NOTE 17 – INCOME TAXES

Income from continuing operations before income taxes:


	2015			2014		2013
United States	$	139,749		$	84,801	$	88,405
International		(29,043	)		28,425		(2,491	)

	$	110,706		$	113,226	$	85,914

Income tax expense from the Corporation’s continuing operations has been provided as follows:


	2015			2014		2013
Current:
Federal	$	61,049		$	26,018	$	6,007
International		(58	)		8,027		839
State and local		5,965			6,044		1,620

		66,956			40,089		8,466
Deferred		(21,357	)		22,615		27,530

	$	45,599		$	62,704	$	35,996

Reconciliation of the Corporation’s income tax expense from continuing operations from the U.S. statutory rate to the actual effective income tax rate is as follows:


	2015			2014			2013
Income tax expense at statutory rate	$	38,747		$	39,629		$	30,070
State and local income taxes, net of federal tax benefit		3,085			7,617			3,638
Corporate-owned life insurance		25,861			(1,625	)		(1,682	)
International items, net of foreign tax credits		(12,258	)		4,580			1,880
Accruals and settlements		(1,853	)		793			233
Valuation allowance		(4,244	)		12,606			2,209
Domestic production activities deduction		(5,250	)		(3,815	)		(1,813	)
Other		1,511			2,919			1,461

Income tax at effective tax rate	$	45,599		$	62,704		$	35,996

During 2015, the Corporation surrendered certain of its corporate-owned life insurance policies that resulted in an increase in income tax expense of $28,279 which is included in the “Corporate-owned life insurance” line above. This increase was partially offset by the benefit of dual consolidated losses of the Corporation’s branches totaling $13,268 which is included in the “International items, net of foreign tax credits” line. The net release of valuation allowances of $4,244 further benefitted income tax expense. The Corporation released a valuation allowance against certain net operating loss and foreign tax credit carryforwards as disclosed below in the “Correction of Immaterial Errors” section.

During 2014, the Corporation recorded a valuation allowance against certain net operating loss and foreign tax credit carryforwards which the Corporation believed at the time would expire unused. The valuation allowance was recorded due to the inability to utilize these losses pursuant to Internal Revenue Code (“IRC”) sections 382 and 383 due to the Merger as previously disclosed in Note 2.

Income taxes paid from continuing operations were $59,758 in 2015, $18,637 in 2014 and $25,925 in 2013.

Significant components of the Corporation’s deferred tax assets and liabilities are as follows:


	February 28, 2015			February 28, 2014
Deferred tax assets:
Employee benefit and incentive plans	$	60,082		$	59,225
Goodwill and other intangible assets		41,728			32,724
Net operating loss carryforwards limited by IRC Section 382		24,319			22,179
Net operating loss carryforwards		24,227			24,067
Reserves not currently deductible		19,382			25,189
Inventory costing		9,531			7,243
Accrued expenses deductible as paid		9,187			5,882
Deferred revenue		1,871			2,154
Deferred capital loss		1,407			2,985
Foreign tax credit carryforwards		1,227			6,137
Other (each less than 5 percent of total assets)		8,369			10,859

		201,330			198,644
Valuation allowance		(23,482	)		(29,318	)

Total deferred tax assets		177,848			169,326
Deferred tax liabilities:
Property, plant and equipment		48,123			53,837
Other		3,169			2,235

Total deferred tax liabilities		51,292			56,072

Net deferred tax assets	$	126,556		$	113,254

Net deferred tax assets are included on the Consolidated Statement of Financial Position in the following captions:


	February 28, 2015			February 28, 2014
Deferred and refundable income taxes (current)	$	40,543		$	43,589
Deferred and refundable income taxes (noncurrent)		86,030			70,261
Deferred income taxes and noncurrent income taxes payable		(17	)		(596	)

Net deferred tax assets	$	126,556		$	113,254

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases as well as from net operating loss and tax credit carryforwards, and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income tax payments in future years.

The Corporation periodically reviews the need for valuation allowances against deferred tax assets and recognizes these deferred tax assets to the extent that realization is more likely than not. Based upon a review of earnings history and trends, forecasted earnings and the relevant expiration of carryforwards, the Corporation believes that the valuation allowances provided are appropriate. At February 28, 2015, the valuation allowance of $23,482 related principally to certain international and domestic net operating loss carryforwards, foreign tax credit carryforwards and deferred capital losses.

At February 28, 2015, the Corporation had deferred tax assets of approximately $6,226 for international net operating loss carryforwards, of which $6,106 have no expiration dates and $120 have expiration dates ranging from 2031 through 2032. In addition, the Corporation had deferred tax assets related to domestic net operating loss, state net operating loss and foreign tax credit (“FTC”) carryforwards of approximately $12,923, $5,078 and $8,673, respectively. The federal net operating loss carryforwards have expiration dates ranging from 2020 to 2028. The state net operating loss carryforwards have expiration dates ranging from 2016 to 2036. The FTC carryforward has expiration dates ranging from 2019 to 2022.

Deferred taxes have not been provided on approximately $23,607 of undistributed earnings of international subsidiaries since substantially all of these earnings are necessary to meet their business requirements. It is not practicable to calculate the deferred taxes associated with these earnings; however, foreign tax credits would be available to reduce federal income taxes in the event of distribution.

At February 28, 2015, the Corporation had unrecognized tax benefits of $20,814 that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $18,597 compared to unrecognized tax benefits of $19,011 that, if recognized, would have a favorable effect on the Corporation’s income tax expense of $16,255 at February 28, 2014. It is reasonably possible that the Corporation’s unrecognized tax positions as of February 28, 2015 could decrease approximately $1,772 during 2016 due to anticipated settlements and resulting cash payments related to open years after 2001 which are currently under examination.

The following chart reconciles the Corporation’s total gross unrecognized tax benefits for the years ended February 28, 2015, 2014, and 2013:


	2015			2014			2013
Balance at beginning of year	$	19,011		$	21,659		$	30,360
Additions for tax positions of prior years		3,527			538			2,106
Reductions for tax positions of prior years		(1,440	)		(2,459	)		(184	)
Settlements		(14	)		—			(9,122	)
Statute lapse		(270	)		(727	)		(1,501	)

Balance at end of year	$	20,814		$	19,011		$	21,659

The Corporation recognizes interest and penalties accrued on unrecognized tax benefits and income taxes as a component of income tax expense. During the year ended February 28, 2015, the Corporation recognized a net benefit of $1,281 for interest and penalties due to a reversal of accrued interest on unrecognized tax benefits and income taxes. This was primarily the result of the correction of immaterial errors as discussed below. As of February 28, 2015, the total amount of gross accrued interest and penalties related to unrecognized tax benefits and income taxes netted to a payable of $2,580. During the year ended February 28, 2014, the Corporation recognized a net expense of $41 for interest and penalties related to unrecognized tax benefits and refundable income taxes. As of February 28, 2014, the total amount of gross accrued interest and penalties related to unrecognized tax benefits and income taxes netted to a payable of $3,861.

The Corporation is subject to examination by the IRS for tax years 2010 to the present and various U.S. state and local jurisdictions for tax years 2001 to the present. The Corporation is also subject to tax examination in various international tax jurisdictions, including Canada, the United Kingdom, Australia, Italy, Mexico and New Zealand for tax years 2006 to the present.

Correction of Immaterial Errors

During the first and fourth quarters of 2015, the Corporation identified and corrected errors in the accounting for income taxes that related to the year ended February 28, 2014. The first quarter corrections decreased 2015 income tax expense by $4,144 and primarily related to the Corporation’s failure to consider all sources of available taxable income when assessing the need for a valuation allowance against certain deferred tax assets and the recognition of a liability for an uncertain tax position at February 28, 2014. These errors were the result of the significant complexity created as a result of the Merger and related transactions. The fourth quarter corrections increased income tax expense by $1,761 and related to the Corporation’s conversion to a new fixed asset system during the fourth quarter of fiscal 2014 and issues that occurred during the data conversion process of the tax depreciation records. The impact of correcting these items had a non-cash effect, decreasing tax expense and increasing net income by $2,383. Based on its evaluation as discussed more fully below, the Corporation concluded that the corrections to the financial statements were immaterial to its financial results for the years ended February 28, 2015 and 2014.

In accordance with ASC Topic 250, Accounting Changes and Error Corrections, the Corporation evaluated the effects of the errors on its financial statements for the years ended February 28, 2015 and 2014 and concluded that the results of operations for these periods are not materially misstated. In reaching its conclusion, the Corporation considered numerous qualitative and quantitative factors, including but not limited to the following:

•

In evaluating the financial and operational performance, the Corporation’s shareholder and debt holders focus on performance metrics such as earnings before interest, taxes, depreciation and amortization (“EBITDA”), operating income and cash flows from operations, none of which were impacted by the correction of the errors,

•

The numeric impact of the error on the Corporation’s results of operations, including the net dollar impact, the impact as a percentage of period earnings, the impact on financial trends, and the impact on non-GAAP measures such as adjusted operating income the Corporation presents in quarterly public debt holder conference calls, which were deemed immaterial, particularly in light of the Corporation’s stakeholders’ focus on EBITDA, operating income and cash flows from operations, and

•

The absence of any impact on the Corporation’s compliance with its debt covenants, management compensation or segment reporting.

Based on its evaluation, the Corporation concluded that it is not probable that the judgment of a reasonable person relying on the financial statements would have been changed or influenced by the error or correction of the error.