NOTE 7—INCOME TAXES

        On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was signed into law making significant changes to the Internal Revenue Code. The changes include, but are not limited to, a federal statutory rate reduction from 35% to 21%, the elimination of U.S. federal alternative minimum tax, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.

        As a result of the Tax Act's effective date for the change in tax rate of January 1, 2018, the Company's federal statutory rate for fiscal 2017 was 33.9%. The Tax Act requires the Company, and other fiscal year taxpayers, to compute a blended statutory tax rate based on the ratio of the number of fiscal year days in calendar year 2017 at the 35% statutory rate versus the number of fiscal year days in calendar year 2018 at the new 21% statutory rate.

        The Company's deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary items are expected to be realized or settled. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company remeasured its U.S. deferred tax assets and liabilities and recognized a non-cash $72 million tax expense.

        The components of Income (Loss) from Continuing Operations before Provision (Benefit) for Income Taxes are as follows (amounts in millions):

                                                                                                                                                                                    

        The Provision (Benefit) for Income Taxes consisted of the following (amounts in millions):

                                                                                                                                                                                    

        The Company's combined federal, state and foreign effective tax rate for continuing operations for fiscal 2017, fiscal 2016, and fiscal 2015 was approximately 53.6%, 43.6%, and not meaningful since income tax expense (benefit) was significantly impacted by the reversal of substantially all of the valuation allowance and the decrease in the Company's unrecognized tax positions, respectively.

        The Company's effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where it operates, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits.

        The Company's fiscal 2017 effective rate was impacted by the Tax Act, excess tax benefits related to stock-based compensation, and by the geographical mix of where income was generated. The Company's fiscal 2016 effective rate was impacted by the repatriation of $72 million of cash from Canada to the U.S., which, to the extent of current earnings and profits, and foreign withholding taxes, resulted in $4 million of tax expense and was also impacted by the geographical mix of where income was generated. The Company's fiscal 2015 effective rate was impacted by reversing substantially all of the valuation allowance on its net U.S. deferred income taxes and a decrease in the Company's unrecognized tax position.

        The reconciliation of the provision (benefit) for income taxes from continuing operations at the federal statutory rate of 33.9% to the actual tax provision (benefit) for fiscal 2017, at the federal statutory rate of 35% to the actual tax provision (benefit) for both fiscal 2016 and fiscal 2015 is as follows (amounts in millions):

                                                                                                                                                                                    

        The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of January 28, 2018 and January 29, 2017 were as follows (amounts in millions):

                                                                                                                                                                                                       

        The Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result all previously unremitted earnings for which no U.S. deferred liability has been accrued is now subject to U.S. tax. As a result, the Company recorded a $1 million charge related to the one-time mandatory tax of previously deferred foreign earnings which is payable over an 8-year period.

        Beginning in fiscal 2017 and prior to the Tax Act, the Company anticipated that all of its Canadian earnings would be permanently reinvested until such time the Canadian borrowings under the Senior ABL Facility, which was initially drawn on during fiscal 2016, are paid off. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allows companies to record provisional amounts, during a measurement period, in situations where accounting for the Tax Act is incomplete. As a result of the Tax Act, the Company is still evaluating its indefinite reinvestment assertion with respect to its Canadian earnings and anticipates completing its analysis during fiscal 2018.

        In fiscal 2016, the Company repatriated $72 million of cash to the U.S., which, to the extent of current earnings and profits, and foreign withholding taxes resulted in $4 million of tax expense. In fiscal 2015, the Company repatriated $92 million of cash and property to the U.S., which, to the extent of current earnings and profits, resulted in $10 million income tax expense in the U.S.

        As of January 28, 2018 the Company had tax-effected U.S. federal net operating loss carryforwards of $166 million which expire beginning in fiscal 2033. The Company also had $85 million of tax effected state net operating loss carryforwards which expire in various years between fiscal 2018 and fiscal 2037. The Company also had $30 million of U.S. federal alternative minimum tax credits. As a result of the Tax Act, the federal alternative minimum tax credit is 50% refundable for any tax year beginning after 2017 and before 2021. It becomes 100% refundable for tax years beginning in 2021. The Company also had $4 million of U.S. federal research and development credits which expire between fiscal 2031 and fiscal 2037, and $5 million of tax-effected state tax credits which expire in various years between fiscal 2019 and fiscal 2028.

        At January 31, 2016, the Company's U.S. operations were in a position of cumulative consolidated pre-tax income for the most recent three-year period. Management concluded that as a consequence of the Company's three-year cumulative consolidated pre-tax income, generation of taxable income in fiscal 2014 and 2015, long net operating loss carryforward periods, a significant reduction in recent interest expense, a projected further reduction in future interest expense, and the business plan for fiscal 2016 and beyond showing continued profitability, that it is more likely than not that substantially all of the Company's U.S. deferred tax assets would be realized. Accordingly, in the fourth quarter of fiscal 2015, the Company reversed substantially all of its valuation allowance on its net U.S. deferred tax assets, resulting in a $1,007 million benefit in its provision for income taxes. The benefit from reversing the valuation allowance was partially offset by the utilization of $20 million of such deferred tax assets to offset current year income.

        In fiscal 2015, after the reversal of the valuation allowance, the Company's remaining valuation allowance on its U.S. deferred tax assets was approximately $6 million. In fiscal 2016, the Company reduced its valuation allowance related to its U.S. continuing operations by $1 million as it determined it is "more likely than not" certain deferred income tax assets would be realized. In fiscal 2017, the Company increased its valuation allowance related to its state continuing operations by $1 million as it determined it is "more likely than not" certain deferred income tax assets would not be realized.

        The future utilization of the Company's net operating loss carryforwards could be limited if the Company experiences an "ownership change," as defined in Section 382 of the Internal Revenue Code of 1986, as amended. In general, an ownership change may result from transactions increasing the aggregate direct or indirect ownership of certain persons (or groups of persons) in the Company's stock by more than 50 percentage points over a testing period (generally 3 years). Future direct or indirect changes in the ownership of the Company's common stock, including sales or acquisitions of the Company's common stock by stockholders and purchases and issuances of the Company's common stock by the Company, some of which are not in our control, could result in an ownership change. Any resulting limitation on the use of the Company's net operating loss carryforwards could result in the payment of taxes above the amounts currently anticipated and have a negative effect on the Company's future results of operations and financial position.

        Upon adoption of ASU 2016-09 at the beginning of fiscal 2017, the Company recorded a $56 million cumulative-effect adjustment to retained earnings in order to recognize a deferred tax asset on the excess deduction for stock option exercises over the expense recorded for book purposes. In fiscal 2017, the application of stock-based compensation guidance in ASU 2016-09 resulted in discrete tax benefits of $16 million from the exercise and vesting of stock based awards. For additional information on the adoption of ASU No. 2016-09, see "Note 1—Nature of Business and Summary of Significant Accounting Policies".

        Prior to ASU No. 2016-09, deferred tax assets relating to tax benefits of employee stock option grants were reduced to reflect exercises in fiscal 2016 and fiscal 2015. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant ("windfalls"). Although these additional tax benefits, or windfalls, are reflected in the Company's net operating loss carryforwards, pursuant to ASC 718, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit did not reduce the Company's current taxes payable in fiscal 2016 or fiscal 2015 due to net operating loss carryforwards, these windfall tax benefits are not reflected in the Company's net operating losses in deferred tax assets for fiscal 2016 or fiscal 2015. Windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for fiscal 2016 and fiscal 2015 were $56 million and $48 million, respectively.

        For fiscal 2017, the Company recorded a $240 million net income tax expense related to discontinued operations mainly from the operations and sale of the Waterworks business. For fiscal 2016, the Company recorded an $87 million net income tax expense related to discontinued operations mainly from the operations of its Waterworks business. For fiscal 2015, the Company recorded a $159 million net income tax expense in discontinued operations of which $86 million related to the operations of the Waterworks business and $73 million related to the operations and sale of the Power Solutions business.

        Federal, state and foreign income taxes net current receivable total $8 million and $7 million as of fiscal 2017 and fiscal 2016, respectively.

Accounting for uncertain tax positions

        The Company follows the GAAP guidance for uncertain tax positions within ASC 740, "Income Taxes." ASC 740 requires application of a "more likely than not" threshold to the recognition and de-recognition of tax positions. It further requires that a change in judgment related to prior years' tax positions be recognized in the quarter of such change. A reconciliation of the beginning and ending amount of unrecognized tax benefits for continuing operations for fiscal 2017, fiscal 2016, and fiscal 2015 is as follows (amounts in millions):

                                                                                                                                                                                                       

        The resolution of the unrecognized tax benefits could affect the annual effective income tax rate.

        The Company did not change its accrual for net interest and penalties related to unrecognized tax benefits in fiscal 2017 or fiscal 2016. For fiscal 2015, the Company decreased its accrual for net interest and penalties related to unrecognized tax benefits by $29 million. The Company's ending net accrual for interest and penalties related to unrecognized tax benefits at fiscal 2017, fiscal 2016, and fiscal 2015, was zero for each of the three periods respectively. The Company's accounting policy is to classify interest and penalties as components of income tax expense. Accrued interest and penalties from unrecognized tax benefits are included as a component of other liabilities on the Consolidated Balance Sheet.

        The Company is subject to audits and examinations of its tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service ("IRS"). Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of provisions for income taxes. Certain of the Company's tax years from 2007 and forward remain open for audit by the IRS and various state governments.

        The decrease in the Company's fiscal 2015 unrecognized U.S. federal and state tax benefits including gross interest accrual was driven by an income tax benefit of approximately $189 million from the settlement of an IRS audit.