INCOME TAXES

Geographic Sources of Income from Continuing Operations Before Income Taxes



	Years Ended October 31,
(in millions)	2018			2017		2016
United States	$	94.8		$	76.1	$	45.1
Foreign	(7.1		)	10.8		6.8
Income from continuing operations before income taxes	$	87.7		$	86.9	$	51.9

Components of Income Tax Benefit (Provision)



	Years Ended October 31,
(in millions)	2018			2017			2016
Current:
Federal	$	(4.3	)	$	(5.9	)	$	17.5
State	(7.3		)	(6.0		)	(9.3		)
Foreign	(3.9		)	(3.0		)	(1.5		)
Deferred:
Federal	21.8			5.0			3.6
State	0.2			0.3			(0.5		)
Foreign	1.7			0.8			0.6
Income tax benefit (provision)	$	8.2		$	(8.8	)	$	10.4

Reconciliation of the U.S. Statutory Tax Rate to Annual Effective Tax (Benefit) Rate



	Years Ended October 31,
	2018		2017		2016
U.S. statutory rate	23.3	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefit	6.9		5.5		7.8
Federal and state tax credits	(7.8	)	(7.5	)	(22.7	)
Impact of foreign operations	1.3		(2.7	)	(5.0	)
Changes in uncertain tax positions	(6.7	)	(19.7	)	(40.0	)
Incremental tax benefit from share-based compensation awards	(3.9	)	(4.2	)	(4.2	)
Tax credits for energy efficient government buildings	(3.2	)	(2.2	)	(2.4	)
Impact from goodwill impairment	4.4		—		—
Transition tax on foreign earnings	5.1		—		—
Remeasurement of U.S. deferred taxes	(31.5	)	—		—
Nondeductible expenses	2.4		5.7		7.7
Other, net	0.3		0.1		3.8
Effective tax (benefit) rate	(9.4	)%	10.1	%	(20.0	)%

The Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017, provides for a reduction of the federal corporate income tax rate from 35% to 21% and a “transition tax” to be levied on the deemed repatriation of indefinitely reinvested earnings of international subsidiaries. Since we have an October 31 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 23.3% for fiscal 2018 and 21% for subsequent fiscal years. Other provisions under the Tax Act become effective for us in fiscal 2019, including limitations on deductibility of interest and executive compensation, as well as a new minimum tax on Global Intangible Low-Taxed Income (“GILTI”).

During 2018 we remeasured certain deferred tax assets and liabilities based on the new tax rates at which they are expected to reverse in the future and recorded a one-time tax benefit of $29.6 million. In addition, we recorded an expense of $4.5 million for the one-time transition tax on the deemed repatriation of indefinitely reinvested earnings of our international subsidiaries. We plan to reinvest our foreign earnings to fund future non-U.S. growth and expansion, and we do not anticipate remitting such earnings to the United States. While U.S. federal tax expense has been recognized as a result of the Tax Act, no deferred tax liabilities with respect to federal and state income taxes or foreign withholding taxes have been recognized.

Due to the complexities of implementing the provisions of the Tax Act, the staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act and permits a measurement period not to exceed one year from the enactment date for companies to complete the required analyses and accounting. As permitted under SAB 118, the adjustments we recorded due to the Tax Act, including the remeasurement of deferred tax assets and liabilities and the transition tax, were based on reasonable estimates and were considered provisional during the year. As of October 31, 2018, the one-time impact of the change in tax rate on our deferred tax assets and liabilities is complete. Additionally, we have completed our assessment of GILTI and have established a policy to account for this tax on a period basis beginning in fiscal year 2019. We have also completed our analysis of the one-time transition tax and recorded the impact.

Our income taxes for 2018 were favorably impacted by: a net tax benefit of $23.2 million related to the impact of the Tax Act, including $1.9 million of adjustments that subsequently reduced the amounts discussed above; $5.8 million, including interest of $1.0 million, related to the expiring statutes of limitations for uncertain tax positions; $3.4 million of excess tax benefits related to the vesting of share-based compensation awards; and $2.8 million related to tax deductions for energy efficient government buildings. These benefits were partially offset by a $1.0 million reduction in certain tax credits, including prior year Work Opportunity Tax Credits (“WOTC”) for new hires.

Our income taxes for 2017 were favorably impacted by a benefit of $17.8 million, including interest of $1.2 million, related to expiring statutes of limitations for uncertain tax positions. In addition, in 2017 we also benefited from $3.6 million of excess tax benefits related to the vesting of share-based compensation awards, $1.9 million of tax credits for energy efficient government buildings, and the 2017 WOTC.

Components of Deferred Tax Assets and Liabilities



	As of October 31,
(in millions)	2018			2017
Deferred tax assets attributable to:
Self-insurance claims (net of recoverables)	$	83.5		$	124.4
Deferred and other compensation	22.7			34.7
Accounts receivable allowances	6.5			8.9
Settlement liabilities	3.3			6.5
Other accruals	(0.3		)	3.5
Other comprehensive income	(5.7		)	0.4
State taxes	0.5			0.8
State net operating loss carryforwards	15.9			12.3
Federal net operating loss carryforwards	5.4			19.9
Tax credits	21.7			19.9
Unrecognized tax benefits	2.4			7.2
Other	1.7			3.1
Gross deferred tax assets	157.6			241.5
Valuation allowance	(12.0		)	(7.7		)
Total deferred tax assets	145.7			233.8

Deferred tax liabilities attributable to:
Property, plant and equipment	(4.2		)	(5.9		)
Goodwill and other acquired intangibles	(179.2		)	(282.0		)
Equity in earnings of foreign investments	—			(3.2		)
Total deferred tax liabilities	(183.4		)	(291.1		)

Net deferred tax liabilities	$	(37.8	)	$	(57.3	)

Tax Loss Carryforwards and Tax Credits

State tax loss carryforwards totaling $255.0 million at October 31, 2018 are being carried forward in several state jurisdictions where we are permitted to use tax losses from prior periods to reduce future taxable income. These losses will expire between 2019 and 2038. Federal loss carryforwards totaling $25.7 million at October 31, 2018 are available to reduce future taxable income and will expire in 2037. Federal and state tax credits totaling $24.6 million are available to reduce future cash taxes and will expire between 2021 and 2038.

The valuation allowance represents the amount of tax benefits related to state net operating loss carryforwards that are not likely to be realized. We believe the remaining net deferred tax assets are more likely than not to be realizable based on estimates of future taxable income.

Changes to the Deferred Tax Asset Valuation Allowance



	Years Ended October 31,
(in millions)	2018		2017			2016
Valuation allowance at beginning of year	$	7.7	$	5.4		$	5.5
GCA acquisition	2.4		4.1			—
Other, net	1.8		(1.8		)	(0.1		)
Valuation allowance at end of year	$	12.0	$	7.7		$	5.4

Unrecognized Tax Benefits

At October 31, 2018, 2017, and 2016, there were $35.8 million, $50.5 million, and $52.0 million, respectively, of unrecognized tax benefits that if recognized in the future would impact our effective tax rate. We estimate that a decrease in unrecognized tax benefits of up to approximately $5.6 million is reasonably possible over the next twelve months due to the resolution of certain tax matters. At October 31, 2018 and 2017, accrued interest and penalties were $1.0 million and $1.9 million, respectively. For interest and penalties, we recognized a benefit of $1.0 million, $0.5 million, and $0.9 million in 2018, 2017, and 2016, respectively.

Reconciliation of Total Unrecognized Tax Benefits



	Years Ended October 31,
(in millions)	2018			2017			2016
Balance at beginning of year	$	53.4		$	57.2		$	82.5
Additions for tax positions related to the current year	0.2			—			—
Additions for tax positions related to prior years	—			16.4			—
Reductions for tax positions related to prior years	(9.0		)	(0.1		)	(3.2		)
Reductions for lapse of statute of limitations	(8.7		)	(19.7		)	(21.9		)
Settlements	(0.1		)	(0.3		)	(0.2		)
Balance at end of year	$	35.8		$	53.4		$	57.2

Jurisdictions

We conduct business in all 50 states, significantly in California, Texas, and New York, as well as in various foreign jurisdictions. Our most significant income tax jurisdiction is the United States.

Tax Years Open for Examination, by Entity



Entity		Open by Statute
ABM state tax returns⁽¹⁾		10/31/2014 – 10/31/2018
ABM federal tax returns		10/31/2015 – 10/31/2018
GCA state tax returns		12/31/2014 – 9/1/2017
GCA federal tax returns		12/31/2015 – 9/1/2017

⁽¹⁾We are currently being examined by the state tax authorities of California, Florida, Massachusetts, New Jersey, New York, and North Carolina.

Reinvestment of Foreign Earnings

We plan to reinvest our foreign earnings to fund future non-U.S. growth and expansion. As a result, we do not anticipate remitting such earnings to the United States and have not provided for federal and state income taxes or foreign withholding taxes that may result if such earnings of our foreign subsidiaries are remitted to the United States.