Income tax

12 Months Ended

Jul. 31, 2024

Income Tax Disclosure [Abstract]

Income tax

Note 4. Income tax

Income before income tax by geographical area consisted of the following:

	For the years ended July 31,
(In millions)	2024	2023	2022
United Kingdom	$80	$80	$102
United States	2,022	2,011	2,222
International	362	373	384
Total	$2,464	$2,464	$2,708

Provision for income taxes consisted of the following:

	For the years ended July 31,
(In millions)	2024	2023	2022
Current:
United Kingdom	$3	$—	($18)
Federal and state (U.S.)	552	624	528
International	49	55	58
Total current	$604	$679	$568
Deferred:
United Kingdom	$155	$17	$20
Federal and state (U.S.)	(32)	(120)	20
International	2	(1)	1
Total deferred	$125	($104)	$41
Provision for income taxes	$729	$575	$609

The following is a reconciliation of income tax expense with income taxes at the U.K. statutory rate:

	For the years ended July 31,
(In millions)	2024			2023			2022
Provision for income taxes at U.K. statutory rate(1)	$616	25.0	%	$518	21.0	%	$515	19.0	%
Non-U.K. tax rate differentials	(30)	(1.2)		68	2.8		127	4.7
Impact of change in reserves	12	0.5		8	0.3		8	0.2
Tax credits	(8)	(0.3)		(15)	(0.6)		(9)	(0.3)
Impact of Merger transaction (2)	144	5.8		—	—		—	—
Non-taxable income	(13)	(0.5)		(6)	(0.2)		(9)	(0.3)
Other	8	0.3		2	—		(23)	(0.8)
Income tax expense	$729	29.6	%	$575	23.3	%	$609	22.5	%

(1)For each fiscal year presented, the Company was tax resident in the U.K. Therefore, the Company has utilized the U.K. statutory rate. Since the change in statutory rate transitioned between fiscal years, the Company utilized a prorated statutory rate during fiscal 2023.

(2)As a result of the steps taken in the fourth quarter of fiscal 2024 to complete the Merger, the Company recognized one-time, non-cash deferred tax charges of $137 million composed of a reduction in deferred tax assets of $90 million related to tax losses that were no longer expected to be realizable and an increase in valuation allowance of $47 million related to UK deferred tax assets no longer expected to be realizable, as well the tax impact of non-deductible expenses related to the Merger.

Deferred Taxes

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	As of July 31,
(In millions)	2024	2023
Assets:
Deferred compensation	$82	$69
Tax loss carryforwards	90	186
Lease liabilities	404	378
Sales returns and other liabilities	106	123
Inventory	45	46
Capitalized research and development	82	44
Other	49	48
Total deferred tax assets	858	894
Valuation allowance	(128)	(81)
Total deferred tax assets, net of valuation allowance	$730	$813
Liabilities:
Right of use assets	($397)	($374)
Goodwill and intangible assets	(129)	(118)
Property, plant and equipment	(34)	(21)
Total deferred tax liabilities	(560)	(513)
Net deferred tax assets	$170	$300

We recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Our valuation allowance at July 31, 2024 related to foreign net capital loss carryforwards in the U.K. and Canada as well as deferred tax assets in the U.K. which are not expected to be realizable. Our valuation allowance at July 31, 2023 relates to foreign net capital loss carryforwards in the U.K. and Canada which are not expected to be realizable. For the year ended July 31, 2024, there was a $47 million change in the valuation allowance (2023: $4 million and 2022: $0 million) driven by the steps taken in the fourth quarter of fiscal 2024 to complete the Merger.

As of July 31, 2024, the Company had $343 million of loss carryforwards related to the U.K. operations. At July 31, 2024, the Company had U.S. federal and state operating loss carryforwards for income tax purposes of $11 million and $12 million, respectively. Some of the loss carryforwards may expire at various dates through 2039. At July 31, 2024, the Company had $8 million of loss carryforwards related to international operations. The Company’s U.K. losses and capital losses were offset with valuation allowances.

Unrecognized Tax Benefits

The following table reconciles the beginning and ending amount of our gross unrecognized tax benefits:

	For the years ended July 31,
(In millions)	2024	2023	2022
Unrecognized tax benefits at beginning of fiscal year	$144	$140	$132
Additions based on tax positions related to current year	25	27	27
Additions for tax positions of prior years	2	2	11
Reductions for tax positions of prior years	(10)	—	—
Reductions due to lapse of statute of limitations	(10)	(25)	(30)
Unrecognized tax benefits	$151	$144	$140

As of July 31, 2024, the unrecognized tax benefits that, if recognized, would impact the effective tax rate were $151 million (2023: $144 million and 2022: $140 million). The Company recognizes interest and penalties in the income tax provision in its consolidated statements of earnings. As of July 31, 2024, the Company had accrued interest of $28 million (2023: $23 million and 2022: $17 million). For the year ended July 31, 2024, the interest expense included in income tax expense was $5 million (2023: $6 million and 2022: $1 million). Penalties related to these positions were not material for all periods presented.

The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlement of ongoing tax audits and assessments and the expiration of applicable statutes of limitations. The Company anticipates that the balance of gross unrecognized tax benefits, excluding interest and penalties, will be reduced by $37 million during the next 12 months, primarily due to the anticipated settlement of tax examinations and statute of limitation expirations. However, the outcomes and timing of such events are highly uncertain and changes in the occurrence, expected outcomes and timing of such events could cause the Company’s current estimate to change materially in the future.

Reinvestment of Unremitted Earnings

We consider foreign earnings of specific subsidiaries to be indefinitely reinvested. These permanently reinvested earnings of foreign subsidiaries at July 31, 2024 amounted to $795 million (2023: $725 million). The Company is not recording a deferred tax liability, if any, on such amounts. If at some future date, the Company ceases to be permanently reinvested in these specific foreign subsidiaries, the Company may be subject to foreign withholding and other taxes on these undistributed earnings and may need to record a deferred tax liability for any outside basis difference on these specific foreign subsidiaries. In addition, interest payments made between the U.S. and U.K. are anticipated to be exempt from withholding taxes, however, if Ferguson should fail to meet treaty requirements, withholding taxes may apply to these payments.

Tax Return Examination Status

The Company files income tax returns in the U.K., U.S. and in various foreign, state and local jurisdictions. We are subject to tax audits in the various jurisdictions until the respective statutes of limitation expire. The Company is no longer subject to U.S. federal income tax or U.K. examinations by tax authorities for fiscal years before 2020. There are ongoing U.S. state and local audits and other foreign audits covering fiscal 2013-2022. We do not expect the results from any ongoing income tax audit to have a material impact on our consolidated financial condition, results of operations or cash flows.