SEC Document

RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

NOTE 8 - OTHER (INCOME) EXPENSE, NET

Other (income) expense, net, consists of the following components:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

November 30,

 

 

November 30,

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Royalty expense, net

 

$

(178

)

 

$

581

 

 

$

90

 

 

$

1,336

 

(Income) related to unconsolidated equity affiliates

 

 

(244

)

 

 

(324

)

 

 

(517

)

 

 

(537

)

Other (income) expense, net

 

$

(422

)

 

$

257

 

 

$

(427

)

 

$

799

 

 

 

NOTE 9 — INCOME TAXES

The effective income tax expense rate was 12.2% for the three months ended November 30, 2017 compared to an effective income tax benefit rate of 34.3% for the three months ended November 30, 2016.  The effective income tax expense rate was 19.6% for the six months ended November 30, 2017 compared to an effective income tax benefit rate of 3.7% for the six months ended November 30, 2016.

The effective tax rate for the three months ended November 30, 2017 and 2016 reflect variances from the 35% federal statutory rate due to lower effective tax rate of certain of our foreign subsidiaries, the benefit of the domestic manufacturing deduction, partially offset by the unfavorable impact of state and local taxes. Additionally, we recorded favorable discrete tax adjustments for excess tax benefits related to equity compensation of $2.0 million and $1.0 million, respectively, in the three-month periods ended November 30, 2017 and 2016; and $3.5 million and $11.3 million, respectively, for the six month periods ended November 30, 2017 and 2016.

Additionally, during the three-month period ended November 30, 2017, we approved and completed a foreign legal entity restructuring and corresponding planning strategy that resulted in a discrete tax benefit of $18.0 million. Of this amount, a U.S. tax benefit of $1.2 million resulted from the generation of foreign tax credits which offset a deemed inclusion in U.S. taxable income of foreign earnings.  The planned subsequent distribution of these foreign earnings resulted in a benefit of $16.8 million for a corresponding reduction in the estimated deferred income tax liability for the U.S. tax cost associated with unremitted foreign earnings that are not considered permanently reinvested.

Furthermore, income tax expense for the six-month period ended November 30, 2017 reflects the net discrete tax benefit of $9.0 million that we previously reported during the three-month period ended August 31, 2017.  As of November 30, 2017, the amount of unremitted foreign earnings, not previously subject to U.S. tax that may be repatriated and the corresponding deferred tax liability have been adjusted to $221.8 million and $63.4 million, respectively. The reduction to the amount of unremitted foreign earnings that may be repatriated, and the related tax impact, is principally the result of the above noted transaction related to the foreign earnings not considered permanently reinvested, partially offset by the impact of foreign currency translation. The increase to the deferred tax liability related to foreign currency translation was recorded as a component of accumulated other comprehensive income.

We have not provided for U.S. income and foreign withholding taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of November 30, 2017.  Accordingly, no provision has been made for U.S. income taxes or foreign withholding taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were paid to us as dividends.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law.  The income tax effects of changes in tax laws are recognized in the period when enacted. The Act provides for numerous significant tax law changes and modifications with varying effective dates, which include reducing the corporate income tax rate from 35% to 21%, creating a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings), broadening the tax base and allowing for immediate capital expensing of certain qualified property.

As a fiscal year-end taxpayer, certain provisions of the Act will begin to impact us in our fiscal third quarter ending February 28, 2018, while other provisions will impact us beginning in fiscal 2019. The corporate tax rate reduction is effective for RPM as of January 1, 2018 and, accordingly, will reduce our current fiscal year federal statutory rate to a blended rate of approximately 29.2%.

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