Note 11 - Income Taxes

12 Months Ended

Nov. 28, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 11: Income Taxes

On 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 35 percent to 21 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	2020		2019		2018
United States	$	20,328	$	31,796	$	19,388
Non-U.S.		138,028		141,032		137,338
Total	$	158,356	$	172,828	$	156,726

Components of the provision for income tax expense (benefit)	2020			2019			2018
Current:
U.S. federal	$	5,243		$	9,122		$	9,652
State		1,320			3,294			1,597
Non-U.S.		56,542			47,848			37,980
		63,105			60,264			49,229
Deferred:
U.S. federal		(4,709	)		(432	)		(50,115	)
State		(4,111	)		125			(197	)
Non-U.S.		(12,364	)		(10,549	)		(5,273	)
		(21,184	)		(10,856	)		(55,585	)
Total	$	41,921		$	49,408		$	(6,356	)

Reconciliation of effective income tax	2020			2019			2018
Statutory U.S. federal income tax rate	$	33,255		$	36,294		$	34,605
State income taxes, net of federal benefit		(2,104	)		2,785			1,148
Foreign dividend repatriation		900			825			1,258
Foreign operations		(563	)		8,712			(3,253	)
Impact of option valuation		-			-			330
Executive compensation over $1.0 million		1,420			1,661			611
Change in valuation allowance		5,925			1,097			5,213
Research and development tax credit		(906	)		(802	)		(982	)
Section 199 manufacturing deduction		-			-			(319	)
Foreign-derived intangible income		(1,396	)		(2,240	)		-
Global intangible low-taxed income		1,932			2,029			-
Provision to return		1,704			(3,271	)		(1,921	)
Cross currency swap		(6,748	)		2,677			-
Contingency reserve		8,287			(957	)		1,943
Transition tax		-			-			42,007
Dividends received deduction		-			-			(8,484	)
Deferred tax rate change		-			-			(79,488	)
Other		215			598			976
Total income tax expense (benefit)	$	41,921		$	49,408		$	(6,356	)

Deferred income tax balances at each year-end related to:	2020			2019
Deferred tax assets:
Pension and other post-retirement benefit plans	$	1,417		$	6,847
Employee benefit costs		24,538			21,468
Foreign tax credit carryforward		6,905			2,175
Tax loss carryforwards		31,495			26,427
Leases		7,133			-
Hedging activity		12,906			1,198
Other		36,521			32,626
Gross deferred tax assets		120,915			90,741
Less: valuation allowance		(21,843	)		(14,986	)
Total net deferred tax assets		99,072			75,755
Deferred tax liability:
Depreciation and amortization		(220,379	)		(224,248	)
Leases		(7,194	)		-
Total deferred tax liability		(227,573	)		(224,248	)
Net deferred tax liability	$	(128,501	)	$	(148,493	)

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 and floating-to-fixed hedges 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 for 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 $936,607 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.

While non-U.S. operations have been profitable overall, there are cumulative tax losses of $115,550 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 $78,438 can be carried forward indefinitely, while the remaining $37,112 of tax losses must be utilized during 2021 to 2038.

The U.S. has a branch foreign tax credit carryforward of $4,357. A valuation allowance has been recorded against this foreign tax credit carryforward to reflect that this amount is not more-likely-than-not to be realized.

The table below sets forth the changes to our gross unrecognized tax benefit as a result of uncertain tax positions, excluding accrued interest.  We do not anticipate that the total unrecognized tax benefits will change significantly within the next twelve months.

	2020			2019
Balance at beginning of year	$	8,946		$	8,420
Tax positions related to the current year:
Additions		579			684
Tax positions related to prior years:
Additions		7,400			3,077
Reductions		(283	)		(1,484	)
Settlements		(747	)		(105	)
Lapses in applicable statutes of limitation		(1,326	)		(1,646	)
Balance at end of year	$	14,569		$	8,946

Included in the balance of unrecognized tax benefits as of November 28, 2020 and November 30, 2019 are potential benefits of $9,125 and $6,755, respectively, 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 November 28, 2020, we recognized a net benefit for interest and penalties of $2,378 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $3,520 as of November 28, 2020. For the year ended November 30, 2019, we recognized a net benefit for interest and penalties of $59 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $1,142 as of November 30, 2019.

We are subject to U.S. federal income tax as well as income tax in numerous state and foreign jurisdictions. Apart from the 2012 and 2013 U.S. federal audits discussed below, we are no longer subject to U.S. federal tax examination for years prior to 2017, or Swiss income tax examination for years prior to 2015. 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. 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 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.