total deferred tax assets		71,750			62,429
Valuation allowance for deferred tax assets		(22,292	)		(19,629	)

Net deferred tax assets		49,458			42,800
Deferred tax liabilities:
Property, plant and equipment		(58,606	)		(67,317	)
Undistributed earnings of unconsolidated affiliates		(43,947	)		(20,893	)
Other		(583	)		(1,243	)

Total deferred tax liabilities		(103,136	)		(89,453	)

Net deferred tax liabilities	$	(53,678	)	$	(46,653	)

The above amounts are classified in the consolidated balance sheets as of May 31 as follows:


(in thousands)	2011			2010
Current assets:
Deferred income taxes	$	28,297		$	21,964
Other assets:
Deferred income taxes		2,006			3,276
Noncurrent liabilities:
Deferred income taxes		(83,981	)		(71,893	)

Net deferred tax liabilities	$	(53,678	)	$	(46,653	)

At May 31, 2011, we had tax benefits for federal net operating loss carryforwards of $205,000 that expire from fiscal 2012 to the fiscal year ending May 31, 2020. These net operating loss carryforwards are subject to utilization limitations. At May 31, 2011, we had tax benefits for state net operating loss carryforwards of $18,184,000 that expire from fiscal 2012 to the fiscal year ending May 31, 2031. At May 31, 2011, we had tax benefits for foreign net operating loss carryforwards of $2,728,000 for income tax purposes that expire from fiscal 2012 to the fiscal year ending May 31, 2031. At May 31, 2011, we had a tax benefit for a foreign capital loss carryforward of $1,384,000 with no future expiration date. At May 31, 2011, we had tax benefits for foreign tax credit carryforwards of $1,265,000 that expire in the fiscal year ending May 31, 2021.

The valuation allowance for deferred tax assets of $22,292,000 is associated primarily with the net operating and capital loss carryforwards and foreign tax credit carryforwards. The valuation allowance includes $1,470,000 for federal, $17,404,000 for state and $3,418,000 for foreign. The majority of the federal valuation allowance relates to foreign tax credits with the remainder relating to the net operating loss carryforwards. The majority of the state valuation allowance relates to Metal Framing operations in various states and our Decatur, Alabama facility, while the foreign valuation allowance relates to operations in China, Canada, and the Czech Republic. Based on our history of profitability and taxable income projections, we have determined that it is more likely than not that the remaining net deferred tax assets are otherwise realizable.