On December 22, 2017, the U.S. enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The U.S. Government continues to issue significant amounts of TCJA guidance and we expect that to continue for the foreseeable future. The Company is actively monitoring the impact of new Treasury Regulations. Any future adjustments resulting from retrospective guidance issued after December 31, 2019 will be considered as discrete income tax expense or benefit in the interim period the guidance is issued.

During 2018, the Company made the election on the 2017 Federal Income Tax Return to pay the one-time TCJA Transition Tax liability over an eight-year period without interest, as allowed by TCJA. The IRS has issued guidance that requires offset of 2017 and 2018 tax return refunds against the long-term liability subject to the eight-year payment election.

In connection with the Separation, we entered into the Agreements with Danaher, including a tax matters agreement. The tax matters agreement distinguishes between the treatment of tax matters for “joint” filings compared to “separate” filings prior to the Separation. “Joint” filings involve legal entities, such as those in the United States, that include operations from both Danaher and the Company. By contrast, “separate” filings involve certain entities (primarily outside of the United States), that exclusively include either Danaher’s or the Company’s operations, respectively. In accordance with the tax matters agreement, the Company is liable for and has indemnified Danaher against all income tax liabilities involving “separate” filings for periods prior to the Separation.



	2019			2018			2017
Current:
Federal U.S.	$	38.9		$	48.3		$	170.0
Non-U.S.	84.6			96.3			69.8
State and local	11.7			7.8			10.5
Deferred:
Federal U.S.	43.0			27.3			(62.0		)
Non-U.S.	(21.1		)	(19.6		)	(1.7		)
State and local	(8.0		)	—			2.7
Income tax provision	$	149.1		$	160.1		$	189.3



	Percentage of Pretax Earnings
	2019		2018		2017
Statutory federal income tax rate	21.0	%	21.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
State income taxes (net of federal income tax benefit)	(0.3	)%	1.0	%	0.7	%
Foreign income taxed at different rates than U.S. statutory rate	(0.7	)%	0.8	%	(5.3	)%
U.S. federal permanent differences related to the TCJA	(6.2	)%	(4.8	)%	(2.9	)%
Compensation related	(1.0	)%	(1.5	)%	(1.7	)%
Other	0.5	%	(0.5	)%	(1.6	)%
Effective income tax rate before adjustments related to the 2017 TCJA provisional estimates	13.3	%	16.0	%	24.2	%

Deferred tax revaluation	—	%	(1.3	)%	(19.2	)%
Transition tax	—	%	0.1	%	12.6	%
Vontier transaction tax costs	3.7	%	—	%	—	%
Total Vontier transaction tax costs and adjustments to 2017 TCJA provisional estimates	3.7	%	(1.2	)%	(6.6	)%
Effective income tax rate after adjustments related to the Vontier transaction tax costs and 2017 TCJA provisional estimates	17.0	%	14.8	%	17.6	%

Our effective tax rate for 2019 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, and earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, offset by tax costs related to transactions completed in 2019 in anticipation of our separation into two independent, publicly traded companies.

Our effective tax rate for 2018 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, earnings outside the United States that are taxed at rates lower than the U.S. federal statutory rate, and the effect of adjustments to the provision estimates recorded in 2017 related to the TCJA as permitted under the SEC Staff Accounting Bulletin No. 118 (“SAB 118”) issued on December 22, 2017.

Our effective tax rate for 2017, including provisional estimates of the TCJA, differs from the U.S. federal statutory rate of 35.0% due primarily to net favorable impacts associated with the TCJA, our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law, state tax impacts, and favorable adjustments related to differences between estimates included in the 2016 provision and amounts calculated on the 2016 U.S. income tax return filed in October 2017.

SAB 118 provides guidance on the financial statement implications of the TCJA. Pursuant to SAB 118, the Company recorded cumulatively $83 million of net favorable adjustments, which is made up of net favorable adjustments of $13 million and $70 million recorded during the years ended December 31, 2018 and 2017, respectively. The 2018 effective tax rate included the true-up to the 2017 provisional estimates as a discrete adjustment. The 2017 provisional estimates for the one-time TCJA Transition Tax resulted in additional tax expense of $1 million and $135 million during the years ended December 31, 2018 and 2017, respectively. The provisional estimated tax benefit for the deferred tax revaluation resulted in additional tax benefit of $14 million and $205 million during the years ended December 31, 2018 and 2017, respectively.

We conduct business globally, and, as part of our global business, we file numerous income tax returns in the U.S. federal, state and foreign jurisdictions. After the TCJA, our ability to obtain a tax benefit in certain countries that continue to have lower statutory tax rates than the United States is dependent on our levels of taxable income in such foreign countries. We believe that a change in the statutory tax rate of any individual foreign country would not have a material effect on our financial statements given the geographic dispersion of our taxable income.

subject to examination in the United States, various states, and foreign jurisdictions for the tax years 2010 to 2019. We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions, and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary.

All deferred tax assets and liabilities have been classified as noncurrent and are included in Other assets and Other long-term liabilities in the accompanying Consolidated Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows ($ in millions):



	2019			2018
Deferred Tax Assets:
Allowance for doubtful accounts	$	16.7		$	17.4
Operating lease liabilities	44.4			—
Inventories	16.6			17.9
Pension benefits	30.3			27.3
Environmental and regulatory compliance	10.4			10.1
Other accruals and prepayments	35.2			50.5
Deferred service income	15.1			7.1
Warranty services	16.0			19.7
Stock-based compensation expense	27.8			14.2
Tax credit and loss carryforwards	171.4			131.4
Valuation allowances	(58.4		)	(40.3		)
Total deferred tax assets	$	325.5		$	255.3
Deferred Tax Liabilities:
Property, plant and equipment	$	(47.3	)	$	(11.7	)
Operating lease right-of-use assets	(43.7		)	—
Insurance, including self-insurance	(200.5		)	(155.2		)
Goodwill and other intangibles	(722.0		)	(597.1		)
Other	(26.7		)	(14.7		)
Total deferred tax liabilities	(1,040.2		)	(778.7		)
Net deferred tax liability	$	(714.7	)	$	(523.4	)

In accordance with GAAP, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which the tax benefit has already been reflected in our Consolidated Statements of Earnings. Deferred tax liabilities generally represent items that have already been taken as a deduction on our tax return but have not yet been recognized as an expense in our Consolidated Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

Our deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. We evaluate the realizability of deferred income tax assets for each of the jurisdictions in which we operate. If we experience cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, we normally conclude that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if we experience cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, we then consider a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary

differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, and prudent and feasible tax planning strategies. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, we would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, we establish a valuation allowance.

Deferred taxes associated with U.S. entities consist of net deferred tax liabilities of approximately $659 million and $559 million inclusive of valuation allowances of $22 million and $13 million as of December 31, 2019 and December 31, 2018, respectively. Deferred taxes associated with non-U.S. entities consist of net deferred tax liabilities of $56 million and net deferred tax assets of $36 million, inclusive of valuation allowances of $36 million and $27 million, as of December 31, 2019 and December 31, 2018, respectively. Our valuation allowance increased by $18 million and by $14 million during the years ended December 31, 2019 and December 31, 2018, respectively, due primarily to foreign net operating losses in both years and state operating losses in 2019.

As of December 31, 2019, our U.S. and non-U.S. net operating loss carryforwards totaled $886 million, of which $225 million is related to federal net operating loss carryforwards, $347 million is related to state net operating loss carryforwards, and $314 million is related to non-U.S. net operating loss carryforwards. Included in deferred tax assets as of December 31, 2019 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling $130 million, before applicable valuation allowances of $42 million. Certain of these losses can be carried forward indefinitely and others can be carried forward to various dates from 2020 through 2037. Recognition of some of these loss carryforwards is subject to an annual limit, which may cause them to expire before they are used.

As of December 31, 2019, our U.S. and non-U.S. tax credit carryforwards totaled $41 million, which is primarily related to U.S. tax credit carryforwards. Certain of these credits can be carried forward indefinitely and other can be carried forward to various dates from 2020 through 2037. As of December 31, 2019, we maintain a $13 million valuation allowance related to certain tax credit carryforwards from the Separation.

We recognize tax benefits from uncertain tax positions only if, in our assessment, it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in evaluating tax positions and determining income tax provisions. We re-evaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain in certain circumstances, including when: (i) a tax audit is completed; (ii) applicable tax laws change, including a tax case ruling or legislative guidance; or (iii) the applicable statute of limitations expires. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.

As of December 31, 2019, gross unrecognized tax benefits for continuing and discontinued operations were $215 million ($231 million total, including $23 million associated with interest and penalties, and net of the impact of $7 million of indirect tax benefits). As of December 31, 2018, gross unrecognized tax benefits for continuing and discontinued operations were $133 million ($144 million total, including $16 million associated with interest and penalties, and net of the impact of $5 million of indirect tax benefits). We recognized approximately $8 million and $4 million in potential interest and penalties associated with uncertain tax positions during 2019 and 2018, respectively. This amount was not significant during 2017. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.



	2019			2018			2017
Unrecognized tax benefits, beginning of year	$	133.4		$	59.0		$	28.6
Additions based on tax positions related to the current year	17.8			40.8			25.3
Additions for tax positions of prior years	79.7			39.0			7.8
Reductions for tax positions of prior years	(13.0		)	(3.8		)	(1.9		)
Lapse of statute of limitations	(2.3		)	(3.5		)	(3.3		)
Settlements	(0.3		)	(6.4		)	(0.6		)
Effect of foreign currency translation	(0.4		)	(0.9		)	1.9
Separation related adjustments ^(a)	—			9.2			1.2
Unrecognized tax benefits, end of year	$	214.9		$	133.4		$	59.0

^(a) Unrecognized tax benefit reserves increased by $9 million and $1 million during the year ended December 31, 2018 and December 31, 2017, respectively, due primarily to unrecognized tax benefits from pre-Separation periods.

The TCJA eliminated the U.S. tax cost for qualified repatriation beginning in 2018. Foreign cumulative earnings remain subject to foreign remittance taxes. As a result of the TCJA, during 2018, we repatriated an estimated $275 million subject to no foreign remittance taxes. The remittance excluded foreign earnings: 1) required as working capital for local operating needs, 2) subject to local law restrictions, 3) subject to high foreign remittance tax costs, 4) previously invested in physical assets or acquisitions, or 5) intended for future acquisitions/growth. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.

The TCJA imposed a final U.S. tax on cumulative earnings from our foreign operations that we have previously made an assertion regarding the amount of such earnings intended for indefinite reinvestment. As of December 31, 2019, the earnings we plan to reinvest indefinitely outside of the United States for which foreign deferred taxes have not been provided was estimated at $2.4 billion.