Note 11 - Income Taxes

12 Months Ended

Dec. 02, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 11: Income Taxes

Income before income taxes and income from equity method investments	2023		2022		2021
United States	$	15,276	$	63,718	$	14,989
Non-U.S.		218,885		188,210		201,862
Total	$	234,161	$	251,928	$	216,851

Components of the provision for income tax expense (benefit)	2023			2022			2021
Current:
U.S. federal	$	18,347		$	12,181		$	10,310
State		5,529			3,389			2,265
Non-U.S.		87,449			63,750			57,801
		111,325			79,320			70,376
Deferred:
U.S. federal		(100	)		8,150			(6,891	)
State		(4,111	)		(1,767	)		(350	)
Non-U.S.		(13,585	)		(8,517	)		(102	)
		(17,796	)		(2,134	)		(7,343	)
Total	$	93,529		$	77,186		$	63,033

Reconciliation of effective income tax	2023			2022			2021
Tax at statutory U.S. federal income tax rate	$	49,174		$	52,760		$	45,539
State income taxes, net of federal benefit		1,137			1,252			1,444
Foreign dividend repatriation1		21,730			2,596			1,104
Foreign operations		12,558			1,868			19,673
Executive compensation over $1.0 million		784			2,847			2,507
Non-U.S. stock option expense		730			525			575
Change in valuation allowance		725			3,187			(9,572	)
Research and development tax credit		(1,400	)		(927	)		(993	)
Foreign-derived intangible income		(2,665	)		(2,786	)		(2,617	)
Global intangible low-taxed income		2,345			1,890			2,334
Provision to return		1,336			840			1,122
Cross currency swap		-			7,020			3,931
Contingency reserve		5,951			5,909			(2,139	)
Other		1,124			205			125
Total income tax expense	$	93,529		$	77,186		$	63,033

¹ Foreign dividend repatriation line includes impact of withholding tax recorded on earnings that are no longer permanently reinvested.

Deferred income tax balances at each year-end related to:	2023			2022
Deferred tax assets:
Pension and other post-retirement benefit plans	$	5,306		$	6,752
Employee benefit costs		27,672			25,196
Foreign tax credit carryforward		6,538			7,884
Tax loss carryforwards		25,894			22,948
Leases		12,716			8,538
Hedging activity		18,638			13,299
Interest deduction limitation		37,519			17,736
Other		33,022			28,840
Gross deferred tax assets		167,305			131,193
Less: valuation allowance		(15,595	)		(14,424	)
Total net deferred tax assets		151,710			116,769
Deferred tax liability:
Depreciation and amortization		(209,266	)		(215,219	)
Pension and other post-retirement benefit plans		(41,444	)		(37,362	)
Undistributed earnings of non-U.S. subsidiaries		(21,926	)		-
Leases		(12,510	)		(8,329	)
Total deferred tax liability		(285,146	)		(260,910	)
Net deferred tax liability	$	(133,436	)	$	(144,141	)

The difference between the change in the deferred tax liability on the balance sheet and the deferred tax provision is primarily related to the defined benefit pension plan adjustment and hedges recorded in accumulated other comprehensive income (loss) offset by liabilities established in purchase accounting.

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 $1,154,354 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 $81,655 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 $60,269 can be carried forward indefinitely, while the remaining $21,386 of tax losses must be utilized during 2024 to 2041.

The U.S. has a branch foreign tax credit carryforward of $4,465. 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.

	2023			2022
Balance at beginning of year	$	17,582		$	13,281
Tax positions related to the current year:
Additions		723			469
Tax positions related to prior years:
Additions		5,658			5,885
Reductions		(965	)		(1,019	)
Settlements		(8,156	)		-
Lapses in applicable statutes of limitation		(588	)		(1,034	)
Balance at end of year	$	14,254		$	17,582

Included in the balance of unrecognized tax benefits as of  December 2, 2023 and December 3, 2022 are potential benefits of $10,338 and $12,663 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 2, 2023, we recognized a net benefit for interest and penalties of $824 relating to unrecognized tax benefits and had net accumulated accrued interest and penalties of $6,708 as of December 2, 2023. 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.

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 2020 or Swiss income tax examination for years prior to 2020. 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.