Note 11 - Income Taxes

12 Months Ended

Dec. 03, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 11: Income Taxes

Income before income taxes and income from equity method investments	2022		2021		2020
United States	$	63,718	$	14,989	$	20,328
Non-U.S.		188,210		201,862		138,028
Total	$	251,928	$	216,851	$	158,356

Components of the provision for income tax expense (benefit)	2022			2021			2020
Current:
U.S. federal	$	12,181		$	10,310		$	5,243
State		3,389			2,265			1,320
Non-U.S.		63,750			57,801			56,542
		79,320			70,376			63,105
Deferred:
U.S. federal		8,150			(6,891	)		(4,709	)
State		(1,767	)		(350	)		(4,111	)
Non-U.S.		(8,517	)		(102	)		(12,364	)
		(2,134	)		(7,343	)		(21,184	)
Total	$	77,186		$	63,033		$	41,921

Reconciliation of effective income tax	2022			2021			2020
Tax at statutory U.S. federal income tax rate	$	52,760		$	45,539		$	33,255
State income taxes, net of federal benefit		1,252			1,444			(2,104	)
Foreign dividend repatriation		2,596			1,104			900
Foreign operations		1,868			19,673			(563	)
Executive compensation over $1.0 million		2,847			2,507			1,420
Non-U.S. stock option expense		525			575			358
Change in valuation allowance		3,187			(9,572	)		5,925
Research and development tax credit		(927	)		(993	)		(906	)
Foreign-derived intangible income		(2,786	)		(2,617	)		(1,396	)
Global intangible low-taxed income		1,890			2,334			1,932
Provision to return		840			1,122			1,704
Cross currency swap		7,020			3,931			(6,748	)
Contingency reserve		5,909			(2,139	)		8,287
Other		205			125			(143	)
Total income tax expense	$	77,186		$	63,033		$	41,921

Deferred income tax balances at each year-end related to:	2022			2021
Deferred tax assets:
Pension and other post-retirement benefit plans	$	6,752		$	12,118
Employee benefit costs		25,196			26,799
Foreign tax credit carryforward		7,884			7,309
Tax loss carryforwards		22,948			24,071
Leases		8,538			8,590
Hedging activity		13,299			2,623
Interest deduction limitation		17,736			12,428
Other		28,840			27,410
Gross deferred tax assets		131,193			121,348
Less: valuation allowance		(14,424	)		(11,341	)
Total net deferred tax assets		116,769			110,007
Deferred tax liability:
Depreciation and amortization		(215,219	)		(207,726	)
Pension and other post-retirement benefit plans		(37,362	)		(36,042	)
Leases		(8,329	)		(8,524	)
Total deferred tax liability		(260,910	)		(252,292	)
Net deferred tax liability	$	(144,141	)	$	(142,285	)

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 primarily relate to foreign net operating loss carryforwards and branch foreign tax credit carryforwards where the future potential benefits do not meet the more-likely-than-not realization test. The increase in the valuation allowance is primarily related to a decrease in foreign net operating losses for which the Company does not expect to receive a full 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 $1,119,823 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 $77,315 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 $58,762 can be carried forward indefinitely, while the remaining $18,553 of tax losses must be utilized during 2023 to 2040.

The U.S. has a branch foreign tax credit carryforward of $5,042. 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.

	2022			2021
Balance at beginning of year	$	13,281		$	14,569
Tax positions related to the current year:
Additions		469			401
Tax positions related to prior years:
Additions		5,885			1,323
Reductions		(1,019	)		(950	)
Settlements		-			(161	)
Lapses in applicable statutes of limitation		(1,034	)		(1,901	)
Balance at end of year	$	17,582		$	13,281

Included in the balance of unrecognized tax benefits as of  December 3, 2022 and November 27, 2021 are potential benefits of $12,663 and $8,888 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 December 3, 2022, we recognized a net benefit for interest and penalties of $2,760 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $6,275 as of December 3, 2022. For the year ended November 27, 2021, we recognized a net benefit for interest and penalties of $703 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $2,817 as of November 27, 2021.

We are subject to U.S. federal income tax as well as income tax in numerous state and foreign jurisdictions. We are no longer subject to U.S. federal tax examination for years prior to 2019 or Swiss income tax examination for years prior to 2018. 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.