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Income Taxes
12 Months Ended
May 31, 2014
Income Taxes

NOTE G — INCOME TAXES

The provision for income taxes is calculated in accordance with ASC 740, which requires the recognition of deferred income taxes using the liability method.

Income (loss) before income taxes as shown in the Consolidated Statements of Income is summarized below for the periods indicated. Certain foreign operations are branches of RPM International Inc.’s subsidiaries and are therefore subject to income taxes in both the United States and the respective foreign jurisdictions. Accordingly, the provision (benefit) for income taxes by jurisdiction and the income (loss) before income taxes by jurisdiction may not be directly related.

 

Year Ended May 31,

   2014      2013      2012  
(In thousands)                     

United States

   $ 209,626      $ 5,104      $ 187,687  

Foreign

     214,861        171,787        140,602  
  

 

 

    

 

 

    

 

 

 

Income Before Income Taxes

   $ 424,487      $ 176,891      $ 328,289  
  

 

 

    

 

 

    

 

 

 

Provision (benefit) for income taxes consists of the following for the periods indicated:

 

Year Ended May 31,

   2014     2013     2012  
(In thousands)                   

Current:

      

U.S. Federal

   $ 46,846     $ 56,590     $ 45,547  

State and local

     5,660       6,694       6,836  

Foreign

     59,425       44,747       49,231  
  

 

 

   

 

 

   

 

 

 

Total Current

     111,931       108,031       101,614  
  

 

 

   

 

 

   

 

 

 

Deferred:

      

U.S. Federal

     16,747       (31,987     (787

State and local

     1,292       (3,649     (572

Foreign

     (11,467     (5,355     (5,729
  

 

 

   

 

 

   

 

 

 

 

Total Deferred

     6,572         (40,991     (7,088
  

 

 

    

 

 

   

 

 

 

Provision for Income Taxes

   $ 118,503      $ 67,040     $ 94,526  
  

 

 

    

 

 

   

 

 

 

The significant components of deferred income tax assets and liabilities as of May 31, 2014 and 2013 were as follows:

 

     2014     2013  
(In thousands)             

Deferred income tax assets related to:

    

Inventories

   $ 6,944     $ 6,795  

Allowance for losses

     6,410       7,584  

Accrued compensation and benefits

     102,579       113,394  

Accrued other expenses

     10,256       16,322  

Other long-term liabilities

     19,646       29,954  

Net operating loss and credit carryforwards

     71,534       70,208  

Net unrealized loss on securities

     19,185       21,727  
  

 

 

   

 

 

 

Total Deferred Income Tax Assets

     236,554       265,984  

Less: valuation allowances

     (85,719     (89,909
  

 

 

   

 

 

 

Net Deferred Income Tax Assets

     150,835       176,075  
  

 

 

   

 

 

 

Deferred income tax (liabilities) related to:

    

Depreciation

     (47,639     (48,491

Pension and other postretirement benefits

     (7,867     (12,204

Amortization of intangibles

     (115,166     (125,042
  

 

 

   

 

 

 

Total Deferred Income Tax (Liabilities)

     (170,672     (185,737
  

 

 

   

 

 

 

Deferred Income Tax Assets (Liabilities), Net

   $ (19,837   $ (9,662
  

 

 

   

 

 

 

At May 31, 2014, we had U.S. federal foreign tax credit carryforwards of approximately $9.7 million, which expire in 2021. Additionally, at May 31, 2014, we had approximately $37.6 million of state net operating loss carryforwards that expire at various dates beginning in 2015 and foreign net operating loss carryforwards of approximately $182.9 million, of which approximately $35.4 million will expire at various dates beginning in 2015 and approximately $147.5 million that have an indefinite carryforward period. Also, as of May 31, 2014, we had foreign capital loss carryforwards of approximately $19.2 million that can be carried forward indefinitely. These net operating loss, capital loss and foreign tax credit carryforwards may be used to offset a portion of future taxable income and, thereby, reduce or eliminate our U.S. federal, state or foreign income taxes otherwise payable.

When evaluating the realizability of deferred income tax assets, we consider, among other items, whether a jurisdiction has experienced cumulative pretax losses and whether a jurisdiction will generate the appropriate character of income to recognize a deferred income tax asset. More specifically, if a jurisdiction experiences cumulative pretax losses for a period of three years, including the current fiscal year, or if a jurisdiction does not have sufficient income of the appropriate character in the relevant carryback or projected carryforward periods, we generally conclude that it is more likely than not that the respective deferred tax asset will not be realized unless factors such as expected operational changes, availability of prudent and feasible tax planning strategies, reversal of taxable temporary differences or other information exists that would lead us to conclude otherwise. If, after we have evaluated these factors, the deferred income tax assets are not expected to be realized within the carryforward or carryback periods allowed for that jurisdiction, we would conclude that a valuation allowance is required. To the extent that the deferred income tax asset is expected to be utilized within the carryback or carryforward periods, we would conclude that a valuation allowance would not be required.

In applying the above, we determined, based on the available evidence, that future U.S. taxable income along with anticipated foreign source income, will be sufficient to recognize certain deferred tax assets, which were previously subject to valuation allowances. As a result, during this fiscal year, we recorded a reduction in valuation allowances associated with the estimated utilization of foreign tax credit carryforwards of approximately $4.7 million. This reduction was partially offset by approximately $0.5 million of other incremental adjustments to the valuation allowances. Further, we believe it is uncertain whether future taxable income of certain of our foreign subsidiaries, future taxable income of the appropriate character and anticipated foreign source income, will be sufficient to recognize the remaining corresponding deferred tax assets. Accordingly, we intend to maintain the recorded valuation allowances until sufficient positive evidence exists to support a reversal of the tax valuation allowances.

Total valuation allowances of approximately $85.7 million and $89.9 million have been recorded as of May 31, 2014 and 2013, respectively. The recorded valuation allowances relate to U.S. federal foreign tax credit carryforwards, foreign capital loss carryforwards, certain foreign net operating losses, net foreign deferred tax assets and unrealized losses on securities.

The following table reconciles income tax expense (benefit) computed by applying the U.S. statutory federal income tax rate against income (loss) before income taxes to the provision (benefit) for income taxes:

 

Year Ended May 31,

   2014     2013     2012  
(In thousands)                   

Income tax expense (benefit) at the U.S. statutory federal income tax rate

   $ 148,570     $ 61,912     $ 114,901  

Impact of foreign operations

     (24,874     (11,552     (32,192

State and local income taxes net of federal income tax benefit

     4,519       1,979       4,073  

Tax benefits from the domestic manufacturing deduction

     (4,878     (4,489     (3,744

Nondeductible fines and penalties

     (2,002     4,802       —    

Nondeductible business expense

     1,508       1,269       1,304  

Valuation allowance

     (2,998     14,729       9,353  

Other

     (1,342     (1,610     831  
  

 

 

   

 

 

   

 

 

 

Provision for Income Tax Expense

   $ 118,503     $ 67,040     $ 94,526  
  

 

 

   

 

 

   

 

 

 

Effective Income Tax Rate

     27.9     37.9     28.8
  

 

 

   

 

 

   

 

 

 

Uncertain income tax positions are accounted for in accordance with ASC 740. The following table summarizes the activity related to unrecognized tax benefits:

 

(In millions)

   2014     2013     2012  

Balance at June 1

   $ 8.4     $ 3.3     $ 6.4  

Additions based on tax positions related to current year

     0.1       —         —    

Additions for tax positions of prior years

     8.9       6.0       0.5  

Reductions for tax positions of prior years

     (1.7     (0.9     (0.4

Settlements

     —         —         (3.2
  

 

 

   

 

 

   

 

 

 

Balance at May 31

   $ 15.7     $ 8.4     $ 3.3  
  

 

 

   

 

 

   

 

 

 

The line item titled, “Additions for tax positions of prior years,” in the table above reflects our estimate of the impact of the Canadian law change, Canada Bill C-48, Technical Tax Amendments Act, 2012, which was effective June 26, 2013.

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $15.0 million at May 31, 2014, $7.5 million at May 31, 2013 and $2.4 million at May 31, 2012. We do not anticipate any significant changes to the above total unrecognized tax benefits within the next 12 months.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. At May 31, 2014, 2013 and 2012, the accrual for interest and penalties was $5.2 million, $5.2 million and $1.5 million, respectively. Unrecognized tax benefits, including interest and penalties, have been classified as other long-term liabilities unless expected to be paid in one year.

We, or our subsidiaries, file income tax returns in the U.S. and in various state, local and foreign jurisdictions. In addition, with limited exceptions, we, or our subsidiaries, are generally subject to state and local or non-U.S. income tax examinations by tax authorities for the fiscal years 2008 through 2014.

During the current fiscal year, we settled a U.S. federal examination of fiscal year 2011 and were notified by the Internal Revenue Service that they will perform limited scope examinations of fiscal years 2012 and 2013.

We are currently under examination, or have been notified of an upcoming tax examination for various non-U.S. and domestic state and local jurisdictions. Although it is possible that certain tax examinations could be resolved during the next 12 months, the timing and outcomes are uncertain.

We include SPHC and its domestic subsidiaries (collectively, the “SPHC Group”) in our consolidated federal income tax return. We entered into a tax-cooperation agreement (the “Agreement”) with the SPHC Group, effective from June 1, 2010. Generally, the Agreement provides, amongst other items, that the federal income taxes of the SPHC Group are to be computed on a stand-alone separate return basis. The current portion of such income tax payable, if any, is due from the SPHC Group to us. Conversely, subject to the terms of the Agreement, income tax benefits associated with net operating loss or tax credit carryovers generated by the SPHC Group, if any, for the taxable year that benefits our consolidated income tax return for that taxable year are payable by us to the SPHC Group. Additionally, pursuant to the terms of the Agreement, a similar approach is applied to consolidated, combined or unitary state tax returns.