SEC Document


At May 31, 2017, we had U.S. federal foreign tax credit carryforwards of approximately $33.4 million, which expire in various years ending in 2027. Additionally, at May 31, 2017, we had approximately $68.8 million of state net operating loss carryforwards that expire at various dates beginning in 2018 and foreign net operating loss carryforwards of approximately $170.0 million, of which approximately $22.2 million will expire at various dates beginning in 2018 and approximately $147.8 million that have an indefinite carryforward period. Also, as of May 31, 2017, we had foreign capital loss carryforwards of approximately $14.2 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 taxable income from certain of our foreign subsidiaries will be sufficient to recognize corresponding deferred tax asset that were previously subject to valuation allowances. As a result, during this fiscal year, we recorded income tax expense of $0.9 million in connection with a net increase in valuation allowances associated with the estimated utilization of foreign net operating loss carryforwards and other foreign deferred tax assets. For the year ended May 31, 2016, we recorded net reduction in valuation allowances associated with the estimated utilization of foreign net operating loss carryforwards of $5.8 million. This benefit was partially offset by $2.4 million of additions to valuation allowances for other foreign deferred tax assets. For the year ended May 31, 2015, we determined that future U.S. taxable income along with anticipated foreign source income, will be sufficient to recognize foreign tax and other credit carryforwards of approximately $12.0 million that were previously subject to valuation allowances. The benefit was partially offset by approximately $1.5 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 and future taxable income of the appropriate character 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 $63.7 million and $60.1 million have been recorded as of May 31, 2017 and 2016, respectively. The recorded valuation allowances relate to 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,    2017        2016        2015       
(In thousands)                         

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

   $   85,517        $   169,213        $   158,638       

Impact of foreign operations

     (20,156        (29,969        (32,706)      

State and local income taxes, net of federal income tax benefit

     4,734          4,310          4,140       

Tax benefits from the domestic manufacturing deduction

     (2,537        (8,030        -       

Nondeductible business expense

     2,394          2,224          1,782       

Valuation allowance

     933          (3,357        (10,455)      

Unremitted foreign earnings

     (621        (3,712        106,227       

Non-taxable gain from joint venture remeasurement

     -          (2,790        -       

Tax Benefits from Employee Share-Based Payments

     (12,078          

Other

     1,476          (1,881        (2,701)      

Provision for Income Tax Expense

   $ 59,662        $ 126,008        $ 224,925       

Effective Income Tax Rate

     24.4        26.1        49.6%       

 

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)    2017      2016      2015    

Balance at June 1

     $13.7         $12.9         $15.7    

Additions based on tax positions related to current year

     0.2         0.3         -    

Additions for tax positions of prior years

     2.9         2.6         0.9    

Reductions for tax positions of prior years

     (3.2)        (1.4)        (1.5)   

Foreign currency translation

     (0.4)        (0.7)        (2.2)   

Balance at May 31

     $13.2         $13.7         $12.9    

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $4.6 million at May 31, 2017, $2.5 million at May 31, 2016 and $3.9 million at May 31, 2015. 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, 2017, 2016 and 2015, the accrual for interest and penalties was $3.1 million, $2.8 million and $3.8 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. The Internal Revenue Service (“IRS”) has notified us of an examination of our 2015 federal income tax return and the statutory audit period has expired for all years through 2013. Further, with limited

 

 

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RPM International Inc. and Subsidiaries     49


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