Taxes on Earnings

12 Months Ended

Sep. 27, 2019

TAXES ON EARNINGS

The Company accounts for income taxes under an asset and liability approach where deferred income taxes are based upon enacted tax laws and rates applicable to the periods in which the taxes become payable.

Taxes on earnings from continuing operations were as follows:



	Fiscal Years
(In millions)	2019		2018			2017
Current provision:
Federal	$	39.0	$	188.3		$	30.9
State and local	5.2		8.0			4.3
Foreign	69.3		47.9			67.5
Total current	113.5		244.2			102.7
Deferred provision (benefit):
Federal	4.0		43.7			(18.3		)
State and local	2.8		(3.3		)	(0.2		)
Foreign	8.3		17.2			(7.1		)
Total deferred	15.1		57.6			(25.6		)
Taxes on earnings	$	128.6	$	301.8		$	77.1

Earnings from continuing operations before taxes are generated from the following geographic areas:



	Fiscal Years
(In millions)	2019		2018		2017
United States	$	136.4	$	168.4	$	77.2
Foreign	284.4		283.7		225.9
Total earnings before taxes	$	420.8	$	452.1	$	303.1

The effective tax rate on continuing operations differs from the U.S. federal statutory tax rate as a result of the following:



	Fiscal Years
	2019		2018		2017
Federal statutory income tax rate	21.0	%	24.6	%	35.0	%
Impact of U.S. Tax Reform	2.1	%	46.3	%	—	%
State and local taxes, net of federal tax benefit	2.6	%	0.5	%	0.9	%
Non-U.S. income taxed at different rates, net	1.5	%	(0.6	)%	(8.4	)%
Foreign-derived intangible income deduction	(1.4	)%	—	%	—	%
Resolution of tax contingencies due to expiration of statutes of limitation	(1.8	)%	(2.5	)%	(1.7	)%
Excess stock deduction	(1.6	)%	(1.5	)%	—	%
Goodwill impairment	2.5	%	—	%	—	%
Change in acquirer's deferred taxes related to purchase accounting	0.7	%	(1.8	)%	—	%
In-process R&D expense	1.1	%	—	%	—	%
Other	3.9	%	1.8	%	(0.4	)%
Effective tax rate	30.6	%	66.8	%	25.4	%

During fiscal year 2019, the Company's effective tax rate was higher than the U.S. federal statutory rate primarily because the current period includes a goodwill impairment charge and an in-process R&D expense, neither of which generate a tax benefit for the Company. As a result of finalizing the impact of the Tax Cuts and Jobs Act (the "Act"), the Company recognized a tax expense of $6.2 million in fiscal year ended September 27, 2019. The Company recognized a total tax expense related to the Act of $214.0 million as of September 27, 2019 as compared to the provisional estimate of $207.8 million recognized as of September 28, 2018. The current period also includes the impact of several provisions of the Act that take effect for the Company for the first time in the fiscal year ending September 27, 2019, including a new minimum tax on certain foreign earnings (the Global Intangible Low-taxed Income, or "GILTI"), a new tax on certain payments to foreign related parties (the Base Erosion and Anti-avoidance Tax), a new incentive for foreign-derived intangible income, changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. The Company has elected to account for GILTI as a period cost rather than on a deferred basis. The current period also reflects the fact that, as the Company has a September fiscal year end, the lower 21% federal rate is now fully phased in; that is, it is applicable to our domestic earnings for the full fiscal year ending September 27, 2019.

During fiscal year 2018, the Company’s effective tax rate was higher than the U.S. federal statutory rate primarily because it included the tax effect of a change in law due to the enactment of the Act. Among other changes, the Act reduced the U.S. corporate tax rate from 35% to 21%, and imposed a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries.

During fiscal year 2017, the Company’s effective tax rate was lower than the U.S. federal statutory rate primarily because the Company’s foreign earnings are taxed at rates that are, on average, lower than the U.S. federal rate. This reduction is partly offset by the fact that the Company’s domestic earnings are also subject to state income taxes.

The Company adopted the FASB guidance related to intra-entity transfers of assets other than inventory in the first quarter of fiscal year 2019. This standard changes the treatment of the tax effect of transfers of property other than inventory among the entities within a registrant's consolidated group. Under the prior standard, the tax effect related to the transfer of property other than inventory from one member of the group to another was recorded to prepaid income taxes, which is included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. Under the new standard, the tax effect related to the transfer of property other than inventory from one member of the group to another is recorded as a discrete item to taxes on earnings in the Condensed Consolidated Statements of Earnings. The Company recorded a cumulative effect of a change in accounting principle of $0.2 million as of September 29, 2018, as a result of adopting the new standard. The Company expects that the new standard may cause its effective tax rate to be more volatile and less predictable going forward.

Significant components of deferred tax assets and liabilities are as follows:



	September 27,			September 28,
(In millions)	2019			2018
Deferred Tax Assets:
Deferred revenues	$	21.1		$	13.2
Deferred compensation	33.9			34.6
Product warranty	5.5			7.5
Inventory adjustments	6.0			7.6
Share-based compensation	12.4			13.7
Environmental reserve	1.8			2.2
Accruals and reserves	11.8			12.1
Net operating loss carryforwards	120.7			132.0
Other	37.1			24.2
	250.3			247.1
Valuation allowance	(99.7		)	(101.6		)
Total deferred tax assets	150.6			145.5
Deferred Tax Liabilities:
Tax-deductible goodwill	(20.7		)	(31.6		)
Intangibles	(61.7		)	(6.7		)
Property, plant and equipment	(7.1		)	(9.4		)
Unremitted earnings of foreign subsidiaries	(34.1		)	(20.4		)
Other	(17.6		)	(6.6		)
Total deferred tax liabilities	(141.2		)	(74.7		)
Net deferred tax assets	$	9.4		$	70.8
Reported As:
Deferred tax assets	$	84.7		$	102.2
Net current deferred tax liabilities (included in accrued liabilities)	(75.3		)	(31.4		)
Net deferred tax assets	$	9.4		$	70.8

The Company has federal net operating loss carryforwards of approximately $8.1 million expiring between 2020 and 2031. The federal net operating loss carryforwards are subject to an annual limitation of $0.8 million per year. The Company has state net operating loss carryforwards of $5.7 million expiring between 2021 and 2032. The Company has foreign net operating loss carryforwards of $382.3 million with an indefinite life. Of this amount, $22.1 million is unavailable to the Company under local loss utilization rules.

The valuation allowance relates primarily to net operating losses in certain foreign jurisdictions where, based on the weight of available evidence, it is more likely than not that the tax benefit of the net operating losses will not be realized. The valuation allowance decreased by $1.9 million, and $4.2 million in fiscal years 2019 and 2018, respectively, and increased by $26.2 million in fiscal year 2017.

Income taxes paid were as follows:



	Fiscal Years
(In millions)	2019		2018		2017
Federal income taxes paid, net	$	50.5	$	10.6	$	62.0
State, income taxes paid, net	11.9		7.2		5.0
Foreign income taxes paid, net	66.1		68.2		77.1
Total income taxes paid, net	$	128.5	$	86.0	$	144.1

The Company accounts for uncertainty in income taxes following a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that, based on the technical merits, the position will be sustained on audit,

including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Changes in the Company’s unrecognized tax benefits were as follows:



	Fiscal Years
(In millions)	2019			2018			2017
Unrecognized tax benefits balance–beginning of fiscal year	$	43.5		$	42.7		$	40.7
Additions based on tax positions related to a prior year	0.2			1.1			1.4
Reductions based on tax positions related to a prior year	(0.8		)	(3.0		)	(0.3		)
Additions based on tax positions related to the current year	13.2			14.8			5.8
Settlements	—			(2.8		)	—
Reductions resulting from the expiration of the applicable statute of limitations	(6.3		)	(9.3		)	(4.9		)
Unrecognized tax benefits balance–end of fiscal year	$	49.8		$	43.5		$	42.7

As of September 27, 2019, the total amount of gross unrecognized tax benefits was $49.8 million. Of this amount, $30.7 million would affect the effective tax rate if recognized. The difference would be offset by changes to deferred tax assets and liabilities.

The Company includes interest and penalties related to income taxes within taxes on earnings on the Consolidated Statements of Earnings. As of September 27, 2019, the Company had accrued $7.5 million for the payment of interest and penalties related to unrecognized tax benefits. During fiscal year 2019, a net charge of $0.9 million related to interest and penalties was included in taxes on earnings in the Consolidated Statements of Earnings. As of September 28, 2018, the Company had accrued $6.6 million for the payment of interest and penalties related to unrecognized tax benefits. During fiscal year 2018, a net benefit of $1.8 million related to interest and penalties was included in taxes on earnings in the Consolidated Statements of Earnings.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Company’s U.S. federal tax returns are generally no longer subject to tax examinations for years prior to 2016. The Company has significant operations in Switzerland. The Company’s Swiss tax returns are generally no longer subject to tax examinations for years prior to 2015. For U.S. states and other foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to 2007.