Income Taxes

12 Months Ended

Oct. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of income before income taxes for each fiscal year were as follows:

 

	2022		2021		2020
	(In millions)
U.S.	$	1,171	$	512	$	92
Foreign	6,428		6,259		4,074
	$	7,599	$	6,771	$	4,166

The components of the provision for income taxes for each fiscal year were as follows:

	2022		2021		2020
	(In millions)
Current:
U.S.	$	590	$	462	$	196
Foreign	275		344		263
State	14		17		20
	879		823		479
Deferred:
U.S.	(62)		(3)		(3)
Foreign	265		67		76
State	(8)		(4)		(5)
	195		60		68
	$	1,074	$	883	$	547

A reconciliation between the statutory U.S. federal income tax rate and Applied’s actual effective income tax rate for each fiscal year is presented below:

 

	2022		2021		2020
Tax provision at U.S. statutory rate	21.0	%	21.0	%	21.0	%
Effect of foreign operations taxed at various rates	(4.4)		(7.0)		(5.9)
Changes in prior years’ unrecognized tax benefits	(0.9)		0.2		0.5
Resolutions of prior years’ income tax filings	(0.2)		(0.1)		(1.0)
Research and other tax credits	(1.0)		(0.9)		(1.3)
Other	(0.4)		(0.2)		(0.2)
	14.1	%	13.0	%	13.1	%

Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that vary from period to period, such as changes in income tax laws and the resolution of prior years’ income tax filings.

Applied’s effective tax rate for fiscal 2022 was higher than fiscal 2021 primarily due to a reduction of deferred tax assets related to a new tax incentive in Singapore, partially offset by changes in uncertain tax positions. Applied’s effective tax rate for fiscal 2021 was slightly lower than fiscal 2020 primarily due to higher proportion of pre-tax income in lower tax jurisdictions, partially offset by resolutions of prior years’ income tax filings.

In the reconciliation between the statutory U.S. federal income tax rate and the effective income tax rate, the effect of foreign operations taxed at various rates represents the difference between an income tax provision at the U.S. federal statutory income tax rate and the recorded income tax provision, with the difference expressed as a percentage of worldwide income before income taxes. This effect is substantially related to the tax effect of pre-tax income in jurisdictions with lower statutory tax rates. The foreign operations with the most significant effective tax rate impact are in Singapore. The statutory tax rate for fiscal 2022 for Singapore is 17%. Applied has been granted conditional reduced tax rates that expire beginning in fiscal 2025, excluding potential renewal and subject to certain conditions with which Applied expects to comply. The tax benefits arising from these tax rates were $232 million or $0.26 per diluted share and $370 million or $0.40 per diluted share and $215 million or $0.23 per diluted share for fiscal 2022, 2021 and 2020, respectively.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized. The components of deferred income tax assets and liabilities were as follows: 

	October 30, 2022		October 31, 2021
	(In millions)
Deferred tax assets:
Allowance for doubtful accounts	$	5	$	4
Inventory reserves and basis difference	131		112
Installation and warranty reserves	29		29
Intangible assets	984		1,281
Accrued liabilities	35		31
Deferred revenue	82		25
Tax credits	453		369
Deferred compensation	125		133
Share-based compensation	42		34
Lease liability	81		61
Other	67		89
Gross deferred tax assets	2,034		2,168
Valuation allowance	(460)		(361)
Total deferred tax assets	1,574		1,807
Deferred tax liabilities:
Fixed assets	(111)		(93)
Right of use assets	(80)		(62)
Undistributed foreign earnings	(39)		(37)
Total deferred tax liabilities	(230)		(192)
Net deferred tax assets	$	1,344	$	1,615

A valuation allowance is recorded to reflect the estimated amount of net deferred tax assets that may not be realized. Changes in the valuation allowance in each fiscal year were as follows:

	2022		2021		2020
	(In millions)
Beginning balance	$	361	$	314	$	257
Increases	99		47		57
Ending balance	$	460	$	361	$	314

At October 30, 2022, Applied has state research and development tax credit carryforwards of $453 million, including $427 million of credits that are carried over until exhausted and $23 million that are carried over for 15 years and begin to expire in fiscal 2031. It is more likely than not that all tax credit carryforwards, net of valuation allowance, will be utilized.

Applied maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored based on the best information available. Gross unrecognized tax benefits are classified as non-current income taxes payable or as a reduction in deferred tax assets. A reconciliation of the beginning and ending balances of gross unrecognized tax benefits in each fiscal year is as follows: 

	2022		2021		2020
	(In millions)
Beginning balance of gross unrecognized tax benefits	$	537	$	496	$	845
Settlements with tax authorities	(25)		—		(446)
Lapses of statutes of limitation	—		(4)		(3)
Increases in tax positions for current year	26		26		44
Increases in tax positions for prior years	28		23		91
Decreases in tax positions for prior years	(68)		(4)		(35)
Ending balance of gross unrecognized tax benefits	$	498	$	537	$	496

In fiscal 2020, Applied settled tax audits in Singapore related to fiscal 2012 through fiscal 2019 for additional tax payments of $72 million and a reduction of future tax deductions of $374 million. The tax expense impact of these settlements was $26 million.

Tax expense for interest and penalties on unrecognized tax benefits for fiscal 2022, 2021 and 2020 was $14 million, $14 million and $24 million, respectively. The income tax liability for interest and penalties for fiscal 2022, 2021 and 2020 was $103 million, $88 million and $74 million, respectively, and was classified as non-current income taxes payable.

Included in the balance of unrecognized tax benefits for fiscal 2022, 2021 and 2020 are $388 million, $442 million, and $410 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. returns for fiscal 2015 and later years, and foreign tax returns for fiscal 2011 and later years.

The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that may be part of the settlement process, is highly uncertain. This could cause fluctuations in Applied’s financial condition and results of operations. Applied continues to have ongoing negotiations with various taxing authorities throughout the year.