INCOME TAXES

Significant components of the Company’s deferred tax assets and liabilities at the end of each fiscal year were as follows:



(Millions of Dollars)	2012		2011
Deferred tax liabilities:
Depreciation	$	53.2	$	57.3
Amortization of intangibles	915.8		933.6
Liability on undistributed foreign earnings	436.9		421.8
Discharge of indebtedness	15.5		26.1
Inventories	22.2		24.2
Deferred revenue	12.4		20.6
Other	67.6		54.8
Total deferred tax liabilities	$	1,523.6	$	1,538.4
Deferred tax assets:
Employee benefit plans	$	413.0	$	408.4
Doubtful accounts	7.0		16.0
Accruals	109.5		133.7
Restructuring charges	32.9		4.4
Debt amortization	31.3		24.7
Operating loss, capital loss and tax credit carry forwards	635.0		353.2
Currency and derivatives	49.1		43.2
Other	89.7		120.9
Total deferred tax assets	$	1,367.5	$	1,104.5
Net Deferred Tax Liabilities before Valuation Allowance	$	156.1	$	433.9
Valuation allowance	$	552.6	$	300.4
Net Deferred Tax Liabilities after Valuation Allowance	$	708.7	$	734.3

Net operating loss carry forwards of $891.0 million as of December 29, 2012, are available to reduce future tax obligations of certain U.S. and foreign companies. The net operating loss carry forwards have various expiration dates beginning in 2013 with certain jurisdictions having indefinite carry forward periods. The U.S. federal capital loss carry forward of $808.5 million begins expiring in 2015. The increase in the capital loss carry forward is attributable to the sale of shares for the U.S. HHI business. The U.S. foreign tax credit carry forwards of $69.6 million and research and development tax credit carry forwards of $7.2 million begin expiring in 2019 and 2030, respectively.

A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company recorded a valuation allowance of $552.6 million and $300.4 million for deferred tax assets existing as of December 29, 2012 and December 31, 2011, respectively. The valuation allowance is primarily attributable to foreign and state net operating loss carry forwards and a U.S. federal capital loss carry forward. A significant portion of the increase in the valuation allowance for the period ended December 29, 2012 pertains to the U.S. capital loss realized upon the sale of the HHI business. Capital losses are only allowed to offset capital gains, of which none are expected to be realized as of December 29, 2012.

The classification of deferred taxes as of December 29, 2012 and December 31, 2011 is as follows:



	2012					2011
	Deferred Tax Asset			Deferred Tax Liability		Deferred Tax Asset			Deferred Tax Liability
Current	$	(142.1	)	$	36.3	$	(102.0	)	$	56.0
Non-current	(132.4		)	946.9		(70.7		)	851.0
Total	$	(274.5	)	$	983.2	$	(172.7	)	$	907.0

Income tax expense (benefit) attributable to continuing operations consisted of the following:



(Millions of Dollars)	2012			2011			2010
Current:
Federal	$	11.6		$	(149.8	)	$	(90.9	)
Foreign	107.5			200.1			91.0
State	8.8			9.3			5.4
Total current	$	127.9		$	59.6		$	5.5
Deferred:
Federal	$	15.8		$	27.8		$	44.3
Foreign	(57.7		)	(31.0		)	(28.4		)
State	(7.1		)	(6.3		)	(3.4		)
Total deferred	(49.0		)	(9.5		)	12.5
Income taxes on continuing operations	$	78.9		$	50.1		$	18.0

Net income taxes paid during 2012, 2011 and 2010 were $248.4 million, $114.7 million and $83.6 million, respectively. The 2012 amount includes refunds of $50.6 million primarily related to a U.S. NOL carryback claim. The 2011 amount includes refunds of $74.6 million primarily relating to prior year overpayments and prepaid taxes. The 2010 amount includes U.S. Federal refunds of $77.4 million primarily relating to an NOL carry back, an audit settlement and a prior year overpayment. During 2012, 2011 and 2010, the Company had tax holidays in the Czech Republic and China resulting in a reduction of tax expense amounting to $3.1 million, $3.5 million, and $2.9 million, respectively. The tax holiday in the Czech Republic expired during 2011 while a portion of the tax holiday in China expires in 2015.

The reconciliation of the U.S. federal statutory income tax to the income taxes on continuing operations is as follows:



(Millions of Dollars)	2012			2011			2010
Tax at statutory rate	$	184.5		$	226.9		$	56.4
State income taxes, net of federal benefits	1.5			(2.2		)	1.6
Difference between foreign and federal income tax	(110.2		)	(91.2		)	(64.4		)
Tax accrual reserve	48.4			19.4			7.3
Audit settlements	(49.0		)	(73.4		)	(36.0		)
NOL & Valuation Allowance related items	3.2			(1.8		)	12.4
Foreign dividends and related items	15.0			(10.9		)	7.8
Merger related costs	(6.9		)	6.4			50.1
Change in deferred tax liabilities on undistributed foreign earnings	(17.2		)	(26.2		)	(10.6		)
Statutory income tax rate change	(5.2		)	(1.3		)	1.5
Other-net	14.8			4.4			(8.1		)
Income taxes on continuing operations	$	78.9		$	50.1		$	18.0

The components of earnings from continuing operations before income taxes consisted of the following:



(Millions of Dollars)	2012		2011		2010
United States	$	271.6	$	171.9	$	(201.3	)
Foreign	256.0		476.5		369.9
Earnings from continuing operations before income taxes	$	527.6	$	648.4	$	168.6

Except for certain legacy Black & Decker foreign earnings as described below, all undistributed foreign earnings of the Company at December 29, 2012, in the amount of approximately $3,902.0 million are considered to be invested indefinitely or will be remitted substantially free of additional tax. Accordingly, no provision has been made for tax that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of this liability. As of March 12, 2010, the Company made a determination to repatriate $1,636.1 million of legacy Black & Decker foreign earnings on which U.S. income taxes had not previously been provided. As a result of this repatriation decision, in conjunction with the purchase accounting and ASC 805, the Company has recorded deferred tax liabilities of $436.9 million at December 29, 2012.

The Company’s liabilities for unrecognized tax benefits relate to U.S. and various foreign jurisdictions. The following table summarizes the activity related to the unrecognized tax benefits:



(Millions of Dollars)	2012			2011			2010
Balance at beginning of year	$	214.2		$	273.1		$	30.3
Adjustment for 2010 Merger and acquisitions	—			—			317.6
Additions based on tax positions related to current year	21.5			46.3			18.4
Additions based on tax positions related to prior years	46.5			26.7			0.7
Reductions based on tax positions related to prior years	(69.6		)	(96.6		)	(36.3		)
Settlements	(1.0		)	(22.4		)	(41.0		)
Statute of limitations expirations	(4.4		)	(12.9		)	(16.6		)
Balance at end of year	$	207.2		$	214.2		$	273.1

The gross unrecognized tax benefits at December 29, 2012 and December 31, 2011 includes $179.4 million and $185.4 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The liability for potential penalties and interest related to unrecognized tax benefits was increased by $7.6 million in 2012, decreased by $14.2 million in 2011 and decreased by $6.5 million in 2010. The liability for potential penalties and interest totaled $33.5 million as of December 29, 2012 and $25.9 million as of December 31, 2011. The Company classifies all tax-related interest and penalties as income tax expense. During 2012, 2011 and 2010, the Company recognized tax benefits of $49.0 million, $73.4 million and $36.0 million attributable to favorable settlements of certain tax contingencies, due to a change in the facts and circumstances that did not exist at the acquisition date related to the resolution of legacy Black & Decker income tax audits.

The Company considers many factors when evaluating and estimating its tax positions and the impact on income tax expense, which may require periodic adjustments and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits or final decisions in transfer pricing matters. At this time, an estimate of the range of reasonably possible outcomes is $3 million to $8 million.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. For The Black & Decker Corporation, tax years 2008, 2009 and March 12, 2010 have been settled with the Internal Revenue Service as of December 29, 2012. For Stanley Black & Decker, Inc. tax years 2008 and 2009 are currently under audit. The Company also files many state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax years 2008 and forward generally remain subject to examination by most state tax authorities. In significant foreign jurisdictions, tax years 2003 and forward generally remain subject to examination, while in Germany tax years 1999 and forward remain subject to examination.