Note

: Income Taxes

December 22, 2017,

the President of the United States signed into law U.S. Tax Reform. U.S. Tax Reform includes a number of provisions, including the lowering of the U.S. corporate tax rate from

percent to

percent, effective

January 1, 2018,

which results in a blended federal tax rate for fiscal year

2018.

U.S. Tax Reform also includes international provisions, which generally establish a territorial-style system for taxing foreign-source income of domestic multinational corporations and imposes a

one

-time transition tax on deemed repatriated accumulated foreign earnings as of

December 31, 2017.

The Company recorded a discrete tax charge of

$42.0

million during the year ended

December 1, 2018

for the

one

-time transition tax on deemed repatriation of its non-U.S. subsidiaries earnings. The transition tax was partially offset by a tax benefit of approximately

$8.5

million related to a dividends received deduction for certain foreign tax credits related to the transition tax. This charge includes U.S. state income tax on the portion of the earnings deemed to be repatriated. The

one

-time transition tax is based on the Company’s post-

1986

earnings and profits

not

previously subject to U.S. taxation. The Company also recorded a

$79.5

million benefit for the remeasurement of deferred tax assets and liabilities due to the decreased tax rate.

Income before income taxes and income from equity method investments	2018		2017			2016
United States	$	19,388	$	(33,273	)	$	72,218
Non-U.S.		137,338		93,872			91,226
Total	$	156,726	$	60,599		$	163,444

Components of the provision for income tax expense (benefit)	2018			2017			2016
Current:
U.S. federal	$	9,652		$	444		$	14,515
State		1,597			21			2,789
Non-U.S.		37,980			29,557			27,788
		49,229			30,022			45,092
Deferred:
U.S. federal		(50,115	)		(7,653	)		5,051
State		(197	)		(1,414	)		979
Non-U.S.		(5,273	)		(11,145	)		(2,202	)
		(55,585	)		(20,212	)		3,828
Total	$	(6,356	)	$	9,810		$	48,920

Reconciliation of effective income tax	2018			2017			2016
Statutory U.S. federal income tax rate	$	34,605		$	21,210		$	57,206
State income taxes, net of federal benefit		1,148			(959	)		2,012
Foreign dividend repatriation		1,258			276			519
Foreign operations		(3,253	)		(9,565	)		(3,386	)
Impact of option valuation		330			(1,381	)		(1,879	)
Interest income not taxable in the U.S.		-			(626	)		(525	)
Change in valuation allowance		5,213			(3,694	)		(2,219	)
Tax impact of special charges, net		-			-			173
Research and development tax credit		(982	)		(647	)		(2,291	)
Section 199 manufacturing deduction		(319	)		-			(1,658	)
Royal Adhesives transaction costs		-			2,271			-
Transition tax		42,007			-			-
Dividends received deduction		(8,484	)		-			-
Deferred tax rate change		(79,488	)		-			-
Other		1,609			2,925			968
Total income tax expense (benefit)	$	(6,356	)	$	9,810		$	48,920

Deferred income tax balances at each year-end related to:	2018			2017
Deferred tax assets:
Employee benefit costs	$	19,617		$	36,824
Foreign tax credit carryforward		1,809			27,197
Tax loss carryforwards		27,532			24,096
Other		20,865			20,323
Gross deferred tax assets		69,823			108,440
Less: valuation allowance		(14,129	)		(9,273	)
Total net deferred tax assets		55,694			99,167
Deferred tax liability:
Depreciation and amortization		(242,877	)		(336,260	)
Total deferred tax liability		(242,877	)		(336,260	)
Net deferred tax liability	$	(187,183	)	$	(237,093	)

The difference between the change in the deferred tax assets in the balance sheet and the deferred tax provision is primarily due to the defined benefit pension plan adjustment recorded in accumulated other comprehensive income (loss).

Valuation allowances principally relate to foreign net operating loss carryforwards where the future potential benefits do

not

meet the more-likely-than-

not

realization test. The increase in the valuation allowance relates primarily to current year net operating losses of which the company does

not

expect to receive a tax benefit.

Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-

not

to be realized. We believe it is more-likely-than-

not

that reversal of deferred tax liabilities and forecasted income will be sufficient to fully recover the net deferred tax assets

not

already offset by a valuation allowance. In the event that all or part of the gross deferred tax assets are determined

not

to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

U.S. income taxes have

not

been provided on approximately

$636,513

of undistributed earnings of non-U.S. subsidiaries. We intend to indefinitely reinvest these undistributed earnings. Cash available in the United States has historically been sufficient and we expect it will continue to be sufficient to fund U.S. cash flow requirements. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that

may

be offset, at least in part, by associated foreign tax credits.

While non-U.S. operations have been profitable overall, there are cumulative tax losses of

$100,389

in various countries. These tax losses can be carried forward to offset the income tax liabilities on future income in these countries. Cumulative tax losses of

$51,974

can be carried forward indefinitely, while the remaining

$48,415

of tax losses must be utilized during

2019

2036.

The company also has

$3,022

of tax effected losses in various states.

The U.S. has a foreign tax credit carryforward of

$1,809.

Projected foreign source income in future years is sufficient to utilize these credits in the carryforward period.

The table below sets forth the changes to our gross unrecognized tax benefit as a result of uncertain tax positions, excluding accrued interest, for the fiscal years ended

December 1, 2018,

and excluding accrued interest for the fiscal year ended

December 2, 2017.

We do

not

anticipate that the total unrecognized tax benefits will change significantly within the next

twelve

months.

	2018			2017
Balance at beginning of year	$	8,887		$	4,165
Tax positions related to the current year:
Additions		622			613

Tax positions related to prior years:
Additions		1,625			6,943
Reductions		(763	)		(1,585	)
Settlements		(15	)		(708	)
Lapses in applicable statutes of limitation		(1,936	)		(541	)
Balance at end of year	$	8,420		$	8,887

Included in the balance of unrecognized tax benefits as of

December 1, 2018,

are potential benefits of

$5,320

that, if recognized, would affect the effective tax rate.

We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the year ended

December 1, 2018,

we recognized a net expense for interest and penalties of

$571

relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of

$1,190

as of

December 1, 2018.

For the year ended

December 2, 2017,

we recognized a net benefit for interest and penalties of

$111

relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of

$626

as of

December 2, 2017.

We are subject to U.S. federal income tax as well as income tax in numerous state and foreign jurisdictions. We are

longer subject to U.S. federal tax examination for years prior to

2012

or Swiss income tax examination for years prior to

2012.

During

2015,

the U.S. tax authorities opened an audit for the years ended

December 1, 2012

and

November 30, 2013.

These audits have been principally settled but remain open only for matters to be addressed by the U.S., Canada and Mexican authorities in competent authority. During the

second

quarter of

2016,

H.B. Fuller (China) Adhesives, Ltd. was notified of a transfer pricing audit covering the calendar years

2005

through

2014.

We are in various stages of examination and appeal in several states and other foreign jurisdictions. Although the final outcomes of these examinations cannot currently be determined, we believe that we have recorded adequate liabilities with respect to these examinations.