Income Taxes

3 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

The Company’s tax provision and the resulting effective tax rate for interim periods is determined based upon its estimated annual effective tax rate (“AETR”), adjusted for the effect of discrete items arising in that quarter. The impact of such inclusions could result in a higher or lower effective tax rate during a quarter, based upon the mix and timing of actual earnings or losses versus annual projections. In each quarter, the Company updates its estimate of the AETR, and if the estimated AETR changes, a cumulative adjustment is made in that quarter.

The Company recorded a provision for income taxes of $36.5 million and $7.6 million for the three months ended December 31, 2022, and January 1, 2022, respectively, related to U.S. and non-U.S. income taxes. For the three months ended December 31, 2022, the Company’s tax expense increased significantly when compared to the three months ended January 1, 2022, primarily due to the requirement to capitalize and amortize research and development expenses under Section 174 of the U.S. Internal Revenue Code (“Section 174”) effective the quarter ended December 31, 2022. This resulted in the Company recording significant U.S. current tax expense and no corresponding deferred tax benefit due to the valuation allowance maintained against its U.S. deferred tax assets. For the three months ended January 1, 2022, the Company excluded certain foreign jurisdictions from the calculation of the AETR as the Company anticipated an overall ordinary loss for which no tax benefit could be recognized. For the three months ended January 1, 2022, the Company's tax provision included a discrete income tax benefit of $3.2 million for the release of a portion of the Company's U.S. valuation allowance because of an acquisition in the quarter and U.S. share-based compensation.

For the three months ended December 31, 2022, the Company maintained a full valuation allowance on its deferred tax assets in the U.S. and certain other non-US entities due to a history of operating losses. It is possible

that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of the valuation allowance in the U.S. and certain other non-US entities would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings in the U.S. and certain other non-US entities.