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Income Taxes | 12 Months Ended
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Sep. 30, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The following table presents the components of our consolidated income taxes for continuing operations for years ended September 30, 2022, October 1, 2021 and October 2, 2020 (in thousands):
| For the Years Ended
| September 30, 2022 |  | October 1, 2021 |  | October 2, 2020
Current income tax (benefit) expense from continuing operations: |  |  |  |  |
Federal | $ | (35,291) |  |  | $ | 91,313 |  |  | $ | (37,030) |
State | 4,526 |  |  | 30,886 |  |  | (5,021) |
Foreign | 79,822 |  |  | 38,959 |  |  | 41,616 |
Total current tax expense from continuing operations | 49,057 |  |  | 161,158 |  |  | (435) |
Deferred income tax expense (benefit) from continuing operations: |  |  |  |  |
Federal | 56,526 |  |  | 35,109 |  |  | 53,485 |
State | 17,178 |  |  | 21,826 |  |  | 7,133 |
Foreign | 38,142 |  |  | 56,688 |  |  | (4,863) |
Total deferred tax expense from continuing operations | 111,846 |  |  | 113,623 |  |  | 55,755 |
Consolidated income tax expense from continuing operations | $ | 160,903 |  |  | $ | 274,781 |  |  | $ | 55,320 |
Deferred taxes reflect the tax effects of temporary differences between the amounts recorded as assets and liabilities for financial reporting purposes and the comparable amounts recorded for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The following table presents the components of our net deferred tax (liabilities) assets at September 30, 2022 and October 1, 2021 (in thousands):
| September 30, 2022 |  | October 1, 2021
Deferred tax assets: |  |  |
Obligations relating to: |  |  |
Other employee benefit plans | 138,897 |  |  | 156,931 |
Net operating losses | 132,999 |  |  | 197,929 |
Foreign tax credit | 83,697 |  |  | 87,689 |
Contract revenues and costs | — |  |  | 81,633 |
Lease liability | 138,635 |  |  | 155,064 |
Unrealized foreign exchange loss | 46,005 |  |  | — |
Other | 13,005 |  |  | 19,689 |
Valuation allowance | (113,483) |  |  | (188,662) |
Gross deferred tax assets | 439,755 |  |  | 510,273 |
Deferred tax liabilities: |  |  |
Contract revenues and costs | (6,007) |  |  | — |
Depreciation and amortization | (431,946) |  |  | (436,324) |
Lease right of use asset | (71,658) |  |  | (93,338) |
Partnership investment | (52,787) |  |  | (72,560) |
Hedge Investments | (38,994) |  |  | (13,754) |
Unrealized Foreign Exchange Gain | (45,754) |  |  | — |
Other | (30,206) |  |  | (5,484) |
Gross deferred tax liabilities | (677,352) |  |  | (621,460) |
Net deferred tax liabilities | $ | (237,597) |  |  | $ | (111,187) |
Certain amounts have been reclassified to conform to current year presentation. Tax law changes were enacted in the United Kingdom that, among other provisions, will increase the corporate tax rate to 25% from 19% effective April 1, 2023. The rate change resulted in an increase of $3.2 million and $25.6 million to our deferred income tax expense for the years ended September 30, 2022 and October 1, 2021, respectively. Our current income tax expense in the United Kingdom will be based on the new rate beginning in April 2023. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts. The valuation allowance was $113.5 million at September 30, 2022 and $188.7 million at October 1, 2021. This $75.2 million change in the valuation allowance is attributable mainly to $33.1 million in a change in the realizability of foreign tax credits due to a change in the U.S. foreign tax credit regulations, a decrease of $26.0 million relates to a change in judgment on the realizability of domestic deferred tax assets which are capital in nature, and a decrease of $16.1 million relating to various other items. At September 30, 2022 and October 1, 2021, the domestic and international net operating loss (NOL) carryforwards totaled $491.3 million and $760.4 million, resulting in an NOL deferred tax asset of $133.0 million and $197.9 million, respectively. The Company's net operating losses have various expiration periods between 2023 and indefinite periods. At September 30, 2022, the Company has foreign tax credit carryforwards of $83.7 million, which has a partial valuation allowance of $55.4 million, expiring between 2023 and 2032. The following table presents the income tax benefits from continuing operations realized from the exercise of non-qualified stock options and disqualifying dispositions of stock sold under our employee stock purchase plans for the years ended September 30, 2022, October 1, 2021 and October 2, 2020 (in millions):
For the Years Ended
September 30, 2022 |  | October 1, 2021 |  | October 2, 2020
$ | 2.2 |  |  | $ | 9.9 |  |  | $ | 10.2 |
The following table reconciles total income tax expense from continuing operations using the statutory U.S. federal income tax rate to the consolidated income tax expense for continuing operations shown in the accompanying Consolidated Statements of Earnings for the years ended September 30, 2022, October 1, 2021 and October 2, 2020 (dollars in thousands):
| For the Years Ended
| September 30, 2022 |  | % |  | October 1, 2021 |  | % |  | October 2, 2020 |  | %
Statutory amount | $ | 184,033 |  |  | 21.0 | % |  | $ | 146,078 |  |  | 21.0 | % |  | $ | 92,652 |  |  | 21.0 | %
State taxes, net of the federal benefit | 19,316 |  | 2.2 | % |  | 14,564 |  |  | 2.1 | % |  | 7,254 |  |  | 1.6 | %
Exclusion of tax on non-controlling interests | (7,533) |  | (0.9) | % |  | (7,999) |  |  | (1.1) | % |  | (6,622) |  |  | (1.5) | %
Foreign: |  |  |  |  |  |  |  |  |  |  |
Difference in tax rates of foreign operations | (2,516) |  | (0.3) | % |  | 3,684 |  |  | 0.5 | % |  | (6,267) |  |  | (1.4) | %
Expense/(benefit) from foreign valuation allowance change | 2,982 |  | 0.3 | % |  | 2,148 |  |  | 0.3 | % |  | (16,861) |  |  | (3.8) | %
Nondeductible compensation | — |  | — | % |  | 48,727 |  |  | 7.0 | % |  | — |  |  | — | %
U.S. tax cost (benefit) of foreign operations | 48,843 |  |  | 5.6 | % |  | 35,228 |  |  | 5.1 | % |  | 42,992 |  |  | 9.7 | %
Tax differential on foreign earnings | 49,309 |  |  | 5.6 | % |  | 89,787 |  |  | 12.9 | % |  | 19,864 |  |  | 4.5 | %
Foreign tax credits | (33,734) |  | (3.8) | % |  | (25,230) |  |  | (3.6) | % |  | (26,471) |  |  | (6.0) | %
Tax Rate Change | 3,210 |  | 0.4 | % |  | 25,588 |  |  | 3.7 | % |  | (6,811) |  |  | (1.5) | %
Valuation allowance | (59,121) |  | (6.7) | % |  | 38,928 |  |  | 5.6 | % |  | — |  |  | — | %
Uncertain tax positions | (1,439) |  | (0.2) | % |  | 978 |  |  | 0.1 | % |  | (11,338) |  |  | (2.6) | %
Other items: |  |  |  |  |  |  |  |  |  |  |
Energy efficient commercial buildings deduction | (2,681) |  | (0.3) | % |  | (3,760) |  |  | (0.5) | % |  | (7,267) |  |  | (1.6) | %
Disallowed officer compensation | 6,034 |  | 0.7 | % |  | 6,689 |  |  | 1.0 | % |  | 5,081 |  |  | 1.2 | %
Stock compensation | (2,168) |  | (0.2) | % |  | (9,946) |  |  | (1.4) | % |  | (10,234) |  |  | (2.3) | %
Other items – net | 5,677 |  | 0.6 | % |  | (896) |  |  | (0.1) | % |  | (788) |  |  | (0.2) | %
Total other items | 6,862 |  | 0.8 | % |  | (7,913) |  |  | (1.1) | % |  | (13,208) |  |  | (3.0) | %
Taxes on income from continuing operations | $ | 160,903 |  |  | 18.4 | % |  | $ | 274,781 |  |  | 39.5 | % |  | $ | 55,320 |  |  | 12.5 | %
The following table presents income tax payments, net made during the years ended September 30, 2022, October 1, 2021 and October 2, 2020 (in millions):
September 30, 2022 |  | October 1, 2021 |  | October 2, 2020
$ | 113.9 |  |  | $ | 75.6 |  |  | $ | 39.8 |
The following table presents the components of our consolidated earnings from continuing operations before taxes for the years ended September 30, 2022, October 1, 2021 and October 2, 2020 (in thousands):
| For the Years Ended
| September 30, 2022 |  | October 1, 2021 |  | October 2, 2020
United States earnings | $ | 415,673 |  |  | $ | 634,820 |  |  | $ | 208,302 |
Foreign earnings | 460,674 |  |  | 60,782 |  |  | 232,901 |
| $ | 876,347 |  |  | $ | 695,602 |  |  | $ | 441,203 |
We do not record a deferred tax liability for unremitted earnings of our foreign subsidiaries to the extent that the earnings meet the indefinite reversal criteria. This criteria is met if the foreign subsidiary has invested, or will invest, the earnings indefinitely. The decision as to the amount of unremitted earnings that we intend to maintain in non-U.S. subsidiaries considers items including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity plans, and expected cash requirements in the U.S. As of September 30, 2022, we had not recognized a deferred tax liability on approximately $168.0 million of undistributed earnings for certain foreign subsidiaries, because these earnings are intended to be indefinitely reinvested. If such earnings were distributed, some countries may impose additional taxes. The unrecognized deferred tax liability (the amount payable if distributed) is approximately $13.1 million. The Company has various long-term foreign currency denominated intercompany loans not anticipated to be settled in the foreseeable future. Due to the long-term nature of the loan, the foreign currency gains (losses) resulting from re-measurement are generally recognized as a component of accumulated other comprehensive income (loss). Deferred taxes are not provided on the unrealized gains of approximately $101.7 million because the intercompany loans and the related gains (losses) on the loans denominated in the functional currencies of the subsidiaries are viewed as a part of the Company’s net investment in the subsidiaries and are considered to be indefinitely reinvested by the Company. The unrecognized deferred taxes are approximately $25 million as of September 30, 2022. The Company accounts for unrecognized tax benefits in accordance with ASC Topic 740, Income Taxes. It accounts for interest and penalties on unrecognized tax benefits as interest and penalties reported above the line (i.e., not as part of income tax expense). The Company’s liability for gross unrecognized tax benefits was $81.9 million and $91.9 million at September 30, 2022 and October 1, 2021, respectively, after ASU 2013-11 netting of $7.0 million and $21.7 million, respectively. If recognized, $73.5 million would affect the Company’s consolidated effective income tax rate. The Company had $43.5 million and $41.6 million in accrued interest and penalties at September 30, 2022 and October 1, 2021, respectively. The Company estimates that, within twelve months, we may realize a decrease in our uncertain tax positions of approximately $2.2 million as a result of concluding various tax audits and closing tax years. As of September 30, 2022, the Company’s U.S. federal income tax returns for tax years 2009 and forward remain subject to examination. The following table presents the reconciliation of the beginning and ending amount of unrecognized tax benefits, with StreetLight and PA Consulting related impacts added for the years ended September 30, 2022, October 1, 2021 and October 2, 2020 (in thousands):
| For the Years Ended
| September 30, 2022 |  | October 1, 2021 |  | October 2, 2020
Balance, beginning of year | $ | 113,633 |  |  | $ | 102,484 |  |  | $ | 104,355 |
Acquisitions/Divestitures | 192 |  |  | 7,639 |  |  | — |
Additions based on tax positions related to the current year | 1,136 |  |  | 7,088 |  |  | 1,064 |
Additions for tax positions of prior years | 1,207 |  |  | 1,711 |  |  | 7,472 |
Reductions for tax positions of prior years | (3,672) |  |  | (4,851) |  |  | (6,695) |
Settlement | (23,603) |  |  | (438) |  |  | (3,712) |
Balance, end of year | $ | 88,893 |  |  | $ | 113,633 |  |  | $ | 102,484 |
As further discussed in Note 14, PA Consulting Business Combination and Note 15, Other Business Combinations, the Company has made several acquisitions and a strategic investment, all of which were accounted for as stock purchases and the tax attributes of the net assets acquired were carried over, with the exception of the Buffalo Group, which was treated as an asset acquisition and the net assets were stepped up to fair value.

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