Income Taxes

12 Months Ended

Oct. 31, 2019



8	Income Taxes

Earnings before income taxes were as follows (in thousands):



Fiscal Years Ended October 31	2019		2018		2017
Earnings before income taxes:
U.S.	$	283,730	$	333,136	$	307,136
Foreign	38,403		39,261		46,048
Total earnings before income taxes	$	322,133	$	372,397	$	353,184

A reconciliation of the statutory federal income tax rate to the company's consolidated effective tax rate is summarized as follows:



Fiscal Years Ended October 31	2019		2018		2017
Statutory federal income tax rate	21.0	%	23.3	%	35.0	%
Excess deduction for stock compensation	(3.7	)	(3.5	)	(5.3	)
Domestic manufacturer's deduction	0.1		(0.9	)	(1.2	)
State and local income taxes, net of federal benefit	1.1		1.3		0.5
Foreign operations	(0.3	)	(0.5	)	(2.3	)
Federal research tax credit	(1.5	)	(1.2	)	(1.5	)
Foreign-derived intangible income	(1.3	)	—		—
Remeasurement of deferred tax assets and liabilities	(0.1	)	5.2		—
Deemed repatriation tax	(0.2	)	3.6		—
Other, net	(0.2	)	(0.3	)	(1.0	)
Consolidated effective tax rate	14.9	%	27.0	%	24.2	%

On December 22, 2017, the U.S. enacted Public Law No. 115-97 ("Tax Act"), originally introduced as the Tax Cuts and Jobs Act, which significantly modified the Internal Revenue Code. The Tax Act reduced the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent, created a territorial-type tax system with an exemption for foreign dividends, and imposed a one-time deemed repatriation tax on a U.S. company's historical undistributed earnings and profits of foreign affiliates. The tax rate change was effective January 1, 2018, which resulted in a blended statutory tax rate of 23.3 percent for the fiscal year ended October 31, 2018. The reduced tax rate of 21.0 percent was applicable to the fiscal year ended October 31, 2019. Among other provisions, the Tax Act also increased expensing for certain business assets, created new taxes on certain foreign sourced earnings, provided an incentive on specified export activities, adopted limitations on business interest expense deductions, repealed deductions for income attributable to domestic production activities, and added other anti-base erosion rules.

As of October 31, 2018, the company completed the accounting for the effects of the Tax Act. The company recorded tax expense of $19.3 million for the remeasurement of deferred tax assets and liabilities, and tax expense of $13.4 million for the one-time transition tax on deemed repatriation tax of its non-U.S. subsidiaries. Included with the company's provision for income taxes within the Consolidated Statements of Earnings for the fiscal year ended October 31, 2019 are final immaterial adjustments related to the Tax Act, including a tax benefit of $0.3 million for the remeasurement of deferred tax assets and liabilities and a tax benefit of $0.7 million for the deemed repatriation.

The Global Intangible Low-Taxed Income ("GILTI") provisions under the Tax Act requires the company to include in its U.S. income tax return any foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, the company is allowed to

make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (“period cost method”) or (2) factoring such amounts into the company’s measurement of its deferred taxes (“deferred method”).The company has elected the period cost method and therefore, has recorded additional income tax expense, net of offsetting foreign tax credits, in the amount of $1.0 million as a result of GILTI for the fiscal year ended October 31, 2019, which is included within foreign operations in the company's reconciliation of the statutory federal income tax rate to the company's consolidated effective tax rate above.

The Foreign-Derived Intangible Income (“FDII”) provisions of the Tax Act provide an incentive to domestic corporations in the form of a lower tax rate on income derived from tangible and intangible products and services in foreign markets. This lower tax rate is accomplished through an additional tax deduction based on a percentage of qualifying sales. The FDII deduction provided the company an additional tax benefit of $4.2 million in the fiscal year ended October 31, 2019.

Components of the company's provision for income taxes were as follows (in thousands):



Fiscal Years Ended October 31	2019			2018		2017
Current provision:
Federal	$	37,415		$	64,375	$	83,091
State	7,495			6,192		3,036
Foreign	6,846			7,087		8,166
Total current provision	$	51,756		$	77,654	$	94,293
Deferred provision (benefit):
Federal	$	(37	)	$	22,074	$	(8,774	)
State	(3,205		)	308		(101		)
Foreign	(364		)	422		49
Total deferred provision (benefit)	(3,606		)	22,804		(8,826		)
Total provision for income taxes	$	48,150		$	100,458	$	85,467

The tax effects of temporary differences that give rise to deferred income tax (liabilities) assets, net, are presented below (in thousands):



October 31	2019			2018
Deferred income tax assets:
Compensation and benefits	$	27,969		$	24,315
Warranty and insurance	25,788			19,037
Advertising and sales allowance	8,866			7,650
Inventory	4,005			2,742
Other	8,745			5,047
Valuation allowance	(3,199		)	(1,178		)
Total deferred income tax assets	$	72,174		$	57,613
Deferred income tax liabilities:
Depreciation	$	(40,964	)	$	(12,381	)
Amortization	(75,538		)	(8,377		)
Total deferred income tax liabilities	(116,502		)	(20,758		)
Deferred income tax (liabilities) assets, net	$	(44,328	)	$	36,855

The net change in the total valuation allowance between the fiscal years ended October 31, 2019 and 2018 was an increase of $2.0 million, including $1.7 million related to deferred tax assets recorded as a result of the company's purchase accounting for the CMW acquisition related to branch foreign tax credits, as well as future capital loss carryforwards determined not to be realizable. The change in valuation allowance also included loss and credit carryforwards that are expected to expire prior to utilization. As of October 31, 2019, the company had net operating loss carryforwards of approximately $3.4 million in foreign jurisdictions, which are comprised of $2.8 million that do not expire and $0.6 million that expire between fiscal 2020 and fiscal 2028. The company also had domestic credit carryforwards of $1.0 million that expires between fiscal 2029 and fiscal 2034.

The company considers that $17.2 million of undistributed earnings of its foreign operations are intended to be indefinitely reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, the company may be subject to foreign withholding taxes, state income taxes, and/or additional federal taxes for currency fluctuations. As of October 31, 2019, the unrecognized deferred tax liabilities for temporary differences related to the company’s investment in non-U.S. subsidiaries, and any withholding, state, or additional federal taxes upon any future repatriation, are expected to be immaterial and have not been recorded.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Unrecognized tax benefits as of October 31, 2018	$	2,345
Increase as a result of tax positions taken during a prior period	149
Increase as a result of tax positions taken during the current period	467
Decrease relating to settlements with taxing authorities	(215		)
Reductions as a result of statute of limitations lapses	(73		)
Unrecognized tax benefits as of October 31, 2019	$	2,673

The company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes within the Consolidated Statements of Earnings. In addition to the liability of $2.7 million for unrecognized tax benefits as of October 31, 2019, the company had an amount of $0.5 million of accrued interest and penalties. Included in the balance of unrecognized tax benefits as of October 31, 2019 are potential benefits of $2.5 million that, if recognized, would affect the effective tax rate from continuing operations.

The company and its wholly owned subsidiaries file income tax returns in the U.S. federal jurisdiction, and numerous state and foreign jurisdictions. With few exceptions, the company is no longer subject to U.S. federal, state and local, and foreign income tax examinations by tax authorities for taxable years before fiscal 2015. The Internal Revenue Service completed an audit of fiscal 2014 through fiscal 2017, with no material adjustments to tax expense or unrecognized tax benefits. The company is also under audit in certain state jurisdictions and expects various statutes of limitation to expire during the next

12 months. Due to the uncertainty related to the response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.