INCOME TAXES

12 Months Ended

Dec. 29, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 7: INCOME TAXES

Income Tax Provision

The provisions for current and deferred income taxes attributable to continuing operations are as follows:

	Fiscal Year Ended
(In millions)	December 29, 2023		December 30, 2022		December 31, 2021
Current:
United States	$	328	$	633	$	415
International	50		82		70
State and local	66		98		65
Total current income taxes	444		813		550
Deferred:
United States	(380)		(523)		(55)
International	10		(61)		(34)
State and local	(51)		(17)		(21)
Total deferred income taxes	(421)		(601)		(110)
Total income taxes	$	23	$	212	$	440

A reconciliation of the U.S. statutory income tax rate to our effective income tax rate is as follows:

	Fiscal Year Ended
	December 29, 2023		December 30, 2022		December 31, 2021
U.S. statutory income tax rate	21.0	%	21.0	%	21.0	%
State taxes	1.1		2.2		1.8
International income	—		—		0.4
Non-deductible goodwill impairment	3.6		14.2		0.6
Research and development tax credit	(12.5)		(13.0)		(5.9)
FDII deduction	(4.4)		(5.1)		(1.4)
Changes in valuation allowance	0.5		0.1		0.9
Impact of divestitures and reorganizations	(8.5)		(1.3)		4.1
Equity-based compensation(1)	0.2		(0.2)		(1.1)
Settlement of tax audits	(1.1)		(0.7)		(1.1)
Other items	2.0		(0.5)		—
Effective income tax rate	1.9	%	16.7	%	19.3	%

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(1)Includes non-deductible equity-based compensation and excess tax benefits from equity-based compensation.

As of December 29, 2023, we estimate our outside basis difference in foreign subsidiaries that are considered indefinitely reinvested to be approximately $1.5 billion. The outside basis difference is comprised predominantly of purchase accounting adjustments and to a lesser extent, undistributed earnings and other equity adjustments. In the event of a disposition of the foreign subsidiaries or a distribution, we may be subject to incremental U.S. income taxes, subject to an adjustment for foreign tax credits, and withholding taxes or income taxes payable to the foreign jurisdictions. As of December 29, 2023, the determination of the amount of unrecognized deferred tax liability related to the outside basis difference is not practicable.

Purchase of Tax Credits under IRA

The IRA includes a new transferability provision under Section 6418 of the Internal Revenue Code which permits, in certain circumstances, the sale of federal income tax credits generated from renewable and alternative energy sources. During the year ended December 29, 2023, we entered into a binding agreement to purchase tax credits totaling $51 million for the 2023 tax year for a net purchase price of $0.95 per $1.00 of tax credits, allowing us to reduce our 2023 federal income taxes payable by the amount of credits we expect to claim on our tax returns as a result of our binding agreement. We have recorded a liability to the transferor for the amount owed in the “Other accrued items” line of the Consolidated Balance Sheet. We have recorded an income tax benefit of $2 million for the difference between the amount paid or to be paid to the transferor and the reduction to our taxes payable in the “Income taxes” line of the Consolidated Statement of Operations.

Deferred Income Tax Assets (Liabilities)

The components of deferred income tax assets (liabilities) were as follows:

(In millions)	December 29, 2023		December 30, 2022
Deferred tax assets, net:
Accruals	$	334	$	227
Tax loss and credit carryforwards	217		194
Operating lease obligation	243		239
Capitalized research and experimental expenditures	1,125		646
Other	272		372
Valuation allowance(1)	(240)		(243)
Deferred tax assets, net	1,951		1,435
Deferred tax liabilities:
Property, plant and equipment	(252)		(167)
Acquired intangibles	(2,143)		(1,566)
Operating lease right-of-use asset	(219)		(210)
Other	(61)		(138)
Deferred tax liabilities	(2,675)		(2,081)
Net deferred tax liabilities	$	(724)	$	(646)

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(1)The valuation allowance has been established to offset certain domestic and foreign deferred tax assets due to uncertainty regarding our ability to realize them in the future. The net change in our valuation allowance in fiscal 2023 and 2022 was a decrease of $3 million and $14 million, respectively.

Net deferred tax assets (liabilities) were classified as follows in our Consolidated Balance Sheet:

(In millions)	December 29, 2023		December 30, 2022
Deferred income tax assets	$	91	$	73
Deferred income tax liabilities	(815)		(719)
Net deferred tax liabilities	$	(724)	$	(646)

Tax loss and credit carryforwards at December 29, 2023 have expiration dates ranging from less than one year to no expiration date. A significant portion of the carryforwards are either indefinite or begin expiring in 2035. The tax-effected amounts of federal, international and state and local operating loss carryforwards at December 29, 2023 were $5 million, $83 million and $4 million, respectively. The tax-effected amounts of federal, international and state and local capital loss carryforwards were not material at December 29, 2023. There were no international

credit carryforwards, and $7 million and $110 million of federal and state and local credit carryforwards, respectively, at December 29, 2023.

Income from continuing operations before income taxes of international subsidiaries was $205 million, $95 million and $29 million in fiscal 2023, 2022 and 2021, respectively. We paid $715 million, $309 million and $358 million in income taxes, net of refunds received, in fiscal 2023, 2022 and 2021, respectively.

Tax Uncertainties

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	Fiscal Year Ended
(In millions)	December 29, 2023		December 30, 2022		December 31, 2021
Balance at beginning of period	$	613	$	587	$	542
Additions based on tax positions taken during current period	99		124		115
Additions based on tax positions taken during prior period	8		4		11
Additions from tax positions related to acquired entities	86		—		—
Decreases based on tax positions taken during prior period	(133)		(76)		(64)
Decreases from lapse in statutes of limitations	(11)		(6)		(15)
Decreases from settlements	(10)		(20)		(2)
Balance at end of fiscal year	$	652	$	613	$	587

As of December 29, 2023, we had $652 million of unrecognized tax benefits, of which $509 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. As of December 30, 2022, we had $613 million of unrecognized tax benefits, of which $486 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. We recognized interest and penalties of $20 million, $12 million and $3 million in fiscal 2023, 2022 and 2021, respectively. We had accrued $80 million for the potential payment of interest and penalties as of December 29, 2023 (and this amount was not included in the $652 million of unrecognized tax benefits balance at December 29, 2023 shown above). We had accrued $59 million for the potential payment of interest and penalties as of December 30, 2022 (and this amount was not included in the $613 million of unrecognized tax benefits balance at December 30, 2022 shown above).

We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those of our subsidiaries and affiliates, in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the Compliance Assurance Process, the Internal Revenue Service (“IRS”) is examining our federal tax returns for fiscal 2017, 2018, 2019, 2020 and 2021 and refund claims related to fiscal 2010 through 2016. Legacy L3’s federal tax returns for calendar years 2017 and 2018 are currently under IRS examination and refund claims related to calendar years 2012, 2013, 2015 and 2016 have been filed with the IRS. In addition, legacy AJRD refund claims related to calendar year 2019 have been filed with the IRS.

We are currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2013 through 2021. It is reasonably possible that there could be a significant change to our unrecognized tax benefit balance during the course of the next twelve months as these examinations continue, other tax examinations commence or various statutes of limitations expire. An estimate of the range of possible changes is not practicable for the remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods under various stages of examination.