14. TAXES ON EARNINGS

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”, which provides for an asset and liability approach under which 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 Ended
(In millions)	2012			2011			2010
Current provision:
Federal	$	99.3		$	80.4		$	69.1
State and local		8.5			11.7			15.5
Foreign		63.5			52.7			50.7

Total current		171.3			144.8			135.3

Deferred provision (benefit):
Federal		(4.5	)		32.9			27.2
State and local		0.1			6.0			2.8
Foreign		2.0			(3.6	)		0.1

Total deferred		(2.4	)		35.3			30.1

Taxes on earnings	$	168.9		$	180.1		$	165.4

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


	Fiscal Years Ended
(In millions)	2012		2011		2010
United States	$	271.4	$	299.3	$	282.1
Foreign		324.5		289.4		250.8

	$	595.9	$	588.7	$	532.9

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


	Fiscal Years Ended
	2012			2011			2010
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
State and local taxes, net of federal tax benefit		1.3			2.5			2.2
Non-U.S. income taxed at different rates, net		(5.9	)		(3.3	)		(4.6	)
Resolution of tax contingencies due to lapses of statutes of limitations		(1.8	)		(2.8	)		(0.1	)
Other		(0.3	)		(0.8	)		(1.5	)

Effective tax rate		28.3	%		30.6	%		31.0	%

During fiscal years 2012, 2011 and 2010, 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, on average, are 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. During fiscal years 2012 and 2011, the benefit of the release of liabilities for uncertain tax positions as a result of the expiration of the statutes of limitation in various jurisdictions also contributed to the Company’s effective tax rate being lower than the U.S. federal statutory rate.

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


(In millions)	September 28, 2012			September 30, 2011
Deferred Tax Assets:
Deferred revenues	$	26.8		$	36.0
Deferred compensation		32.7			30.0
Product warranty		13.7			13.2
Inventory adjustments		17.0			18.9
Equity-based compensation		41.8			39.0
Environmental reserve		5.9			6.9
Net operating loss carryforwards		54.2			49.0
Other		45.4			39.9

		237.5			232.9
Valuation allowance		(45.8	)		(46.9	)

Total deferred tax assets		191.7			186.0

Deferred Tax Liabilities:
Tax-deductible goodwill		(27.4	)		(27.7	)
Fixed assets		(22.3	)		(27.2	)
Other		(28.8	)		(24.0	)

Total deferred tax liabilities		(78.5	)		(78.9	)

Net deferred tax assets	$	113.2		$	107.1

Reported As:
Net current deferred tax assets	$	115.8		$	113.9
Net long-term deferred tax assets (included in “Other Assets”)		13.8			10.8
Net current deferred tax liabilities (included in “Accrued Expenses”)		(2.9	)		(3.2	)
Net long-term deferred tax liabilities (included in “Other long-term liabilities”)		(13.5	)		(14.4	)

Net deferred tax assets	$	113.2		$	107.1

The Company has not provided for U.S. federal income and foreign withholding taxes on $1,051.2 million of cumulative undistributed earnings of non-U.S. subsidiaries. Such earnings are intended to be reinvested in the non-U.S. subsidiaries for an indefinite period of time. If such earnings were not considered to be reinvested indefinitely, additional deferred taxes of approximately $281.7 million would be provided.

The Company has federal net operating loss carryforwards of approximately $16.3 million expiring between 2018 and 2031. The federal net operating loss carryforwards are subject to an annual limitation of approximately $1.3 million per year. The Company has state net operating loss carryforwards of $14.8 million expiring between 2013 and 2034. The Company has foreign net operating loss carryforwards of $152.7 million with an indefinite life. Of this amount, $38.6 million is unavailable to the Company under local loss utilization rules.

The valuation allowance decreased by $1.1 million during fiscal year 2012. Of the ending valuation allowance of $45.8 million, $15.3 million is attributable to ACCEL’s deferred tax assets as of the acquisition date which, if recognized, will be allocated to reduce goodwill.

Income taxes paid were as follows:


	Fiscal Years Ended
(In millions)	2012		2011		2010
Federal income taxes paid, net	$	77.6	$	70.0	$	76.0
State income taxes paid, net		9.3		11.9		14.9
Foreign income taxes paid, net		47.7		57.5		46.1

Total	$	134.6	$	139.4	$	137.0

The Company accounts for uncertainty in income taxes in accordance with the provisions in ASC 740, “Income Taxes” related to accounting for uncertainty in income taxes, which contain a two-step approach to 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 Ended
(In millions)	2012			2011			2010
Unrecognized tax benefits balance—beginning of fiscal year	$	37.1		$	46.4		$	58.9
Additions based on tax positions related to a prior year		3.8			1.0			1.4
Reductions based on tax positions related to a prior year		(0.9	)		(0.4	)		(14.4	)
Additions based on tax positions related to the current year		7.1			8.6			7.9
Reductions based on tax positions related to the current year		(0.3	)		0.0			0.0
Settlements		(0.4	)		(5.1	)		(7.2	)
Reductions resulting from the expiration of the applicable statute of limitations		(7.6	)		(13.4	)		(0.2	)

Unrecognized tax benefits balance—end of fiscal year	$	38.8		$	37.1		$	46.4

As of September 28, 2012, the total amount of gross unrecognized tax benefits was $38.8 million. Of this amount, $33.1 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 28, 2012, the Company had accrued $5.5 million for the payment of interest and penalties related to unrecognized tax benefits. A net benefit of $2.2 million related to interest and penalties was included in “Taxes on earnings.” As of September 30, 2011, the Company had accrued $7.6 million for the payment of interest and penalties related to unrecognized tax benefits. A net benefit of $2.8 million related to interest and penalties was included in “Taxes on 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 2009. 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 2008. For U.S. states and other foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to 2006.