Income Taxes

12 Months Ended

Oct. 31, 2019

INCOME TAXES

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). The legislation significantly changed U.S. tax law by, among other items, (1) lowering the corporate income tax rate from 35% to 21%, effective January 1, 2018; (2) allowing for the acceleration of expensing of qualified business assets; (3) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries that may be payable over eight years; (4) a new limitation on deductible interest expense; (5) limitations on the deductibility of certain executive compensation; and (6) eliminating U.S. federal income tax on dividends from foreign subsidiaries. The corporate income tax rate change was administratively effective beginning 2018. Therefore, the Company used a blended statutory rate for 2018 of 23.33% on U.S. earnings.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Bulletin also provides for a measurement period that should not extend beyond one year from the U.S. Tax Reform enactment date. In accordance with the Bulletin, the Company recorded a tax benefit of $72.0 million related to the revaluation of deferred tax assets and liabilities during the year ended October 31, 2018 as well as a provisional tax expense of $52.8 million for the transition tax liability. During the first quarter of 2019, the Company revised its calculation for the transition tax liability to $55.1 million. In addition, the Company re-evaluated its indefinite reinvestment assertion, concluding that the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates will no longer be indefinitely reinvested. These changes in assertion required the recognition of a tax benefit of $1.7 million due to Section 986(c) currency losses. The provisional calculations related to the Tax Reform Act are now complete.

In addition, the Tax Reform Act established new tax provisions that affected the Company in 2019, including (1) eliminating the U.S. manufacturing deduction; (2) establishing new limitations on deductible interest expense and certain executive compensation; (3) creating the base erosion anti-abuse tax (“BEAT”); (4) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (5) establishing a deduction for foreign-derived intangible income (“FDII”); and (6) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries. Regarding the new GILTI tax rules, the Company is allowed to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred or (2) reflect such portion of the future GILTI exclusions in U.S. taxable income that relate to existing basis differences in the Company’s measurement of deferred taxes. The Company has elected to treat taxes due to future GILTI inclusions in U.S. taxable income as a current period expense.

With respect to pre-October 31, 2016 undistributed foreign earnings, the Company is indefinitely reinvested as defined under ASC 740-30-25-1. For post-October 31, 2016 foreign earnings, the Company is not indefinitely reinvested. Accordingly, during 2017, the Company began recording a deferred tax liability with respect to post-October 31, 2016 foreign unremitted earnings, generally based on foreign jurisdiction withholding taxes. As disclosed above, Company no longer asserts that the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates is indefinitely reinvested and has recorded the appropriate U.S. federal and state impacts. Total deferred taxes accrued by the Company relative to undistributed earnings were $6.6 million and $8.4 million at October 31, 2019 and 2018, respectively. The decrease in the liability is primarily attributable to tax-deductible foreign currency losses that would be recognized on distributions of previously taxed earnings to the U.S.

The provision for income taxes consists of the following:



	Year Ended October 31,
(in millions)	2019			2018			2017
Current
Federal	$	26.6		$	74.0		$	33.0
State and local	6.1			8.0			6.0
Non-U.S.	35.9			36.1			25.9
	68.6			118.1			64.9
Deferred
Federal	2.1			(45.2		)	4.5
State and local	0.9			0.8			(2.0		)
Non-U.S.	(0.9		)	(0.4		)	(0.2		)
	2.1			(44.8		)	2.3
	$	70.7		$	73.3		$	67.2

The non-U.S. income before income tax expense was $132.1 million, $102.3 million and $85.2 million in 2019, 2018, and 2017, respectively. The U.S. income before income tax was $129.9 million, $197.5 million and $115.1 million in 2019, 2018, and 2017, respectively.

The following is a reconciliation of the provision for income taxes based on the federal statutory rate to the Company’s effective income tax rate:



	Year Ended October 31,
	2019		2018		2017
Federal statutory rate	21.00	%	23.33	%	35.00	%
Impact of foreign tax rate differential	0.10	%	(0.57	)%	(9.86	)%
State and local taxes, net of federal tax benefit	1.99	%	2.38	%	1.35	%
Net impact of changes in valuation allowances	2.41	%	5.65	%	20.74	%
Non-deductible write-off and impairment of goodwill and other intangible assets	0.29	%	0.06	%	(0.02	)%
Unrecognized tax benefits	(0.76	)%	3.41	%	(2.00	)%
Permanent book-tax differences	(0.87	)%	(4.03	)%	(15.71	)%
Withholding taxes	2.43	%	1.84	%	1.88	%
Tax Reform Act ⁽¹⁾	(0.19	)%	(7.31	)%	—	%
Other items, net	0.58	%	(0.33	)%	2.20	%
	26.98	%	24.43	%	33.58	%

⁽¹⁾Reflects the net impact of the change in deferred tax assets and liabilities and the estimated transition tax resulting from the Tax Reform Act.

The primary items which increased the Company’s effective income tax rate from the federal statutory rate in 2019 were state and local taxes, increases in valuation allowances, and withholding tax liabilities.

The primary items which increased the Company’s effective income tax rate from the federal statutory rate in 2018 were increases in valuation allowances and unrecognized tax benefits; offset primarily by the remeasurement of the domestic deferred tax liabilities, net of the transition tax liability due to the Tax Reform Act, and permanent book-tax differences.

The primary items which decreased the Company’s effective income tax rate from the federal statutory rate in 2017 were permanent book-tax differences, unrecognized tax benefits, the impact of foreign tax rates that differ from the federal statutory tax rate, and other immaterial items; offset primarily by increases in valuation allowances. Also, in 2017, the Company included in the table

above a $38.6 million and 19.26% change in valuation allowance, with offsetting amounts in permanent book-tax differences, for certain intercompany financing transactions.

The components of the Company’s deferred tax assets and liabilities as of October 31 for the years indicated were as follows:



(in millions)	2019			2018
Deferred Tax Assets
Net operating loss and other carryforwards	$	206.9		$	122.8
Foreign tax credits	21.5			20.7
Pension liabilities	24.1			12.2
Incentive liabilities	12.0			12.1
Workers compensation accruals	12.1			6.6
Inventories	6.7			4.9
State income taxes	9.4			4.5
Deferred compensation	2.3			2.2
Other	41.2			16.5
Total Deferred Tax Assets	336.2			202.5
Valuation allowance	(175.0		)	(157.2		)
Net Deferred Tax Assets	$	161.2		$	45.3

Deferred Tax Liabilities
Properties, plants and equipment	$	152.7		$	78.9
Timberland transactions	74.2			73.5
Goodwill and other intangible assets	207.5			49.2
Other	23.9			15.6
Total Deferred Tax Liabilities	458.3			217.2
Net Deferred Tax Liability	$	297.1		$	171.9

As of October 31, 2019 and 2018, the Company had deferred income tax benefits of $206.9 million and $122.8 million, respectively, from net operating loss carryforwards and interest expense limitation carryforwards. These carryforwards are composed of $49.4 million, $27.3 million, and $130.2 million in U.S. Federal, state, and non-U.S. jurisdictions, respectively. The Company has recorded valuation allowances of $142.3 million and $137.1 million against non-U.S. deferred tax assets as of October 31, 2019 and 2018 respectively. The Company has also recorded valuation allowances of $32.7 million and $20.1 million, as of October 31, 2019 and 2018, respectively, against U.S. deferred tax assets. The Company had net changes in valuation allowances in 2019 of $17.8 million.

As discussed in Note 2 - Acquisitions and Divestitures, the table above reflects a net deferred tax liability of $139.1 million related to the Caraustar Acquisition, as well as a net deferred tax liability of $5.8 million related to the Tholu Acquisition.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(in millions)	2019			2018			2017
Balance at November 1	$	36.2		$	26.8		$	29.7
Increases in tax positions for prior years	5.1			7.8			2.1
Decreases in tax positions for prior years	(0.7		)	(1.4		)	(1.8		)
Increases in tax positions for current years	4.3			8.0			6.7
Settlements with taxing authorities	(3.6		)	—			(7.4		)
Lapse in statute of limitations	(2.0		)	(3.6		)	(4.6		)
Currency translation	(0.5		)	(1.4		)	2.1
Balance at October 31	$	38.8		$	36.2		$	26.8

The 2019 net increase in unrecognized tax benefits is primarily related to increases in unrecognized tax benefits related to prior years and the current year, offset by decreases related to the settlement of prior years’ tax audits and lapse in statute of limitations. The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various non-U.S. jurisdictions and is subject to audit by various taxing authorities for 2012 through the current year. The Company has completed its U.S. federal tax audit for the tax years through 2013.

The October 31, 2019, 2018, 2017 balances include $34.1 million, $36.2 million and $26.8 million, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. The Company also recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense net of tax, as applicable. As of October 31, 2019 and October 31, 2018, the Company had $6.3 million and $4.9 million, respectively, accrued for the payment of interest and penalties.

The Company has estimated the reasonably possible expected net change in unrecognized tax benefits through October 31, 2019 under ASC 740. The Company’s estimate is based on lapses of the applicable statutes of limitations, settlements and payments of uncertain tax positions. The estimated net decrease in unrecognized tax benefits for the next 12 months ranges from zero to $5.9 million. Actual results may differ materially from this estimate.