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)	2017			2016			2015
Current provision:
Federal	$	31.6		$	57.6		$	5.5
State and local	4.3			7.4			4.6
Foreign	68.9			74.5			73.2
Total current	104.8			139.5			83.3
Deferred provision (benefit):
Federal	(13.3		)	(14.9		)	4.4
State and local	0.2			(1.6		)	(0.4		)
Foreign	(4.0		)	(7.7		)	2.6
Total deferred	(17.1		)	(24.2		)	6.6
Taxes on earnings	$	87.7		$	115.3		$	89.9

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



	Fiscal Years
(In millions)	2017		2016		2015
United States	$	93.7	$	83.2	$	82.3
Foreign	251.1		357.4		319.0
Total earnings before taxes	$	344.8	$	440.6	$	401.3

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



	Fiscal Years
	2017		2016		2015
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal tax benefit	0.9	%	0.3	%	0.5	%
Non-U.S. income taxed at different rates, net	(8.4	)%	(8.7	)%	(12.6	)%
Other	(2.1	)%	(0.4	)%	(0.5	)%
Effective tax rate	25.4	%	26.2	%	22.4	%

During fiscal years 2017, 2016 and 2015, 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.

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



	September 29,			September 30,
(In millions)	2017			2016
Deferred Tax Assets:
Deferred revenues	$	29.6		$	29.5
Deferred compensation	45.0			36.5
Product warranty	9.6			9.7
Inventory adjustments	11.1			8.7
Share-based compensation	17.8			22.3
Environmental reserve	3.9			3.6
Accruals and reserves	20.1			13.6
Net operating loss carryforwards	124.4			106.4
Other	29.7			37.1
	291.2			267.4
Valuation allowance	(105.8		)	(79.6		)
Total deferred tax assets	185.4			187.8
Deferred Tax Liabilities:
Tax-deductible goodwill	(27.7		)	(23.2		)
Property, plant and equipment	(13.6		)	(14.4		)
Unremitted earnings of foreign subsidiaries	(16.2		)	(20.2		)
Other	(8.9		)	(17.7		)
Total deferred tax liabilities	(66.4		)	(75.5		)
Net deferred tax assets	$	119.0		$	112.3
Reported As:
Deferred tax assets	$	138.8		$	136.8
Deferred tax liabilities (included in other long-term liabilities)	(19.8		)	(24.5		)
Net deferred tax assets	$	119.0		$	112.3

The Company has not provided for U.S. federal income and foreign withholding taxes on $2,176.9 million of cumulative undistributed earnings of non-U.S. subsidiaries as of September 29, 2017. 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, an additional deferred tax liability of approximately $573.8 million would be provided.

The Company has federal net operating loss carryforwards of approximately $9.6 million expiring between 2018 and 2031. The federal net operating loss carryforwards are subject to an annual limitation of approximately $1.1 million per year. The Company has state net operating loss carryforwards of $7.2 million expiring between 2018 and 2032. The Company has foreign net operating loss carryforwards of $382.8 million with an indefinite life. Of this amount, $21.1 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 increased by $26.2 million, $9.9 million and $2.2 million in fiscal years 2017, 2016 and 2015, respectively.

Income taxes paid were as follows:



	Fiscal Years
(In millions)	2017		2016		2015
Federal income taxes paid, net	$	62.0	$	78.3	$	57.1
State, income taxes paid, net	5.0		5.0		7.2
Foreign income taxes paid, net	77.1		72.6		55.5
Total income taxes paid, net	$	144.1	$	155.9	$	119.8

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)	2017			2016			2015
Unrecognized tax benefits balance–beginning of fiscal year	$	40.7		$	39.5		$	49.6
Additions based on tax positions related to a prior year	1.4			0.6			—
Reductions based on tax positions related to a prior year	(0.3		)	(0.8		)	(9.9		)
Additions based on tax positions related to the current year	5.8			6.6			5.7
Settlements	—			—			—
Reductions resulting from the expiration of the applicable statute of limitations	(4.9		)	(5.2		)	(5.9		)
Unrecognized tax benefits balance–end of fiscal year	$	42.7		$	40.7		$	39.5

As of September 29, 2017, the total amount of gross unrecognized tax benefits was $42.7 million. Of this amount, $36.6 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 29, 2017, the Company had accrued $8.9 million for the payment of interest and penalties related to unrecognized tax benefits. During fiscal year 2017, a net expense of $0.9 million related to interest and penalties was included in taxes on earnings in the Consolidated Statements of Earnings. As of September 30, 2016, the Company had accrued $8.0 million for the payment of interest and penalties related to unrecognized tax benefits. During fiscal year 2016, a net benefit of $0.8 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 2014. 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 2013. For U.S. states and other foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to 2007.