Note L – Income Taxes

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


(in thousands)	2015		2014		2013
United States based operations	$	104,732	$	210,783	$	190,942
Non – United States based operations		8,296		6,718		10,358

Earnings before income taxes		113,028		217,501		201,300
Less: Net earnings attributable to noncontrolling interests*		10,471		8,852		393

Earnings before income taxes attributable to controlling interest	$	102,557	$	208,649	$	200,907

*	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)	2015			2014			2013
Current
Federal	$	57,511		$	73,149		$	54,427
State and local		2,731			3,537			4,109
Foreign		5,490			6,579			4,131

		65,732			83,265			62,667

Deferred
Federal		(37,839	)		(25,453	)		4,698
State and local		(754	)		(1,194	)		(2,170	)
Foreign		(1,367	)		731			(730	)

		(39,960	)		(25,916	)		1,798

	$	25,772		$	57,349		$	64,465

Tax benefits related to stock-based compensation that were credited to additional paid-in capital were $6,179,000, $7,115,000, and $4,054,000 for fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Tax benefits (expenses) related to defined benefit pension liability that were credited to (deducted from) other comprehensive income (“OCI”) were $1,914,000, $511,000, and $(1,415,000) for fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Tax benefits (expenses) related to cash flow hedges that were credited to (deducted from) OCI were $6,952,000, $(1,039,000), and $(763,000) for fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

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


	2015			2014			2013
Federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		3.0			2.0			2.3
Change in state and local valuation allowances		(1.1	)		(0.9	)		(1.3	)
Non-U.S. income taxes at other than 35%		(0.7	)		(1.0	)		(1.7	)
Change in Non-U.S. valuation allowances		1.2			1.4			1.1
Qualified production activities deduction		(5.9	)		(3.9	)		(3.0	)
Acquisition of an additional 10% interest in TWB		(0.0	)		(3.4	)		(0.0	)
Research & development credits		(0.2	)		(1.1	)		(0.1	)
Tax write off of investment in foreign subsidiary		(0.0	)		(1.1	)		(0.0	)
Benefit related to foreign tax credits		(5.3	)		(0.0	)		(0.0	)
Other		(0.9	)		0.5			(0.2	)

Effective tax rate attributable to controlling interest		25.1	%		27.5	%		32.1	%

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 22.8%, 26.4% and 32.0% for fiscal 2015, fiscal 2014 and fiscal 2013, respectively. The change in effective income tax rates, upon inclusion of net earnings attributable to noncontrolling interests, is primarily a result of our Spartan, Worthington Nitin Cylinders, Worthington Aritas, and TWB consolidated joint ventures. The earnings attributable to the noncontrolling interests in Spartan and TWB’s U.S. operations do not generate tax expense to Worthington since the investors in Spartan and TWB’s U.S. operations are taxed directly based on the earnings attributable to them. The tax expense of Worthington Nitin Cylinders and Worthington Aritas, both foreign corporations, is reported in our consolidated tax expense. Since the consolidation of TWB on July 31, 2013, the tax expense of TWB’s wholly-owned foreign corporations are 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 $3,530,000, $4,110,000, and $3,705,000 as of May 31, 2015, 2014 and 2013, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate attributable to controlling interest was $2,401,000 as of May 31, 2015. 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, 2015, 2014 and 2013, we had accrued liabilities of $947,000 $1,049,000 and $1,128,000, respectively, for interest and penalties related to unrecognized tax benefits.

A tabular reconciliation of unrecognized tax benefits follows:


(In thousands)
Balance at May 31, 2014	$	4,110
Increases – tax positions taken in prior years		306
Decreases – tax positions taken in prior years		(456	)
Increases (decreases) – current tax positions		672
Settlements		(636	)
Lapse of statutes of limitations		(466	)

Balance at May 31, 2015	$	3,530

Approximately $922,000 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 – 2012 and forward

U.S. State and Local – 2010 and forward Austria – 2013 and forward

Canada – 2011 and forward

Mexico – 2009 and forward

Earnings before income taxes attributable to foreign sources for fiscal 2015, fiscal 2014 and fiscal 2013 were as noted above. As of May 31, 2015, 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 and our wholly-owned Canadian subsidiary (“Canada”), which ceased operations in February 2014 as a result of the sale of the Company’s small and medium steel high pressure gas and cylinders business in North America. The decision to no longer reinvest Canada’s undistributed earnings indefinitely was made during the fourth quarter of fiscal 2014. Accordingly, no deferred tax liability has been recorded for our foreign earnings, except those that pertain to TWB and Canada. Excluding TWB and Canada, the undistributed earnings of our foreign subsidiaries at May 31, 2015 were approximately $205,000,000. If such earnings were not permanently reinvested, a deferred tax liability of approximately $13,000,000 would have been required.

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


(in thousands)	2015			2014
Deferred tax assets
Accounts receivable	$	1,895		$	2,400
Inventories		8,051			7,210
Accrued expenses		33,678			40,873
Net operating and capital loss carry forwards		14,326			19,302
Tax credit carry forwards		3,688			203
Stock-based compensation		20,434			12,573
Derivative contracts		9,177			1,838
Other		247			541

Total deferred tax assets		91,496			84,940
Valuation allowance for deferred tax assets		(13,036	)		(21,701	)

Net deferred tax assets		78,460			63,239

Deferred tax liabilities
Property, plant and equipment		(39,433	)		(67,472	)
Undistributed earnings of unconsolidated affiliates		(35,165	)		(39,429	)
Other		(2,150	)		(3,395	)

Total deferred tax liabilities		(76,748	)		(110,296	)

Net deferred tax asset (liability)	$	1,712		$	(47,057	)

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


(in thousands)	2015			2014
Current assets:
Deferred income taxes	$	22,034		$	24,272
Noncurrent assets:
Other assets		1,173			4
Noncurrent liabilities:

Deferred income taxes		(21,495	)		(71,333	)

Net deferred tax asset (liability)	$	1,712		$	(47,057	)

At May 31, 2015, we had tax benefits for state net operating loss carry forwards of $12,218,000 that expire from fiscal 2016 to the fiscal year ending May 31, 2035, tax benefits for foreign net operating loss carry forwards of $2,108,000 that expire from fiscal 2018 to the fiscal year ending May 31, 2035, and a tax benefit for foreign income tax credit carry forwards of $3,653,000, that expires on May 31, 2025.

The valuation allowance for deferred tax assets of $13,036,000 at May 31, 2015 is associated primarily with the net operating loss carry forwards. The valuation allowance includes $11,607,000 for state and $1,429,000 for foreign. The majority of the state valuation allowance relates to our Decatur, Alabama facility and metal framing operations in various states. The foreign valuation allowance relates to operations in Turkey. 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.