INCOME TAXES

12 Months Ended

Dec. 30, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 5. INCOME TAXES

The components of income from continuing operations before income taxes consisted of the following:

(In millions)	2023		2022		2021
United States	$	176	$	226	$	173
Foreign		24		16		58
Total income from continuing operations before  income taxes	$	200	$	242	$	231

The income tax expense related to income from continuing operations consisted of the following:

(In millions)	2023			2022			2021
Current:
Federal	$	11		$	26		$	14
State		(3	)		(4	)		8
Foreign		10			7			5
Deferred:
Federal		34			27			13
State		7			10			2
Foreign		2			(2	)		2
Total income tax expense	$	61		$	64		$	44

The following is a reconciliation of income taxes at the U.S. Federal statutory rate to the provision for income taxes:

(In millions)	2023			2022			2021
Federal tax computed at the statutory rate	$	42		$	51		$	48
State taxes, net of federal benefit		12			11			10
Foreign income taxed at rates other than federal		3			2			(5	)
Decrease in valuation allowance		—			—			(3	)
Non-deductible goodwill impairments		14			—			—
Other non-deductible expenses and settlements		4			4			5
FIN 48 adjustments		4			(2	)		—
Non-taxable income and additional deductible expenses		(2	)		(1	)		(3	)
Impact of stock compensation windfall		(5	)		(3	)		(6	)
State NOL expirations (additions)		(1	)		2			—
Tax credits		(12	)		—			—
Reduction of capital loss carryback		3			—			—
Other items, net		(1	)		—			(2	)
Income tax expense	$	61		$	64		$	44

During 2023 and 2022, the mix of income and losses across jurisdictions, although still applicable, has become less of a factor in influencing the Company’s effective tax rates due to limited international operations and improved operating results. The Company’s effective tax rates were 31%, 26% and 19% in 2023, 2022 and 2021, respectively. In 2023, the Company’s effective tax rate was primarily impacted by the goodwill impairment in the Company’s Varis Division, the recognition of a tax windfall associated with stock-based compensation awards, recognition of 2022 and 2023 Research and Development tax credits, and certain nondeductible items. These factors, along with the impact of state taxes and the mix of income and losses across U.S. and non-U.S. jurisdictions, caused the Company’s effective tax rate of 31% for 2023 to differ from the statutory rate of 21%. The Company’s effective tax rate for prior periods has varied considerably primarily due to stock-based compensation awards, recognition of tax benefits due to state taxes, recognition of tax benefits due to an agreement reached with the IRS related to a prior tax position, certain nondeductible items and the mix of income and losses across U.S. and non-U.S. jurisdictions. Changes in pretax income projections and the mix of income across jurisdictions could impact the effective tax rates in future quarters.

The Company continues to have a U.S. valuation allowance for certain U.S. Federal credits and state tax attributes, which relate to deferred tax assets that require either certain types of income or for income to be earned in certain jurisdictions in order to be realized. The Company will continue to assess the realizability of its deferred tax assets in the U.S. and remaining foreign jurisdictions in future periods. Changes in pretax income projections could impact this evaluation in future periods.

The Company operates in several foreign jurisdictions with income tax rates that differ from the U.S. Federal statutory rate, which resulted in an expense for 2023 presented in the effective tax rate reconciliation. Significant foreign tax jurisdictions for which the Company realized such expense are Canada and Puerto Rico.

The components of deferred income tax assets and liabilities consisted of the following:

	December 30,			December 31,
(In millions)	2023			2022
U.S. and foreign loss carryforwards	$	272		$	277
Operating lease right-of-use assets		259			262
Pension and other accrued compensation		19			35
Accruals for facility closings		1			2
Inventory		10			10
Self-insurance accruals		12			13
Deferred revenue		7			9
U.S. and foreign income tax credit carryforwards		6			38
Allowance for bad debts		5			4
Accrued expenses		13			14
Basis difference in fixed assets		44			43
Internally developed software		—			1
Gross deferred tax assets		648			708
Valuation allowance		(244	)		(266	)
Deferred tax assets		404			442
Internally developed software		2			—
Operating lease liabilities		243			244
Intangibles		16			12
Undistributed foreign earnings		7			5
Deferred tax liabilities		268			261
Net deferred tax assets	$	136		$	181

As of December 30, 2023, and December 31, 2022, deferred income tax liabilities amounting to $3 million and $2 million, respectively, are included in deferred income taxes and other long-term liabilities.

As of December 30, 2023, the Company has utilized all of its U.S. Federal net operating loss (“NOL”) carryforwards. The Company has $238 million of foreign and $620 million of state NOL carryforwards. Of the state NOL carryforwards, $17 million will expire in 2024 and the remaining balance will expire between 2025 and 2042. In 2022, the Company recognized a capital loss on the sale of CompuCom of $841 million, $94 million of which will be carried back to 2020 and 2021 resulting in an expected federal refund of $20 million. The remaining capital loss carryforward of $747 million will be offset by a valuation allowance until such time as the Company is able to utilize the losses.

Additionally, the Company has $3 million of U.S. Federal tax credit carryforwards, which expire in 2024, and $3 million of state tax credit carryforwards which can be carried forward indefinitely.

As of December 30, 2023, the Company has not triggered an “ownership change” as defined in Internal Revenue Code Section 382 or other similar provisions that would limit the use of NOL and tax credit carryforwards. However, if the Company were to experience an ownership change in future periods, its deferred tax assets and income tax expense may be negatively impacted. Deferred income taxes have been provided on all undistributed earnings of foreign subsidiaries.

The following summarizes the activity related to valuation allowances for deferred tax assets:

(In millions)	2023			2022			2021
Beginning balance	$	266		$	93		$	99
Additions, charged to expense		—			184			—
Reductions		(22	)		(11	)		(6	)
Ending balance	$	244		$	266		$	93

The Company’s valuation allowance increased in 2022 due to the valuation allowance related to the capital loss on the sale of CompuCom and decreased during 2023 and 2021 due to the expiration of certain credits for which a valuation allowance had been established. As of December 30, 2023, the Company continues to have a U.S. valuation allowance for certain U.S. Federal credits and certain state tax attributes, which relate to deferred tax assets that require either certain types of income or for income to be earned in certain jurisdictions in order to be realized. The Company will continue to assess the realizability of its deferred tax assets in the U.S. and remaining foreign jurisdictions in future periods. Changes in pretax income projections could impact this evaluation in future periods.

The following table summarizes the activity related to unrecognized tax benefits:

(In millions)	2023		2022			2021
Beginning balance	$	10	$	13		$	13
Increase (decrease) related to prior year tax positions		6		(3	)		—
Ending balance	$	16	$	10		$	13

Included in the balance of $16 million at December 30, 2023, is $15 million of unrecognized tax benefits that, if recognized, would impact the effective tax rate. The other $1 million primarily results from tax positions that, if sustained, would be offset by changes in deferred tax assets. During 2023, the Company increased the unrecognized tax benefits by $6 million related to a federal and a foreign tax filing. It is anticipated that $5 million of the unfavorable material tax positions will be resolved within the next 12 months. Additionally, the Company anticipates that it is reasonably possible that new issues will be raised or resolved by tax authorities that may require changes to the balance of unrecognized tax benefits; however, an estimate of such changes cannot be reasonably made.

The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in the provision for income taxes. The Company recognized immaterial interest and penalty expense in 2023, 2022 and 2021. The Company had approximately $4 million accrued for the payment of interest and penalties as of December 30, 2023.

The Company files a U.S. Federal income tax return and other income tax returns in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. Federal and state and local income tax examinations for years before 2020 and 2017, respectively. The acquired OfficeMax U.S. consolidated group is no longer subject to U.S. Federal income tax examination and with few exceptions, is no longer subject to U.S. state and local income tax examinations for years before 2017. The U.S. Federal income tax returns for 2021 and 2022 are currently under review. Generally, the Company is subject to routine examination for years 2017 and forward in its international tax jurisdictions.