| INCOME TAXES | 12. INCOME TAXES For financial reporting purposes, income before income taxes includes the following components:
For the year ended
January 2, 2021
December 28, 2019
December 29, 2018
United States
$
30,619
$
51,007
$
44,693
Foreign
(6,572
)
24,300
11,702
Total
$
24,047
$
75,307
$
56,395
The Company derives its pretax income based on the consolidated results of its legal entities. Products manufactured in the U.S. are sold worldwide and are the primary reason that pretax income in the U.S. is higher than foreign pretax income. The U.S. legal entities had third-party export sales of $106,147, $105,976, and $98,876 for the 2020, 2019 and 2018 years, respectively. Foreign pretax income is impacted by the level of foreign manufacturing, sales at varying market levels, as well as direct sales to large OEM customers. The components of the income tax provision (benefit) are as follows:
For the year ended
January 2, 2021
December 28, 2019
December 29, 2018
Current tax expense (benefit):
United States
$
3,251
$
7,380
$
4,229
State and local
1,166
(388
)
2,522
Foreign
7,430
9,107
3,707
Total current
11,847
16,099
10,458
Deferred tax expense (benefit):
United States
3,190
665
380
State and local
(326
)
58
110
Foreign
(4,882
)
(1,783
)
(1,283
)
Total deferred
(2,018
)
(1,060
)
(793
)
Total income tax provision
$
9,829
$
15,039
$
9,665
74 On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. As a result of the Act, the Company recorded in the 2017 year-end income tax provision $459 of additional income tax expense, including a benefit of $1,541 related to remeasurement of deferred tax assets and liabilities and $2,000 of expense related to one-time transition tax on mandatory deemed repatriation of foreign earnings. Refinements to these items were made during 2018 for the purpose of 2017 tax return reporting, and provision-to-return adjustments have been recorded in the 2018 year-end provision to adjust the transition tax to $630. The Company elected to pay the transition tax in full during the 2018 fiscal year. As of January 2, 2021, the Company had approximately $19,300 of undistributed earnings of its non-U.S. subsidiaries for which it has not provided for non-U.S. withholding taxes and state taxes because such earnings are intended to be reinvested in international operations. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are acceptable methods subject to an accounting policy election. The Company has elected to treat any taxes on GILTI inclusions as period costs. The reconciliation between the effective income tax rate and the U.S. federal statutory rate is as follows:
For the year ended
January 2, 2021
December 28, 2019
December 29, 2018
U.S. federal taxes at statutory rate
$
5,057
$
15,815
$
11,843
Increase (decrease)
986(c) FX gain/(loss)
—
(281
)
—
Foreign withholding tax
326
—
—
Capitalized transaction costs
387
—
—
Foreign income taxed at different rate
1,363
1,446
1,292
FDII deduction
(1,265
)
(1,790
)
(2,195
)
Changes in estimates related to prior years including foreign
(2,530
)
—
(2,049
)
Goodwill impairment
6,693
—
—
State and local taxes, net
595
(73
)
1,462
Current year tax credits
(674
)
(663
)
(633
)
Foreign deferred other true up
—
—
(810
)
Change in reserve
(453
)
957
578
Foreign patent box benefit
—
(1,213
)
(937
)
Increase in valuation allowance
—
116
526
Other
330
725
588
Income tax provision
$
9,829
$
15,039
$
9,665
75 Deferred income tax assets and liabilities are provided to reflect the future tax consequences of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of January 2, 2021, and December 28, 2019, are presented below:
January 2, 2021
December 28, 2019
Deferred tax assets:
Foreign tax benefit of U.S. reserves
$
5,086
$
3,691
Net operating losses
6,159
510
Inventory
2,495
1,824
Intangible assets and goodwill
675
2,518
Accrued expenses and other
5,485
2,883
Other comprehensive income
—
3,887
Total deferred tax assets
19,900
15,313
Less: Valuation allowance
(428
)
(428
)
Net deferred tax assets
19,472
14,885
Deferred tax liabilities:
Depreciation
(7,493
)
(6,495
)
Intangible assets and goodwill
(82,126
)
(51,834
)
Other deferred tax liabilities
(1,564
)
(43
)
Other comprehensive income
(508
)
—
Total deferred tax liabilities
(91,691
)
(58,372
)
Net deferred tax liabilities
$
(72,219
)
$
(43,487
) As of January 2, 2021, the Company has federal net operating loss (“NOL”) carryforwards of approximately $14,400, Oklahoma NOLs carryforwards of $14,300 and California NOL carryforwards of $33,400. The Oklahoma NOLs are expected to be fully utilized by 2024. The federal and California NOLs were generated by Balboa during pre-acquisition tax years 2011-2019 and are subject to a 20-year carryforward period. As a result of the acquisition, both the federal and the California NOLs are subject to various limitations under Internal Revenue Code (“IRC”) Section 382. IRC Section 382 limits the use of NOLs to the extent there has been an ownership change of more than 50 percent. Additionally, California enacted legislation in June 2020 to suspend the usage of NOLs for tax years 2020, 2021, and 2022. Despite these limitations, the Company expects to fully utilize the federal NOLs by 2027 and the California NOLs by 2025 and thus has recorded a deferred tax asset of $6,159 for all NOLs. Approximately $2,685 of the expected NOL benefit is payable to the previous owners of Balboa. The payout is considered contingent consideration and has an estimated fair value of $1,919 as of the acquisition date. A valuation allowance to reduce the deferred tax assets reported is required if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For the fiscal years ended 2020 and 2019 management has determined that no material valuation allowances were required. The Company prescribes a recognition threshold and measurement attribute for an uncertain tax position taken or expected to be taken in a tax return. 76 The following is a roll-forward of the Company’s unrecognized tax benefits:
Unrecognized tax benefits - December 30, 2017
$
4,542
Increases from positions taken during prior periods
372
Increases from positions taken during current period
2,036
Settled positions
—
Lapse of statute of limitations
(837
)
Unrecognized tax benefits - December 29, 2018
$
6,113
Increases from positions taken during prior periods
1,121
Increases from positions taken during current period
817
Settled positions
—
Lapse of statute of limitations
—
Unrecognized tax benefits - December 28, 2019
$
8,051
Increases from positions taken during prior periods
656
Increases from positions taken during current period
459
Current year acquisitions
3,170
Settled positions
(947
)
Lapse of statute of limitations
—
Unrecognized tax benefits - January 2, 2021
$
11,389
At January 2, 2021, the Company had unrecognized tax benefits of $11,389 including accrued interest. If recognized, $1,842 of unrecognized tax benefits would reduce the effective tax rate in future periods. The Company recognizes interest and penalties related to income tax matters in income tax expense. Interest related to the unrecognized tax benefit has been recognized and included in income tax expense. Interest accrued as of January 2, 2021, is not considered material to the Company’s Consolidated Financial Statements. The Company remains subject to income tax examinations in the U.S. and various state and foreign jurisdictions for tax years 2009-2019. Although the Company is not currently under examination in most jurisdictions, limited transfer pricing disputes exist for years dating back to 2008. The Company believes it has adequately reserved for income taxes that could result from any audit adjustments. Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. |
