Income Taxes

12 Months Ended

Apr. 30, 2020

We incur income taxes on the earnings of our U.S. and foreign operations. The following table, based on the locations of the taxable entities from which sales were derived (rather than the location of customers), presents the U.S. and foreign components of our income before income taxes:



	2018		2019		2020
United States	$	747	$	863	$	849
Foreign	230		179		160
	$	977	$	1,042	$	1,009

The income shown above was determined according to GAAP. Because those standards sometimes differ from the tax rules used to calculate taxable income, there are differences between: (a) the amount of taxable income and pretax financial income for a year and (b) the tax bases of assets or liabilities and their amounts as recorded in our financial statements. As a result, we recognize a current tax liability for the estimated income tax payable on the current tax return, and deferred tax liabilities (income tax payable on income that will be recognized on future tax returns) and deferred tax assets (income tax refunds from deductions that will be recognized on future tax returns) for the estimated effects of the differences mentioned above.

Total income tax expense for a year includes the tax associated with the current tax return (current tax expense) and the change in the net deferred tax asset or liability (deferred tax expense). Our total income tax expense for each of the last three years was as follows:



	2018			2019			2020
Current:
U.S. federal	$	265		$	107		$	95
Foreign	47			34			29
State and local	17			28			19
	329			169			143
Deferred:
U.S. federal	(48		)	37			34
Foreign	(13		)	4			7
State and local	(8		)	(3		)	(2		)
	(69		)	38			39
	$	260		$	207		$	182

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revised the future, ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. Because we have an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended April 30, 2018, and 21% for fiscal 2019 and subsequent fiscal years. For the year ended April 30, 2019, the reduction of the U.S. statutory federal rate from 35% (the pre-Tax Act rate) to 21% resulted in a tax benefit of $115.

There were also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, we adjusted our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $43 for the year ended April 30, 2018, composed of a provisional repatriation U.S. tax charge of $91 and a provisional net deferred tax benefit of $48. In the fiscal year ended April 30, 2019, we recorded a benefit of $4 as an adjustment to the provisional repatriation tax.

The changes included in the Tax Act are broad and complex. The U.S. Securities and Exchange Commission issued rules that allowed for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of April 30, 2019, the amounts recorded for the Tax Act for the one-time repatriation tax and the adjustment to our U.S. deferred tax assets and liabilities were finalized and no longer deemed to be provisional.

The Tax Act also established new tax provisions that impact our financial statements beginning in fiscal 2019. These new provisions include (a) Global Intangible Low-Tax Income (GILTI), a new inclusion rule affecting non-routine income earned by foreign subsidiaries; (b) Base Erosion Anti-Abuse Tax (BEAT), a new minimum tax; (c) Foreign-Derived Intangible Income (FDII), a new preferential tax rate for domestic income earned from serving foreign markets; (d) repeal of the domestic production activity deduction; and (e) limitations on the deductibility of certain executive compensation. For the fiscal year ended April 30, 2019 and April 30, 2020, the net impact of these provisions was approximately $12 and $11 of additional tax, respectively.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. It included certain provisions for additional net operating loss utilization, immediate refund for AMT Credit Carryforwards, and increased income limitation under IRC section 163(j) for 2019 and 2020. The CARES Act also retroactively clarified the immediate write-off of qualified improvement property beginning in 2018 and increased the charitable contribution deduction.

As of April 30, 2020, we had approximately $1,279 of undistributed earnings from our foreign subsidiaries. Most of these earnings have been previously subject to tax, primarily as a result of the one-time repatriation tax on foreign earnings required by the Tax Act. Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. During fiscal 2020, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for one of our foreign subsidiaries (but not for its other outside basis differences) and repatriated $15 of cash to the United States. No incremental taxes were due on this distribution of cash beyond the repatriation tax recorded in fiscal year 2018. However, we incurred withholding tax of $1 related to the distribution. We have not changed the indefinite reinvestment assertion on the undistributed earnings or other outside basis differences of any of our other remaining foreign subsidiaries, and no deferred taxes have been provided. A determination of the unrecognized deferred tax liabilities on the other outside basis differences and earnings reinvested indefinitely at April 30, 2020, is not practicable due to the complexities in

the calculations. The other outside basis differences are primarily related to differences between U.S. GAAP and tax basis that arose through purchase accounting. These basis differences could reverse through sales of foreign subsidiaries or other transactions, none of which are considered probable as of April 30, 2020.

As of April 30, 2019, we had approximately $1,266 of undistributed earnings from our foreign subsidiaries. During fiscal 2019, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for one of our foreign subsidiaries (but not for its other outside basis differences) and repatriated $120 of cash to the United States.

Our consolidated effective tax rate usually differs from current statutory rates due to the recognition of amounts for events or transactions with no tax consequences. The following table reconciles our effective tax rate to the federal statutory tax rate in the United States:



	Percent of Income Before Taxes
	2018		2019		2020
U.S. federal statutory rate	30.4	%	21.0	%	21.0	%
State taxes, net of U.S. federal tax benefit	0.8	%	2.1	%	1.7	%
Income taxed at other than U.S. federal statutory rate	(3.4	%)	(0.1	%)	—	%
Tax benefit from foreign-derived sales	—	%	(1.7	%)	(2.0	%)
Adjustments related to prior years	(0.9	%)	(1.2	%)	(1.1	%)
Tax benefit from U.S. manufacturing	(2.5	%)	—	%	—	%
Amortization of deferred tax benefit from intercompany transactions	(1.6	%)	—	%	—	%
Excess tax benefits from stock-based awards	(1.8	%)	(0.7	%)	(2.0	%)
Impact of Tax Act	2.5	%	(0.4	%)	—	%
Other, net	3.1	%	0.8	%	0.4	%
Effective rate	26.6	%	19.8	%	18.0	%

Deferred tax assets and liabilities as of the end of each of the last two years were as follows:



April 30,	2019			2020
Deferred tax assets:
Postretirement and other benefits	$	87		$	110
Accrued liabilities and other	23			23
Inventories	34			26
Lease liabilities	—			14
Loss and credit carryforwards	55			57
Valuation allowance	(25		)	(22		)
Total deferred tax assets, net	174			208
Deferred tax liabilities:
Intangible assets	(218		)	(233		)
Property, plant, and equipment	(73		)	(90		)
Right-of-use assets	—			(13		)
Derivative instruments	(9		)	(18		)
Other	(3		)	(16		)
Total deferred tax liabilities	(303		)	(370		)
Net deferred tax liability	$	(129	)	$	(162	)

Details of the loss and credit carryforwards and related valuation allowances as of the end of each of the last two years are as follows:



	April 30, 2019							April 30, 2020
	Gross Amount		Deferred Tax Asset		Valuation Allowance			Gross Amount		Deferred Tax Asset		Valuation Allowance			Expiration (as of April 30, 2020)
Finland net operating losses	$	105	$	21	$	—		$119		$24		$	—		2024-2030
Brazil net operating losses	42		14		(14		)	31		10		(10		)	None
United Kingdom non-trading losses	27		5		(5		)	26		5		(5		)	None
Various state net operating losses and credits	68		6		—			63		9		—			Various¹
Other	54		9		(6		)	50		9		(7		)	Various²
	$	296	$	55	$	(25	)	$	289	$	57	$	(22	)

¹As of April 30, 2020, the net deferred tax asset amount includes credit carryforwards of $3 that do not expire and loss and credit carryforwards of $6 that expire in varying amounts from 2023 to 2040.

²As of April 30, 2020, the gross amount includes loss carryforwards of $24 that do not expire and $26 that expire in varying amounts over the next 20 years.

Although the losses in Brazil can be carried forward indefinitely, it is uncertain whether we will realize sufficient taxable income to allow us to use these losses. The non-trading losses in the United Kingdom can also be carried forward indefinitely. However, we know of no significant transactions that will let us use them.

At April 30, 2020, we had $11 of gross unrecognized tax benefits, $9 of which would reduce our effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:



	2018			2019			2020
Unrecognized tax benefits at beginning of year	$	9		$	11		$	11
Additions for tax positions provided in prior periods	5			1			2
Additions for tax positions provided in current period	1			1			—
Decreases for tax positions provided in prior years	(4		)	(2		)	(1		)
Settlements of tax positions in the current period	—			—			(1		)
Unrecognized tax benefits at end of year	$	11		$	11		$	11

We file income tax returns in the United States, including several state and local jurisdictions, as well as in several other countries in which we conduct business. The major jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2014 for one state in the United States; 2018 in the United Kingdom; 2016 in Australia; 2015 in Finland, Germany, and Poland; 2014 in the Netherlands and Brazil; and 2013 in Mexico. We expect the audits of our fiscal 2018 and fiscal 2019 U.S. federal tax returns to be concluded in the first half of fiscal 2021. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal 2020 tax year.

We believe there will be no material change in our gross unrecognized tax benefits in the next 12 months.