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)	2015		2014
Deferred tax liabilities:
Depreciation	$	99.6	$	72.7
Amortization of intangibles	868.5		888.3
Liability on undistributed foreign earnings	319.9		369.2
Discharge of indebtedness	9.3		12.4
Inventories	—		8.8
Deferred revenue	25.5		32.0
Other	66.8		59.4
Total deferred tax liabilities	$	1,389.6	$	1,442.8
Deferred tax assets:
Employee benefit plans	$	361.1	$	308.3
Doubtful accounts and other customer allowances	19.0		15.0
Inventories	16.1		—
Accruals	135.6		131.7
Restructuring charges	12.6		42.2
Operating loss, capital loss and tax credit carryforwards	562.5		594.6
Currency and derivatives	42.2		47.3
Other	82.7		97.1
Total deferred tax assets	$	1,231.8	$	1,236.2
Net Deferred Tax Liabilities before Valuation Allowance	$	157.8	$	206.6
Valuation allowance	$	480.7	$	551.9
Net Deferred Tax Liabilities after Valuation Allowance	$	638.5	$	758.5

The Company adopted ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," during the first quarter of 2014. This ASU provides that a liability related to an unrecognized tax benefit should be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. As a result, the Company reclassified $30.1 million of unrecognized tax benefits as of January 2, 2016 and $142.9 million of unrecognized tax benefits as of January 3, 2015, which is reflected in the Operating loss, capital loss and tax credit carryforwards line in the table above. The reduction in the amount of the reclassification is primarily due to the utilization of foreign tax credits during 2015.

The Company’s liability on undistributed foreign earnings decreased by $49.3 million during 2015, of which $31.0 million was recorded to the income tax provision and $18.3 million was recorded to currency translation adjustments within Accumulated other comprehensive loss. The amount recorded to currency translation adjustments was driven by the significant fluctuations in foreign exchange rates during 2015, which had the effect of reducing the liability. The amount recorded to the income tax provision is primarily related to a remeasurement of the liability due to a reduction in the taxable earnings and profits of a foreign subsidiary.

Net operating loss carryforwards of $1.183 billion as of January 2, 2016, are available to reduce future tax obligations of certain U.S. and foreign companies. The net operating loss carryforwards have various expiration dates beginning in 2016 with certain jurisdictions having indefinite carry forward periods. The U.S. federal capital loss carry forward of $672.2 million begins expiring in 2017. The capital loss carryforward is primarily attributable to the sale of shares for the U.S. HHI business during the tax year ended December 29, 2012. The U.S. foreign tax credit carryforwards of $15.7 million and research and development tax credit carryforwards of $1.8 million begin expiring in 2023 and 2035, 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 $480.7 million and $551.9 million for deferred tax assets existing as of January 2, 2016 and January 3, 2015, respectively. The valuation allowance is primarily attributable to foreign and state net operating loss carryforwards and a U.S. federal capital loss carryforward, the majority of which was realized upon the sale of the HHI business. Capital losses are only allowed to offset capital gains, of which $38 million (tax effected) was utilized in 2015.

The classification of deferred taxes as of January 2, 2016 and January 3, 2015 is as follows:



	2015					2014
(Millions of Dollars)	Deferred Tax Asset			Deferred Tax Liability		Deferred Tax Asset			Deferred Tax Liability
Current	$	(85.4	)	$	18.5	$	(137.4	)	$	11.9
Non-current	(120.5		)	825.9		(108.7		)	992.7
Total	$	(205.9	)	$	844.4	$	(246.1	)	$	1,004.6

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



(Millions of Dollars)	2015			2014			2013
Current:
Federal	$	64.4		$	18.4		$	84.0
Foreign	171.4			141.1			123.5
State	14.1			17.1			(3.0		)
Total current	$	249.9		$	176.6		$	204.5
Deferred:
Federal	$	64.2		$	55.3		$	(77.1	)
Foreign	(47.3		)	(19.3		)	(50.6		)
State	(18.2		)	14.5			(8.2		)
Total deferred	(1.3		)	50.5			(135.9		)
Income taxes on continuing operations	$	248.6		$	227.1		$	68.6

Net income taxes paid during 2015, 2014 and 2013 were $191.6 million, $113.7 million and $147.3 million, respectively. The 2015 and 2014 amounts include refunds of $31.0 million and $47.1 million, respectively, primarily related to prior year overpayments and closing of tax audits. The 2013 amount includes refunds of $64.5 million primarily related to the closing of a tax audit and a foreign tax credit carry back claim.

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



(Millions of Dollars)	2015			2014			2013
Tax at statutory rate	$	402.9		$	379.7		$	205.8
State income taxes, net of federal benefits	14.9			24.3			(6.6		)
Difference between foreign and federal income tax	(166.9		)	(178.0		)	(124.9		)
Tax accrual reserve	43.9			1.1			15.3
Audit settlements	1.3			(5.3		)	0.9
NOL/capital loss & valuation allowance related items	(21.6		)	2.7			6.8
Foreign dividends and related items	19.1			25.6			(9.5		)
Change in deferred tax liabilities on undistributed foreign earnings	(31.0		)	(6.0		)	(19.5		)
Statutory income tax rate change	4.8			(0.6		)	(1.7		)
Other-net	(18.8		)	(16.4		)	2.0
Income taxes on continuing operations	$	248.6		$	227.1		$	68.6

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



(Millions of Dollars)	2015		2014		2013
United States	$	405.5	$	234.4	$	112.7
Foreign	745.3		850.4		474.9
Earnings from continuing operations before income taxes	$	1,150.8	$	1,084.8	$	587.6

Except for certain legacy Black & Decker foreign earnings, as described below, all remaining undistributed foreign earnings of the Company at January 2, 2016, in the amount of approximately $4.391 billion, 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 January 2, 2016, the amount of earnings subject to repatriation is $1.312 billion for which a deferred tax liability of $319.9 million exists.

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)	2015			2014			2013
Balance at beginning of year	$	280.8		$	269.5		$	207.2
Additions based on tax positions related to current year	23.2			27.4			37.1
Additions based on tax positions related to prior years	24.3			40.1			46.9
Reductions based on tax positions related to prior years	(14.3		)	(30.9		)	(13.2		)
Settlements	(21.5		)	(5.9		)	7.7
Statute of limitations expirations	(9.4		)	(19.4		)	(16.2		)
Balance at end of year	$	283.1		$	280.8		$	269.5

The gross unrecognized tax benefits at January 2, 2016 and January 3, 2015 includes $262.2 million and $261.0 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 decreased by $0.1 million in 2015, increased by $22.0 million in 2014 and increased by $4.1 million in 2013. The liability for potential penalties and interest totaled $59.5 million as of January 2, 2016, $59.6 million as of January 3, 2015, and $37.6 million as of December 28, 2013. The Company classifies all tax-related interest and penalties as income tax expense.

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 $5 million to $10 million.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. Tax years 2008 and 2009 have been settled with the Internal Revenue Service as of December 23, 2014 and tax years 2010, 2011, and 2012 are currently under audit. The Company also files many state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax years 2011 and forward generally remain subject to examination by most state tax authorities. In significant foreign jurisdictions, tax years 2010 and forward generally remain subject to examination.