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Income Taxes | 12 Months Ended
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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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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