INCOME TAXES

12 Months Ended

Jan. 03, 2025

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 7: INCOME TAXES

Income Tax Provision

Our provisions for current and deferred income taxes are as follows:

	Fiscal Year Ended
(In millions)	January 3, 2025	December 29, 2023	December 30, 2022
Current:
United States	$(166)	$328	$633
International	72	50	82
State and local	5	66	98
Total current income taxes	(89)	444	813
Deferred:
United States	244	(380)	(523)
International	(34)	10	(61)
State and local	(36)	(51)	(17)
Total deferred income taxes	174	(421)	(601)
Total income taxes	$85	$23	$212

A reconciliation of the U.S. statutory income tax rate to our effective income tax rate is as follows:

	Fiscal Year Ended
(In millions)	January 3, 2025	December 29, 2023	December 30, 2022
U.S. statutory income tax rate	21.0%	21.0%	21.0%
State taxes	2.1	1.4	2.2
International income	0.4	—	—
Non-deductible goodwill impairment	—	3.6	14.2
R&D tax credit	(10.4)	(12.5)	(13.0)
FDII deduction	(2.1)	(4.4)	(5.1)
Changes in valuation allowance	(2.3)	0.2	0.1
Impact of divestitures and reorganizations	1.2	(8.5)	(1.3)
Share-based compensation(1)	(0.6)	0.2	(0.2)
Settlement of tax audits	(3.4)	(1.1)	(0.7)
Other items	(0.6)	2.0	(0.5)
Effective income tax rate	5.3%	1.9%	16.7%

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(1)Includes non-deductible share-based compensation and excess tax benefits from share-based compensation.

As of January 3, 2025, we estimate our outside basis difference in foreign subsidiaries that are considered

indefinitely reinvested to be approximately $1.5 billion. The outside basis difference is comprised predominantly of

purchase accounting adjustments and to a lesser extent, undistributed earnings and other equity adjustments. In

the event of a disposition of the foreign subsidiaries or a distribution, we may be subject to incremental U.S. income

taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign

jurisdictions. As of January 3, 2025, the determination of the amount of unrecognized deferred tax liability related to

the outside basis difference is not practicable.

Purchase of Tax Credits

Section 6418 of the Internal Revenue Code permits, in certain circumstances, the sale of federal income tax

credits generated from renewable and alternative energy sources. During the year ended January 3, 2025, we

entered into a binding agreement for the purchase of tax credits totaling $200 million for the 2024 tax year for a net

purchase price of $191 million, allowing us to reduce our 2024 federal income taxes payable by the $200 million.

We have recorded a liability to the seller for the amount owed in the “Other current liabilities” line of the

Consolidated Balance Sheet. We have recorded an income tax benefit of $9 million for the difference between the

amount paid or to be paid to the seller and the reduction to our taxes payable in the “Income taxes” line of the

Consolidated Statement of Operations.

Deferred Income Tax Assets (Liabilities)

The components of deferred income tax assets (liabilities) were as follows:

(In millions)	January 3, 2025	December 29, 2023
Deferred tax assets, net:
Accruals	$396	$334
Tax loss and credit carryforwards(1)	249	211
Operating lease obligation	212	243
Capitalized research and experimental expenditures	1,694	1,125
Other	461	380
Valuation allowance(2)	(238)	(240)
Deferred tax assets, net	2,774	2,053
Deferred tax liabilities:
Property, plant and equipment	(216)	(252)
Acquired intangibles	(1,974)	(2,143)
Operating lease ROU asset	(188)	(219)
Deferred revenue on long-term contracts(3)	(913)	—
Other	(305)	(163)
Deferred tax liabilities	(3,596)	(2,777)
Net deferred tax liabilities	$(822)	$(724)

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(1)At January 3, 2025, primarily includes operating loss and credit carryforwards of $81 million and $165 million, respectively, which have

expiration dates ranging from less than one year to no expiration date. A significant portion of the carryforwards are either indefinite or begin

expiring in 2035.

(2)Valuation allowance established to offset certain domestic and foreign deferred tax assets due to the uncertainty regarding our ability to

realize these assets in the future. The net change in our valuation allowance in fiscal 2024 and 2023 was a decrease of $2 million and

$3 million, respectively.

(3)Based on recent IRS guidance, we made a method change to defer taxable income for long-term contracts accounted for under the POC

cost-to-cost method that include deferred R&D expenses, resulting in a $913 million reduction in our current income taxes (current payable)

and corresponding increase to our deferred income taxes (deferred tax liability).

Net deferred tax assets (liabilities) were classified as follows in our Consolidated Balance Sheet:

(In millions)	January 3, 2025	December 29, 2023
Deferred income tax assets	$120	$91
Deferred income tax liabilities	(942)	(815)
Net deferred tax liabilities	$(822)	$(724)

Income before income taxes of our international subsidiaries was $191 million, $205 million and $95 million in

fiscal 2024, 2023 and 2022, respectively.

We paid $102 million, $715 million and $309 million in income taxes, net of refunds received, in fiscal 2024,

2023 and 2022, respectively.

Tax Uncertainties

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	Fiscal Year Ended
(In millions)	January 3, 2025	December 29, 2023	December 30, 2022
Balance at beginning of fiscal year	$652	$613	$587
Additions based on tax positions taken during current period	120	99	124
Additions based on tax positions taken during prior period	23	8	4
Additions from tax positions related to acquired entities	92	86	—
Decreases based on tax positions taken during prior period	(113)	(133)	(76)
Decreases from lapse in statutes of limitations	(9)	(11)	(6)
Decreases from settlements	(7)	(10)	(20)
Balance at end of fiscal year(1)	$758	$652	$613

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(1)Includes unrecognized tax benefits that would favorably impact our future tax rates in the event that the tax benefits are eventually

recognized of $666 million and $509 million at January 3, 2025 and December 29, 2023, respectively.

We recognize accrued interest and penalties related to unrecognized tax benefits in our income tax provision. In

fiscal 2024, 2023 and 2022, we recognized $29 million, $20 million and $12 million, respectively. At January 3,

2025 and December 29, 2023, accrued interest and penalties related to unrecognized tax benefits was $109 million

and $80 million, respectively, which is included in the “Other long-term liabilities” line item in our Consolidated

Balance Sheet.

We file numerous separate and consolidated income tax returns reporting our financial results and, where

appropriate, those of our subsidiaries and affiliates, in the U.S. federal jurisdiction and various state, local and

foreign jurisdictions. Pursuant to the Compliance Assurance Process, the Internal Revenue Service (“IRS”) is

examining our federal tax returns for fiscal 2021, 2022, and 2023. Legacy L3’s federal tax returns for calendar years

2017 and 2018 are currently under IRS examination and refund claims related to calendar years 2012, 2013, 2015

and 2016 have been filed with the IRS. In addition, legacy AJRD refund claims related to calendar year 2019 and

2020 have been filed with the IRS.

We are currently under examination or contesting proposed adjustments by various state and international tax

authorities for fiscal years ranging from 2013 through 2022. It is reasonably possible that there could be a

significant change to our unrecognized tax benefit balance during the course of the next twelve months as these

examinations continue, other tax examinations commence or various statutes of limitations expire. An estimate of

the range of possible changes is not practicable for the remaining unrecognized tax benefits because of the

significant number of jurisdictions in which we do business and the number of open tax periods under various stages

of examination.