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)	2018			2017			2016
Current provision:
Federal	$	188.3		$	30.9		$	56.0
State and local	8.0			4.3			7.3
Foreign	47.9			67.5			75.4
Total current	244.2			102.7			138.7
Deferred provision (benefit):
Federal	43.7			(18.3		)	(17.4		)
State and local	(3.3		)	(0.2		)	(1.7		)
Foreign	17.2			(7.1		)	(9.5		)
Total deferred	57.6			(25.6		)	(28.6		)
Taxes on earnings	$	301.8		$	77.1		$	110.1

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



	Fiscal Years
(In millions)	2018		2017		2016
United States	$	168.4	$	77.2	$	71.7
Foreign	283.7		225.9		360.7
Total earnings before taxes	$	452.1	$	303.1	$	432.4

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



	Fiscal Years
	2018		2017		2016
Federal statutory income tax rate	24.6	%	35.0	%	35.0	%
Impact of U.S. Tax Reform	46.3	%	—	%	—	%
State and local taxes, net of federal tax benefit	0.5	%	0.9	%	0.2	%
Non-U.S. income taxed at different rates, net	(0.6	)%	(8.4	)%	(9.3	)%
Resolution of tax contingencies to due to expiration of statutes of limitation	(2.5	)%	(1.7	)%	(1.2	)%
Change in acquirer's deferred taxes related to purchase accounting	(1.8	)%	—	%	—	%
Excess stock deduction	(1.5	)%	—	%	—	%
Other	1.8	%	(0.4	)%	0.8	%
Effective tax rate	66.8	%	25.4	%	25.5	%

During fiscal year 2018, the Company’s effective tax rate was higher than the U.S. federal statutory rate primarily due to the tax effect of the Tax Cuts and Jobs Act (the "Act"), which was signed into law on December 22, 2017. Among other changes, the Act reduces the U.S. corporate tax rate from 35% to 21%, and imposes a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. U.S. GAAP generally requires that the tax effect of a change in tax laws or rates be accounted for in the period of enactment.

The reduction in the U.S. corporate tax rate was effective January 1, 2018. As the Company has a September fiscal year end, the lower corporate tax rate will be phased in, resulting in a U.S. corporate rate of approximately 24.6% for the Company's fiscal year ended September 28, 2018, and 21% for subsequent fiscal years. The reduction in the rate requires the Company to remeasure its net deferred tax assets that were originally recorded assuming a future tax benefit at the 35% rate. During fiscal year 2018, the Company recorded a provisional tax expense of $43.2 million related to re-measuring its net deferred tax assets as a result of the rate reduction.

As part of the transition to a modified territorial system, the Act imposes a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. The Company recorded a provisional tax expense related to the one-time transition tax of $164.6 million during fiscal year 2018. The Company intends to elect to pay this tax over the eight-year period allowed for in the Act. The transition to a modified territorial regime and the one-time transition tax on unremitted earnings has also caused the Company to re-evaluate its intentions with respect to the unremitted earnings of foreign subsidiaries. In the past, the Company did not accrue U.S. taxes on certain undistributed profits of certain foreign subsidiaries because the earnings were considered to be indefinitely reinvested. In light of the changes to the taxation of foreign earnings in the Act, the Company no longer considers the earnings of its foreign subsidiaries to be indefinitely reinvested.

Other provisions of the Act include a new minimum tax on certain foreign earnings (the Global Intangibles Low-taxed Income, or "GILTI"), a new tax on certain payments to foreign related parties (the Base Erosion Anti-avoidance Tax, or "BEAT"), a new incentive for Foreign-derived Intangibles Income ("FDII"), changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. Generally, these other provisions take effect for the Company in the fiscal year ending September 27, 2019.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”). This guidance allows registrants a “measurement period,” not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Act. SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates of the tax effects of the Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Act. The amounts of the tax effects related to the Act described in the paragraphs above represent the Company’s current reasonable estimates and are provisional amounts within the meaning of SAB 118. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the Act. The Company will continue analyze that guidance and other necessary information during the measurement period, including the amount of foreign earnings and profits, pools of foreign tax, and the Company's foreign cash position, to refine its estimates and complete its accounting for the tax effects of the Act.

The Company adopted the FASB guidance related to employee share-based payments in the first quarter of fiscal year 2018. Among other changes, this guidance changes the treatment of the tax effect of the excess stock deduction. For a share-based compensation instrument, the excess stock deduction is the difference between the amount of the deduction for taxable income and the amount of expense in the financial statements related to that instrument. Under the prior standard, the tax effect of the excess stock deduction related to share-based compensation was recorded to additional paid-in capital in the equity section on the Consolidated Balance Sheets. Under the new standard, the tax effect of the excess stock deduction related to share-based compensation is recorded as a discrete item to Taxes on Earnings in the Consolidated Statements of Earnings. During fiscal year 2018, the Company recorded a tax benefit of $6.9 million related to excess stock deduction activity. The Company expects that the new standard may cause its effective tax rate to be less predictable and more volatile going forward.

During fiscal years 2017 and 2016, 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.

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



	September 28,			September 29,
(In millions)	2018			2017
Deferred Tax Assets:
Deferred revenues	$	13.2		$	40.8
Deferred compensation	34.6			45.0
Product warranty	7.5			9.6
Inventory adjustments	7.6			11.1
Share-based compensation	13.7			17.8
Environmental reserve	2.2			3.9
Accruals and reserves	12.1			20.1
Net operating loss carryforwards	132.0			124.4
Other	24.2			29.7
	247.1			302.4
Valuation allowance	(101.6		)	(105.8		)
Total deferred tax assets	145.5			196.6
Deferred Tax Liabilities:
Tax-deductible goodwill	(31.6		)	(27.7		)
Property, plant and equipment	(9.4		)	(13.6		)
Unremitted earnings of foreign subsidiaries	(20.4		)	(16.2		)
Other	(13.3		)	(8.9		)
Total deferred tax liabilities	(74.7		)	(66.4		)
Net deferred tax assets	$	70.8		$	130.2
Reported As:
Deferred tax assets	$	102.2		$	147.3
Deferred tax liabilities (included in other long-term liabilities)	(31.4		)	(17.1		)
Net deferred tax assets	$	70.8		$	130.2

The Company has federal net operating loss carryforwards of approximately $8.9 million expiring between 2020 and 2031. The federal net operating loss carryforwards are subject to an annual limitation of approximately $0.8 million per year. The Company has state net operating loss carryforwards of $6.3 million expiring between 2019 and 2032. The Company has foreign net operating loss carryforwards of $416.0 million with an indefinite life. Of this amount, $20.7 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 $4.2 million in fiscal year 2018, and increased by $26.2 million and $9.9 million in fiscal years 2017 and 2016, respectively.

Income taxes paid were as follows:



	Fiscal Years
(In millions)	2018		2017		2016
Federal income taxes paid, net	$	10.6	$	62.0	$	78.3
State, income taxes paid, net	7.2		5.0		5.0
Foreign income taxes paid, net	68.2		77.1		72.6
Total income taxes paid, net	$	86.0	$	144.1	$	155.9

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)	2018			2017			2016
Unrecognized tax benefits balance–beginning of fiscal year	$	42.7		$	40.7		$	39.5
Additions based on tax positions related to a prior year	1.1			1.4			0.6
Reductions based on tax positions related to a prior year	(3.0		)	(0.3		)	(0.8		)
Additions based on tax positions related to the current year	14.8			5.8			6.6
Settlements	(2.8		)	—			—
Reductions resulting from the expiration of the applicable statute of limitations	(9.3		)	(4.9		)	(5.2		)
Unrecognized tax benefits balance–end of fiscal year	$	43.5		$	42.7		$	40.7

As of September 28, 2018, the total amount of gross unrecognized tax benefits was $43.5 million. Of this amount, $34.0 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, 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. 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.

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 2015. 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 2014. For U.S. states and other foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to 2007.