Income Taxes

12 Months Ended

Oct. 31, 2020

Income taxes

Income tax expense includes the following:


	2020		2019		2018
Current:
U.S. federal	$	19,265	$	40,012	$	39,837
State and local	984		3,429		1,734
Foreign	45,657		51,590		63,522
Total current	65,906		95,031		105,093
Deferred:
U.S. federal	(10,143)		1,470		(32,829)
State and local	(1,023)		633		891
Foreign	(2,790)		(3,121)		(2,011)
Total deferred	(13,956)		(1,018)		(33,949)
	$	51,950	$	94,013	$	71,144

Earnings before income taxes of domestic operations, which are calculated after intercompany profit eliminations, were $120,054, $222,435 and $192,643 in 2020, 2019 and 2018, respectively.

Our income tax provision for 2020 included a tax benefit of $15,661 due to our share-based payment transactions. Income before taxes in 2020 included a non-cash, assets held for sale impairment charge of $87,371 related to our commitment to sell our screws and barrels product line within the Adhesives reporting unit under our Industrial Precision Solutions segment and the tax benefit of the impairment was $15,254. A portion of the impairment charge did not have related tax benefits.

Our income tax provision for 2019 included a provisional tax benefit of $4,866 to reflect the adjustment to the provisional amounts recognized in 2018 due to changes in interpretations and assumptions and the finalization of estimates related to the U.S. Tax Cuts and Jobs Act ("the Act"). We are paying the transition tax in installments over the eight-year period allowable under the Act. The remaining transition tax is included in other long-term liabilities in the Consolidated Balance Sheet at October 31, 2020.

Other provisions of the Act became effective for us in 2019. The Foreign-Derived Intangible Income provision generates a deduction against our U.S. taxable income for U.S. earnings derived offshore that utilize intangibles held in the U.S. Conversely, the Global Intangible Low-Taxed Income (“GILTI”) provision requires us to subject to U.S. taxation a portion of our foreign subsidiary earnings that exceed an allowable return. We elected to treat any GILTI inclusion as a period expense in the year incurred.

A reconciliation of the U.S. statutory federal rate to the worldwide consolidated effective tax rate follows:


	2020		2019		2018
Statutory federal income tax rate	21.00	%	21.00	%	23.34	%
Transition tax	—		1.46		6.16
Tax rate change deferred tax remeasurement	—		—		(10.94)
Share-based and other compensation	(4.15)		(0.55)		(1.45)
Domestic production deduction	—		—		(0.82)
Foreign tax rate variances, net of foreign tax credits	1.51		1.16		(0.46)
State and local taxes, net of federal income tax benefit	(0.01)		0.74		0.45
Amounts related to prior years	(0.04)		(0.55)		(0.21)
Foreign-Derived Intangible Income Deduction	(0.95)		(1.51)		—
Global Intangible Low-Taxed Income net of foreign tax credits	0.97		0.85		—
Other – net	(1.10)		(0.79)		(0.21)
Effective tax rate	17.23	%	21.81	%	15.86	%

Earnings before income taxes of international operations, which are calculated before intercompany profit elimination entries, were $181,435, $208,669 and $255,877 in 2020, 2019 and 2018, respectively. Deferred income taxes are not provided on undistributed earnings of international subsidiaries that are intended to be permanently invested in their operations. These undistributed earnings represent the post-income tax earnings under U.S. GAAP not adjusted for previously taxed income which aggregated approximately $1,045,389 and $1,101,736 at October 31, 2020 and 2019, respectively. Should these earnings be distributed, applicable foreign tax credits, distributions of previously taxed income, and utilization of other attributes would substantially offset taxes due upon the distribution. It is not practical to estimate the amount of additional taxes that might be payable on these basis differences because of the multiple methods by which these differences could reverse and the impact of withholding, U.S. state and local taxes and currency translation considerations.

At October 31, 2020 and 2019, total unrecognized tax benefits were $6,717 and $2,909, respectively. The amounts that, if recognized, would impact the effective tax rate were $5,998 and $2,429 at October 31, 2020 and 2019, respectively. During 2020, unrecognized tax benefits related primarily to domestic positions and, as recognized, a substantial portion of the gross unrecognized tax benefits were offset against assets recorded in the Consolidated Balance Sheet. A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2020, 2019 and 2018 is as follows:


	2020		2019		2018
Balance at beginning of year	$	2,909	$	2,891	$	3,781
Additions based on tax positions related to the current year	370		370		310
Additions for tax positions of prior years	4,068		547		40
Reductions for tax positions of prior years	—		—		(120)
Settlements	(137)		—		—
Lapse of statute of limitations	(493)		(899)		(1,120)
Balance at end of year	$	6,717	$	2,909	$	2,891

At October 31, 2020 and 2019, we had accrued interest and penalty expense related to unrecognized tax benefits of $2,179 and $593, respectively. We include interest accrued related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as other income (expense).

We are subject to United States Federal income tax as well as income taxes in numerous state and foreign jurisdictions. We are subject to examination in the U.S. by the Internal Revenue Service (IRS) for the 2017 through 2020 tax years; tax years prior to the 2017 year are closed to further examination by the IRS. Generally, major state and foreign jurisdiction tax years remain open to examination for tax years after 2014. Within the next twelve months, it is reasonably possible that certain statute of limitations periods would expire, which could result in a minimal decrease in our unrecognized tax benefits.

Significant components of deferred tax assets and liabilities are as follows:


	2020		2019
Deferred tax assets:
Employee benefits	$	70,838	$	73,025
Other accruals not currently deductible for taxes	16,207		16,294
Tax credit and loss carryforwards	20,268		18,074
Inventory adjustments	8,757		5,269
Total deferred tax assets	116,070		112,662
Valuation allowance	(22,233)		(15,301)
Total deferred tax assets	93,837		97,361
Deferred tax liabilities:
Depreciation and amortization	150,591		169,009
Other - net	410		655
Total deferred tax liabilities	151,001		169,664
Net deferred tax liabilities	$	(57,164)	$	(72,303)

At October 31, 2020, we had $8,565 of tax credit carryforwards, $921 of which expires in 2028 and $7,644 of which has an indefinite carryforward period. We also had $58,559 state, $24,394 foreign operating loss carryforwards, and a $24,227 capital loss carryforward, of which $88,613 will expire in 2021 through 2040, and $18,567 of which has an indefinite carryforward period. The net change in the valuation allowance was an increase of $6,932 in 2020 and of $439 in 2019. The valuation allowance of $22,233 at October 31, 2020, related primarily to tax credits and loss carryforwards that may expire before being realized. We continue to assess the need for valuation allowances against deferred tax assets based on determinations of whether it is more likely than not that deferred tax benefits will be realized.

- 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.

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