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Income Taxes | 12 Months Ended
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Dec. 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes For taxable periods prior to and including the Separation, our operations were included in the consolidated U.S. federal and certain state and local income tax returns of Fortune Brands, as applicable. The Company filed separate foreign income tax returns. Subsequent to the Separation, as a stand-alone entity, we file consolidated U.S. federal income tax returns and various state and local income tax returns. The Company’s foreign income tax returns will continue to be filed on a full-year basis. The Company’s deferred taxes and effective tax rate may differ from those in the pre-Separation taxable periods. The components of income from continuing operations before income taxes were as follows:
(U.S. Dollars presented in millions) |  | 2023 |  | 2022 |  | 2021
Domestic operations |  | $ | 213.2 |  |  | $ | 162.2 |  |  | $ | 204.0 |
Foreign operations |  | 25.5 |  |  | 51.2 |  |  | 34.3 |
Income before income taxes |  | $ | 238.7 |  |  | $ | 213.4 |  |  | $ | 238.3 |
Income tax expense in the consolidated statement of income consisted of the following:
(U.S. Dollars presented in millions) |  | 2023 |  | 2022 |  | 2021
Current |  |  |  |  |  |
Federal |  | $ | 44.2 |  |  | $ | 30.9 |  |  | $ | 43.7 |
State |  | 9.3 |  |  | 14.2 |  |  | 10.8 |
Foreign |  | 8.9 |  |  | 10.6 |  |  | 8.9 |
Deferred |  |  |  |  |  |
Federal |  | 1.2 |  |  | 3.7 |  |  | (5.4) |
State |  | (2.1) |  |  | (2.3) |  |  | (0.2) |
Foreign |  | (4.8) |  |  | 0.9 |  |  | (2.1) |
Total income tax expense |  | $ | 56.7 |  |  | $ | 58.0 |  |  | $ | 55.7 |
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
(in percentages) |  | 2023 |  | 2022 |  | 2021
Income tax expense at U.S. federal statutory income tax rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | %
State and local income taxes, net of federal tax benefit |  | 2.2 |  |  | 4.3 |  |  | 3.9 |
Foreign taxes at a different rate than U.S. federal statutory income tax rate |  | 0.6 |  |  | (0.4) |  |  | (0.2) |
Unrecognized tax benefits |  | — |  |  | (6.6) |  |  | (0.5) |
IRS audit adjustments |  | — |  |  | 8.1 |  |  | — |
Miscellaneous other, net |  | — |  |  | 0.8 |  |  | (0.8) |
Effective income tax rate |  | 23.8 | % |  | 27.2 | % |  | 23.4 | %
For 2023, the Company’s effective tax rate was 23.8 percent, compared to an effective tax rate of 27.2 percent for 2022. The decrease in effective tax rate in 2023 was primarily the result of changes in state and local income taxes and the nonrecurrence of IRS audit adjustments in 2022, including recognition of a deferred tax liability for earnings of various foreign entities, partially offset by benefits for the release of uncertain tax positions in 2022 and foreign income taxed at higher rates. The 2023 effective income tax rate of 23.8 percent was unfavorably impacted by net changes in state and local income taxes, and foreign income taxed at higher rates. The 27.2 percent effective income tax rate for 2022 was unfavorably impacted by IRS audit adjustments, including recognition of a deferred tax liability for earnings of various foreign entities, and state and local income taxes, partially offset by favorable benefits for the release of uncertain tax positions and foreign income taxed at lower rates. For 2022, the Company’s effective tax rate was 27.2 percent, compared to an effective tax rate of 23.4 percent for 2021. The increase in effective tax rate was primarily the result of state and local income taxes and IRS audit adjustments, including recognition of a deferred tax liability for earnings of various foreign entities, partially offset by increased benefits for the release of uncertain tax positions and foreign income taxed at lower rates. The 23.4 percent effective income tax rate for 2021 was unfavorably impacted by state and local income taxes and increases in uncertain tax positions that were partially offset by a favorable benefit for foreign income taxed at lower rates. Deferred income tax assets and liabilities are provided for the impact of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. These temporary differences result in taxable or deductible amounts in future years. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view regarding the future realization of deferred tax assets. The components of net deferred tax assets (liabilities) as of December 31, 2023 and December 25, 2022 were as follows:
(U.S. Dollars presented in millions) |  | 2023 |  | 2022
Deferred tax assets: |  |  |  |
Compensation and benefits |  | $ | 15.9 |  |  | $ | 14.6 |
Other accrued expenses |  | 14.7 |  |  | 15.9 |
Accounts receivable |  | 12.5 |  |  | 18.8 |
Operating lease liabilities |  | 11.0 |  |  | 14.6 |
Capitalized inventories |  | 4.2 |  |  | 6.0 |
Net operating loss and other tax carryforwards |  | 3.2 |  |  | 2.4 |
Defined benefit plans |  | 1.1 |  |  | 2.4 |
Valuation allowance |  | (1.0) |  |  | (1.2) |
Other |  | 8.7 |  |  | 4.6 |
Total deferred tax assets |  | 70.3 |  |  | 78.1 |
Deferred tax liabilities: |  |  |  |
Intangible assets |  | (114.3) |  |  | (118.0) |
Fixed assets |  | (22.0) |  |  | (25.3) |
Operating lease assets |  | (10.5) |  |  | (14.0) |
Prepaid marketing |  | (3.0) |  |  | (4.1) |
Unremitted earnings of foreign subsidiaries |  | — |  |  | (0.2) |
Other |  | (0.4) |  |  | (2.2) |
Total deferred tax liabilities |  | (150.2) |  |  | (163.8) |
Net deferred tax liability |  | $ | (79.9) |  |  | $ | (85.7) |
Deferred taxes were classified in the Consolidated Balance Sheets as of December 31, 2023 and December 25, 2022 as follows:
(U.S. Dollars presented in millions) |  | 2023 |  | 2022
Other assets |  | $ | 3.7 |  |  | $ | 1.6 |
Deferred income taxes |  | (83.6) |  |  | (87.3) |
Net deferred tax liability |  | $ | (79.9) |  |  | $ | (85.7) |
As of December 31, 2023 and December 25, 2022, the Company had deferred tax assets related to net operating losses and other tax credit carryforwards of $3.2 million and $2.4 million, respectively. The net operating losses expire between 2024 and 2043, and the tax credit carryforwards expire between 2029 and 2032. The Company evaluated its ability to realize tax benefits associated with deferred tax assets and concluded, based on all available positive and negative evidence, that it is more likely than not that a portion of the deferred tax assets are not expected to be realized. Accordingly, a valuation allowance of $1.0 million and $1.2 million as of December 31, 2023 and December 25, 2022, respectively, was recorded to reduce the deferred tax assets related to the net operating losses and tax credit carryforwards. A reconciliation of the Company’s gross change in UTBs, including accrued interest and penalties, is as follows:
(U.S. Dollars presented in millions) |  | 2023 |  | 2022 |  | 2021
Unrecognized tax benefits—beginning of year |  | $ | 1.2 |  |  | $ | 20.2 |  |  | $ | 21.5 |
Gross additions—current year tax positions |  | — |  |  | 0.1 |  |  | 0.1 |
Gross additions—prior year tax positions |  | — |  |  | — |  |  | 0.1 |
Gross reductions—prior year tax positions |  | (0.3) |  |  | (17.8) |  |  | (1.5) |
Gross reductions—settlements with taxing authorities |  | — |  |  | (1.3) |  |  | — |
Unrecognized tax benefits—end of year |  | $ | 0.9 |  |  | $ | 1.2 |  |  | $ | 20.2 |
Unrecognized tax benefits—accrued interest and penalties |  | 0.7 |  |  | 0.5 |  |  | 3.0 |
Gross unrecognized tax benefits |  | $ | 1.6 |  |  | $ | 1.7 |  |  | $ | 23.2 |
In the fourth quarter of 2023, the Company released $0.3 million of prior year tax positions due to statute of limitations. In the third quarter of 2022, the IRS completed its examination of the Company’s tax filings for 2017 and 2018. As a result of closing the IRS examination and other changes to UTBs, the Company realized a $19.0 million net reduction in UTBs, which was partially offset by related tax expenses to adjust current and deferred income tax liabilities. As a result of the IRS audit, the Company is now recognizing a deferred tax liability for various foreign entities whose income is currently includable for U.S. federal income tax purposes. Post-Separation, liabilities related to UTBs, including interest and penalties, are reported as a liability within the Consolidated Balance Sheet based upon tax authorities’ ability to assert the Company may be legally liable for UTBs. The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. The Company classifies interest and penalty accruals related to UTBs as income tax expense. In 2023, the Company recognized interest and penalty expense of approximately $0.2 million. In both 2022 and 2021, the Company recognized interest and penalty expenses of approximately $0.1 million. The amount of UTBs that, if recognized as of December 31, 2023, would affect the Company’s effective tax rate is $0.9 million. It is reasonably possible that, within the next twelve months, total UTBs may decrease in the range of $0.4 million to $0.9 million primarily as a result of the conclusion of U.S. federal, state, and foreign income tax proceedings or expiration of the relevant statute of limitations. As of December 31, 2023, the Company believed that it is more-likely-than-not that the tax positions it has taken would be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position, results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates and/or from its historical income tax provisions and accruals and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, interest and/or penalty assessments. For pre-Separation periods, the Company’s federal income tax returns, and various state income tax returns that included operations of the Company, were filed by Fortune Brands and remain open and subject to examination for tax years after 2018. In addition to the U.S., the Company has tax years that remain open and subject to examination by tax authorities in the following major taxing jurisdictions: Canada for years after 2018 and Mexico for years after 2017. As of December 31, 2023, the Company is not permanently reinvested with respect to all earnings generated by foreign operations. There was no material deferred tax expense recorded for foreign and state tax costs associated with the future remittance of these undistributed earnings. Accordingly, the Company’s foreign earnings are subject to the general presumption of APB 23, including the 100 percent dividends-received deduction and previously taxed income components. Income taxes paid directly to taxing authorities, net of refunds received, were $68.5 million, $10.3 million, and $15.3 million during the years ended December 31, 2023, December 25, 2022 and December 26, 2021, respectively. Prior to the Separation in 2022, federal and state income tax payments and refunds were paid and received by Fortune Brands on our behalf.

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