INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a tax on global intangible low-taxed income (“GILTI”) which is a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax ("BEAT"), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

As of December 30, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Act; however, in certain cases (described below) the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. During the fourth quarter, the Company recognized a provisional net charge of $23.6 million for the items it was able to reasonably estimate, which has been included as a component of income tax expense from continuing operations. The Company operates in many countries throughout the world through numerous subsidiaries. In order to complete the accounting associated with the Act, the Company will continue to accumulate the relevant data, refine computational elements, monitor and analyze U.S. federal and state guidance if and when issued, and adjust its provisional estimates accordingly within the measurement period prescribed by SAB 118.

Provisional amounts

Deferred tax assets and liabilities: The Company remeasured certain deferred tax assets and liabilities based on the U.S. tax rates at which they are expected to become realized in the future. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of its deferred tax balance resulted in a decrease to income tax expense of approximately $252.5 million.

International provision tax effects: The Company recorded a provisional amount for the one-time transition tax on undistributed foreign earnings, resulting in an increase to income tax expense of $276.1 million comprised of an accrued provisional income tax payable of approximately $460.7 million, partially offset by the reversal of the deferred tax liability of approximately $184.6 million associated with certain legacy Black & Decker unremitted foreign earnings and profits which were previously designated as not being indefinitely reinvested. The remaining deferred tax liability on unremitted foreign earnings of $4.9 million represents withholding taxes which will become payable upon distribution. The Company is still analyzing certain aspects of the Act and refining its estimate, which may change, possibly materially, due to changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Act.

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



(Millions of Dollars)	2017			2016
Deferred tax liabilities:
Depreciation	$	98.4		$	108.7
Amortization of intangibles	668.0			851.2
Liability on undistributed foreign earnings	4.9			260.7
Deferred revenue	24.6			27.3
Other	62.2			74.1
Total deferred tax liabilities	$	858.1		$	1,322.0
Deferred tax assets:
Employee benefit plans	$	256.4		$	362.5
Doubtful accounts and other customer allowances	16.3			19.3
Basis differences in liabilities	84.5			110.4
Operating loss, capital loss and tax credit carryforwards	632.2			590.3
Currency and derivatives	48.5			45.1
Other	88.6			131.6
Total deferred tax assets	$	1,126.5		$	1,259.2
Net Deferred Tax Asset (Liability) before Valuation Allowance	$	268.4		$	(62.8	)
Valuation allowance	$	(516.7	)	$	(525.5	)
Net Deferred Tax Liability after Valuation Allowance	$	(248.3	)	$	(588.3	)

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 $516.7 million and $525.5 million on deferred tax assets existing as of December 30, 2017 and December 31, 2016, respectively. The valuation allowance in 2017 was primarily attributable to foreign and state net operating loss carryforwards and foreign capital loss carryforwards. The valuation allowance in 2016 was 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. During 2016, the Company recorded a valuation allowance of $27.9 million against a deferred tax asset established for the excess of the outside tax basis over the financial reporting basis for investments in businesses to be sold in 2017, which were classified as Held for Sale on the Company's Consolidated Balance Sheets as of December 31, 2016.

As of December 30, 2017, the Company has approximately $5.7 billion of unremitted foreign earnings and profits. Except for $823.3 million of certain legacy Black & Decker foreign earnings and profits, all remaining unremitted foreign earnings and profits are considered to be invested indefinitely or will be remitted substantially free of additional tax. As a result of the Act, the Company recognized income tax expense of $276.1 million for the one-time transition tax on all of its unremitted foreign earnings and profits. This amount is comprised of an accrued provisional income tax payable of approximately $460.7 million, partially offset by the reversal of the deferred tax liability of approximately $184.6 million established on certain legacy Black & Decker unremitted foreign earnings and profits which were previously designated as not being indefinitely reinvested. The remaining deferred tax liability on unremitted foreign earnings of $4.9 million represents withholding taxes which will become payable upon distribution. The Company is continuing to analyze certain aspects of the Act, and may refine its estimate, potentially materially, due to future guidance that may be issued, clarification of existing law, assumptions made, or actions the Company may take as a result of the Act, including the remittance of foreign earnings and profits currently considered to be invested indefinitely (as described above).

Net operating loss carryforwards of $2.3 billion as of December 30, 2017, 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 2018 with certain jurisdictions having indefinite carryforward periods. The foreign capital loss carryforwards of $52.1 million of December 30, 2017 have indefinite carryforward periods. There was no U.S. federal capital loss carryforward as of December 30, 2017 primarily due to utilization related to the sale of the mechanical security business in the first quarter of 2017.

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



(Millions of Dollars)	2017		2016		2015
United States	$	714.1	$	305.9	$	405.5
Foreign	812.0		920.2		745.3
Earnings from continuing operations before income taxes	$	1,526.1	$	1,226.1	$	1,150.8

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



(Millions of Dollars)	2017			2016			2015
Current:
Federal	$	590.6		$	84.8		$	64.4
Foreign	224.6			191.5			171.4
State	25.4			10.6			14.1
Total current	$	840.6		$	286.9		$	249.9
Deferred:
Federal	$	(513.4	)	$	18.2		$	64.2
Foreign	(33.0		)	(26.1		)	(47.3		)
State	6.3			(17.8		)	(18.2		)
Total deferred	(540.1		)	(25.7		)	(1.3		)
Income taxes on continuing operations	$	300.5		$	261.2		$	248.6

Included in the U.S. Federal and State current income tax expense are provisional income tax liabilities of approximately $455.4 million and $5.3 million, respectively, which have been recorded as a result of the one-time transition tax on unremitted foreign earnings pursuant to the Act. Included in U.S. Federal deferred income tax expense are provisional income tax benefits of approximately $252.5 million related to the re-measurement of existing U.S. Federal deferred tax balances and $184.6 million associated with the reversal of the deferred tax liability for unremitted foreign earnings and profits which were designated as not being indefinitely reinvested.

Net income taxes paid during 2017, 2016 and 2015 were $273.6 million, $233.3 million and $191.6 million, respectively. The 2017, 2016 and 2015 amounts include refunds of $28.5 million, $30.5 million and $31.0 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)	2017			2016			2015
Tax at statutory rate	$	534.1		$	429.1		$	402.9
State income taxes, net of federal benefits	13.3			12.5			14.9
Foreign tax rate differential	(149.0		)	(166.3		)	(166.9		)
Uncertain tax benefits	64.4			32.0			43.9
Tax audit settlements	(16.5		)	(10.5		)	1.3
Change in valuation allowance	(5.4		)	38.9			(21.6		)
Change in deferred tax liabilities on undistributed foreign earnings	(94.1		)	(38.7		)	(31.0		)
Basis difference for businesses Held for Sale	27.9			(27.9		)	—
Stock-based compensation	(23.2		)	—			—
Sale of businesses	(47.3		)	—			—
U.S. Federal tax reform	23.6			—			—
Other-net	(27.3		)	(7.9		)	5.1
Income taxes on continuing operations	$	300.5		$	261.2		$	248.6

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state, and foreign jurisdictions. In the normal course, the Company is subject to examinations by taxing authorities throughout the world. The Internal Revenue Service is currently examining its consolidated U.S. income tax returns for the 2010-2013 tax years. With few exceptions, as of December 30, 2017, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2010.

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)	2017			2016			2015
Balance at beginning of year	$	309.8		$	283.1		$	280.8
Additions based on tax positions related to current year	34.6			14.9			23.2
Additions based on tax positions related to prior years	82.5			53.9			24.3
Reductions based on tax positions related to prior years	(4.2		)	(34.2		)	(14.3		)
Settlements	(0.3		)	5.4			(21.5		)
Statute of limitations expirations	(34.6		)	(13.3		)	(9.4		)
Balance at end of year	$	387.8		$	309.8		$	283.1

The gross unrecognized tax benefits at December 30, 2017 and December 31, 2016 includes $368.7 million and $291.1 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 $3.8 million in 2017, increased by $4.6 million in 2016 and decreased by $0.1 million in 2015. The liability for potential penalties and interest totaled $67.9 million as of December 30, 2017, $64.1 million as of December 31, 2016, and $59.5 million as of January 2, 2016. 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 cannot reasonably estimate the range of the potential change.