Income Taxes

12 Months Ended

Oct. 31, 2019

INCOME TAXES

Geographic Sources of Income from Continuing Operations Before Income Taxes



	Years Ended October 31,
(in millions)	2019		2018			2017
United States	$	137.1	$	94.8		$	76.1
Foreign	23.1		(7.1		)	10.8
Income from continuing operations before income taxes	$	160.2	$	87.7		$	86.9

Components of Income Tax (Provision) Benefit



	Years Ended October 31,
(in millions)	2019			2018			2017
Current:
Federal	$	(6.4	)	$	(4.3	)	$	(5.9	)
State	(10.7		)	(7.3		)	(6.0		)
Foreign	(5.9		)	(3.9		)	(3.0		)
Deferred:
Federal	(8.5		)	21.8			5.0
State	(1.6		)	0.2			0.3
Foreign	0.4			1.7			0.8
Income tax (provision) benefit	$	(32.7	)	$	8.2		$	(8.8	)

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



	Years Ended October 31,
	2019		2018		2017
U.S. statutory rate	21.0	%	23.3	%	35.0	%
State and local income taxes, net of federal tax benefit	5.9		6.9		5.5
Federal and state tax credits	(3.9	)	(7.8	)	(7.5	)
Impact of foreign operations	(1.0	)	1.3		(2.7	)
Changes in uncertain tax positions	(0.8	)	(6.7	)	(19.7	)
Incremental tax benefit from share-based compensation awards	(0.7	)	(3.9	)	(4.2	)
Tax credits for energy efficient government buildings	—		(3.2	)	(2.2	)
Impact from goodwill impairment	—		4.4		—
Transition tax on foreign earnings	(1.1	)	5.1		—
Remeasurement of U.S. deferred taxes	(0.3	)	(31.5	)	—
Nondeductible expenses	2.1		2.4		5.7
Other, net	(0.8	)	0.3		0.1
Effective tax rate	20.4	%	(9.4	)%	10.1	%

On December 22, 2017, the Tax Act was enacted into law. Among other provisions, it reduced the federal corporate income tax rate from 35% to 21% and required companies to pay a one-time transition tax on the deemed repatriation of indefinitely reinvested earnings of international subsidiaries. Our U.S. statutory federal tax rate for fiscal 2019 and future years was reduced to 21% from our blended rate of 23.3% in fiscal 2018. Other provisions under the Tax Act became 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”), which we have elected to account for as a period cost.

During 2018, we finalized our analysis of the transitional impacts of the Tax Act. As a result, we recorded a one-time tax benefit of $29.6 million from the remeasurement of certain deferred tax assets and liabilities based on the new tax rates at which they are expected to reverse in the future. 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. Upon finalizing our tax filings, the impact of the transition tax was ultimately an expense of $2.7 million, which resulted in a benefit of $1.8 million that was recorded in the fourth quarter of 2019. 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.

During 2019 and 2018, we had effective tax rates of 20.4% and (9.4)%, respectively, resulting in a provision for tax of $32.7 million and a benefit from tax of $8.2 million, respectively. Our effective tax rate for 2019 was impacted by the following discrete items: a $1.8 million benefit from the transition tax (including foreign tax credits); a $1.7 million benefit from state true-ups; a $1.6 million benefit from federal true-ups; a $1.3 million provision related to the Work Opportunity Tax Credit (“WOTC”); a $1.3 million benefit from expiring statutes of limitations; a $1.1 million benefit from the vesting of share-based compensation awards; and a $0.9 million benefit from research and development credits. Our effective tax rate for 2018 was impacted by the following discrete items: a $23.2 million benefit related to the Tax Act enactment; a $5.8 million benefit from expiring statutes of limitations; a $3.4 million benefit from the vesting of share-based compensation awards; a $2.8 million benefit for energy efficient government buildings; and a $1.0 million provision for certain tax credits, including WOTC.

Components of Deferred Tax Assets and Liabilities



	As of October 31,
(in millions)	2019			2018
Deferred tax assets attributable to:
Self-insurance claims (net of recoverables)	$	83.6		$	83.5
Deferred and other compensation	25.6			22.7
Accounts receivable allowances	5.6			6.5
Settlement liabilities	3.1			3.3
Other accruals	1.8			(0.3		)
Other comprehensive income	0.5			(5.7		)
State taxes	0.4			0.5
State net operating loss carryforwards	11.2			15.9
Federal net operating loss carryforwards	—			5.4
Tax credits	6.3			21.7
Unrecognized tax benefits	3.0			2.4
Other	—			1.7
Gross deferred tax assets	141.2			157.6
Valuation allowance	(8.4		)	(12.0		)
Total deferred tax assets	132.8			145.7

Deferred tax liabilities attributable to:
Property, plant and equipment	(4.8		)	(4.2		)
Goodwill and other acquired intangibles	(170.6		)	(179.2		)
Other	(5.2		)	—
Total deferred tax liabilities	(180.6		)	(183.4		)

Net deferred tax liabilities	$	(47.7	)	$	(37.8	)

Net Operating Loss Carryforwards and Credits

State net operating loss carryforwards totaling $144.8 million at October 31, 2019 are being carried forward in several state jurisdictions where we are permitted to use net operating losses from prior periods to reduce future taxable income. These losses will expire between 2020 and 2039. Federal net operating loss carryforwards were fully utilized during 2019. Federal and state tax credit carryforwards totaling $7.6 million are available to reduce future cash taxes and will expire between 2022 and 2039.

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 deferred tax assets are more likely than not to be realizable based on estimates of future taxable income.

Changes to the Valuation Allowance



	Years Ended October 31,
(in millions)	2019			2018		2017
Valuation allowance at beginning of year	$	12.0		$	7.7	$	5.4
GCA acquisition	—			2.4		4.1
Other, net	(3.6		)	1.8		(1.8		)
Valuation allowance at end of year	$	8.4		$	12.0	$	7.7

Unrecognized Tax Benefits

At October 31, 2019, 2018, and 2017, there were $35.3 million, $35.8 million, and $50.5 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 $4.7 million is reasonably possible over the next twelve months due to lapses of applicable statutes of limitations. At October 31, 2019 and 2018, accrued interest and penalties were $1.2 million and $1.0 million, respectively. For interest and penalties, we recognized an expense of $0.2 million in 2019 and benefits of $1.0 million and $0.5 million in 2018 and 2017, respectively.

Reconciliation of Total Unrecognized Tax Benefits



	Years Ended October 31,
(in millions)	2019			2018			2017
Balance at beginning of year	$	35.8		$	53.4		$	57.2
Additions for tax positions related to the current year	—			0.2			—
Additions for tax positions related to prior years	3.6			—			16.4
Reductions for tax positions related to prior years	—			(9.0		)	(0.1		)
Reductions for lapse of statute of limitations	(3.9		)	(8.7		)	(19.7		)
Settlements	(0.3		)	(0.1		)	(0.3		)
Balance at end of year	$	35.3		$	35.8		$	53.4

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. Due to expired statutes and closed audits, our federal income tax returns for years prior to fiscal 2016 are no longer subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where we do business, periods prior to fiscal 2015 are no longer subject to examination. We are currently being examined by the IRS and state tax authorities of California, Illinois, Massachusetts, and Wisconsin.