Income Taxes

9 Months Ended

Sep. 30, 2024

Income Tax Disclosure [Abstract]

Income Taxes

Note 8—Income Taxes

The effective tax rate was 7.4% and (15.4)% for the three and nine months ended September 30, 2024, compared to 41.5% and 22.0% in the same periods of 2023. The change in these rates for the three month periods resulted primarily from changes in results of operations in the jurisdictions in which we operate and the incremental tax benefit recorded for foreign derived intangible income in the third quarter of 2023. The change in these rates for the nine month periods resulted primarily from remeasurement of our uncertain tax positions, as described below, as well as the factors described for the three month periods.

On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the IRS regarding our 2015 and 2016 consolidated income tax returns. On June 30, 2021, we received a NOPA from the IRS regarding our 2017 and 2018 consolidated income tax returns. Within the NOPAs, the IRS has asserted that our taxable income for the aforementioned years should be higher based on their assessment of the appropriate amount of taxable income that we should report in the United States in connection with our sourcing of products by our foreign subsidiaries for sale in the United States by our domestic subsidiaries. The transfer pricing methodology was consistently applied for all years subject to the NOPAs and 2019 into 2022, but is no longer employed.

During the three months ended June 30, 2024, the IRS and the relevant foreign taxing authority mutually agreed to proposed adjustments to our 2015 through 2018 consolidated tax returns. This was communicated to us in late June 2024. As a result, we remeasured the uncertain tax position for the 2015 through 2018 tax years, as well as the affected 2019 through 2022 tax years, to the amount expected to be paid upon a final agreement with the IRS. This matter does not impact our 2023, 2024 or future tax years. The total change in estimate, net of an income tax benefit from the foreign taxing authority, is $17.9 million, or $(0.23) impact per basic and diluted common share, including $4.7 million of interest, for the nine months ended September 30, 2024 and is reflected within the income tax provision on our consolidated statements of operations. The total change in estimate reflects an increase in the liability for unrecognized tax benefits of $19.7 million recorded within other current liabilities, partially offset by a $1.9 million increase in the receivable from the foreign taxing authority recorded within other current assets, on our consolidated balance sheet at September 30, 2024. The balance sheet classification and amount owed may be subject to change depending on the timing of a final agreement with the IRS. Excluding the impact of $0.7 million of interest, there has been no change in estimate for the three months ended September 30, 2024.

The liability for unrecognized tax benefits was $38.2 million at September 30, 2024 and $22.7 million at December 31, 2023. Unrecognized tax benefits of $35.5 million and $20.0 million at September 30, 2024 and December 31, 2023 would impact our effective tax rate if recognized.

We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that we have adequately reserved for this matter and that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows beyond the amounts described herein.