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)	2016		2015
Deferred tax liabilities:
Depreciation	$	108.7	$	99.6
Amortization of intangibles	851.2		868.5
Liability on undistributed foreign earnings	260.7		319.9
Discharge of indebtedness	6.2		9.3
Inventories	6.2		—
Deferred revenue	27.3		25.5
Other	61.7		66.8
Total deferred tax liabilities	$	1,322.0	$	1,389.6
Deferred tax assets:
Employee benefit plans	$	362.5	$	361.1
Doubtful accounts and other customer allowances	19.3		19.0
Inventories	—		16.1
Accruals	110.4		135.6
Restructuring charges	4.9		12.6
Operating loss, capital loss and tax credit carryforwards	590.3		562.5
Currency and derivatives	45.1		42.2
Other	126.7		82.7
Total deferred tax assets	$	1,259.2	$	1,231.8
Net Deferred Tax Liabilities before Valuation Allowance	$	62.8	$	157.8
Valuation allowance	$	525.5	$	480.7
Net Deferred Tax Liabilities after Valuation Allowance	$	588.3	$	638.5

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," 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 $12.7 million of unrecognized tax benefits as of December 31, 2016 and $30.1 million of unrecognized tax benefits as of January 2, 2016, which is reflected in the Operating loss, capital loss and tax credit carryforwards line in the table above. The year-over-year reduction in the amount of the reclassification is primarily due to the utilization of foreign tax credits and research and development credits during 2016.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The objective of this update is to simplify the presentation of deferred income taxes by requiring all deferred tax assets and liabilities to be classified as noncurrent in the consolidated balance sheet. This ASU is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods, and can be applied either prospectively or retrospectively. The Company elected to early adopt the pronouncement in the fourth quarter of 2016 on a prospective basis. Prior periods were not retrospectively adjusted.

The Company’s liability on undistributed foreign earnings decreased by $59.2 million during 2016, of which $38.7 million was recorded to the income tax provision and $20.5 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 2016, 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 $1.240 billion as of December 31, 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 2017 with certain jurisdictions having indefinite carry forward periods. The U.S. federal capital loss carry forward of $671.2 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.

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 $525.5 million and $480.7 million on deferred tax assets existing as of December 31, 2016 and January 2, 2016, 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, none of which was utilized in 2016. During 2016, the Company recorded a valuation allowance of $27.9 million against a deferred tax asset established under ASC 740-30-25-9 for the excess of the outside tax basis over the financial reporting basis for investments in businesses to be sold in 2017, which are classified as Held for Sale on the Company's Consolidated Balance Sheets as of December 31, 2016.

The classification of deferred taxes as of December 31, 2016 and January 2, 2016 is as follows:



	2016					2015
(Millions of Dollars)	Deferred Tax Asset			Deferred Tax Liability		Deferred Tax Asset			Deferred Tax Liability
Current	$	—		$	—	$	(85.4	)	$	18.5
Non-current	(147.1		)	735.4		(120.5		)	825.9
Total	$	(147.1	)	$	735.4	$	(205.9	)	$	844.4

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



(Millions of Dollars)	2016			2015			2014
Current:
Federal	$	84.8		$	64.4		$	18.4
Foreign	191.5			171.4			141.1
State	10.6			14.1			17.1
Total current	$	286.9		$	249.9		$	176.6
Deferred:
Federal	$	18.2		$	64.2		$	55.3
Foreign	(26.1		)	(47.3		)	(19.3		)
State	(17.8		)	(18.2		)	14.5
Total deferred	(25.7		)	(1.3		)	50.5
Income taxes on continuing operations	$	261.2		$	248.6		$	227.1

Net income taxes paid during 2016, 2015 and 2014 were $233.3 million, $191.6 million and $113.7 million, respectively. The 2016, 2015 and 2014 amounts include refunds of $30.5 million, $31.0 million and $47.1 million, respectively, primarily related to prior year overpayments and closing of tax audits.

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



(Millions of Dollars)	2016			2015			2014
Tax at statutory rate	$	429.1		$	402.9		$	379.7
State income taxes, net of federal benefits	12.5			14.9			24.3
Difference between foreign and federal income tax	(158.5		)	(166.9		)	(178.0		)
Tax reserve accrual	32.0			43.9			1.1
Audit settlements	(10.5		)	1.3			(5.3		)
NOL/capital loss & valuation allowance related items	31.1			(21.6		)	2.7
Foreign dividends and related items	13.7			19.1			25.6
Change in deferred tax liabilities on undistributed foreign earnings	(38.7		)	(31.0		)	(6.0		)
Statutory income tax rate change	1.7			4.8			(0.6		)
Basis difference for businesses Held for Sale	(27.9		)	—			—
Other-net	(23.3		)	(18.8		)	(16.4		)
Income taxes on continuing operations	$	261.2		$	248.6		$	227.1

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



(Millions of Dollars)	2016		2015		2014
United States	$	305.9	$	405.5	$	234.4
Foreign	920.2		745.3		850.4
Earnings from continuing operations before income taxes	$	1,226.1	$	1,150.8	$	1,084.8

Except for certain legacy Black & Decker foreign earnings, as described below, all remaining undistributed foreign earnings of the Company at December 31, 2016, in the amount of approximately $4.867 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 December 31, 2016, the amount of earnings subject to repatriation is $1.229 billion for which a deferred tax liability of $260.7 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)	2016			2015			2014
Balance at beginning of year	$	283.1		$	280.8		$	269.5
Additions based on tax positions related to current year	14.9			23.2			27.4
Additions based on tax positions related to prior years	53.9			24.3			40.1
Reductions based on tax positions related to prior years	(34.2		)	(14.3		)	(30.9		)
Settlements	5.4			(21.5		)	(5.9		)
Statute of limitations expirations	(13.3		)	(9.4		)	(19.4		)
Balance at end of year	$	309.8		$	283.1		$	280.8

The gross unrecognized tax benefits at December 31, 2016 and January 2, 2016 includes $291.1 million and $262.2 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 $4.6 million in 2016, decreased by $0.1 million in 2015 and increased by $22.0 million in 2014. The liability for potential penalties and interest totaled $64.1 million as of December 31, 2016, $59.5 million as of January 2, 2016, and $59.6 million as of January 3, 2015. 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.

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 2012 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.