Income Taxes

9 Months Ended

Oct. 01, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income taxes

The consolidated effective tax rate for the quarters ended October 1, 2022 and October 2, 2021 was 19% and 24%, respectively. The consolidated effective tax rate for the year-to-date periods ended October 1, 2022 and October 2, 2021 was 21% and 25%, respectively. The lower effective tax rate for the quarter and year-to-date periods ended October 1, 2022, compared to the same periods in 2021, was due to a prior year increase in the United Kingdom (UK) tax rate and a prior year valuation allowance. During the third quarter of 2021, the Company determined that certain foreign deferred tax assets were no longer more likely than not to be realized in the future and a $20 million full valuation allowance was recorded on a discrete period basis. During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent for tax periods after April 1, 2023. The Company revalued its net deferred tax balances related to the UK business to reflect the increased tax rate.

As of October 1, 2022, the Company classified $14 million of unrecognized tax benefits as a net current tax liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $3 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of

any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.

The Company’s total gross unrecognized tax benefits as of October 1, 2022 was $52 million. Of this balance, $45 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

The accrual balance for tax-related interest was approximately $8 million at October 1, 2022.