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Income Taxes | 12 Months Ended
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Dec. 31, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | INCOME TAXES Income before income taxes consisted of the following:
| Fiscal Year
| 2023 |  | 2022 |  | 2021
| (in thousands)
U.S. operations | $ | 3,611 |  |  | $ | 11,758 |  |  | $ | 4,460 |
Foreign operations | 60,043 |  |  | 30,159 |  |  | 68,173 |
Income before income taxes | $ | 63,654 |  |  | $ | 41,917 |  |  | $ | 72,633 |
Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the following components:
| Fiscal Year
| 2023 |  | 2022 |  | 2021
| (in thousands)
Current expense: |  |  |  |  |
Federal | $ | 5,523 |  |  | $ | 1,624 |  |  | $ | 1,987 |
Foreign | 18,330 |  |  | 20,903 |  |  | 21,372 |
State | 2,167 |  |  | 1,307 |  |  | 1,418 |
Current expense | 26,020 |  |  | 23,834 |  |  | 24,777 |
Deferred (benefit) expense: |  |  |  |  |
Federal | (4,810) |  |  | 346 |  |  | (2,841) |
Foreign | (1,212) |  |  | (2,053) |  |  | (3,846) |
State | (861) |  |  | 230 |  |  | (691) |
Deferred benefit | (6,883) |  |  | (1,477) |  |  | (7,378) |
Total income tax expense | $ | 19,137 |  |  | $ | 22,357 |  |  | $ | 17,399 |
The Company’s effective tax rate was 30.1%, 53.3% and 24.0% for fiscal years 2023, 2022 and 2021, respectively. The following summary reconciles income taxes at the U.S. federal statutory rate of 21% applicable for all periods presented to the Company’s actual income tax expense:
| Fiscal Year
| 2023 |  | 2022 |  | 2021
| (in thousands)
Income taxes at U.S. federal statutory rate | $ | 13,367 |  |  | $ | 8,803 |  |  | $ | 15,253 |
Increase (decrease) in taxes resulting from: |  |  |  |  |
State income taxes, net of federal tax effect | (432) |  |  | 817 |  |  | (87) |
Non-deductible business expenses | 747 |  |  | 237 |  |  | 330 |
Non-deductible employee compensation | 1,681 |  |  | 1,678 |  |  | 1,213 |
Tax effects of Company-owned life insurance | (587) |  |  | 612 |  |  | (762) |
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested | 779 |  |  | 1,123 |  |  | 1,219 |
Foreign and U.S. tax effects attributable to foreign operations | 1,537 |  |  | 3,528 |  |  | 1,748 |
Expiring tax attributes | 3,780 |  |  | — |  |  | — |
Valuation allowance effect | (879) |  |  | 2,898 |  |  | 1,349 |
Research and development tax credits | (820) |  |  | (917) |  |  | (793) |
Goodwill impairment | — |  |  | 6,171 |  |  | — |
Unrecognized tax benefits | (79) |  |  | (2,463) |  |  | (2,663) |
Other | 43 |  |  | (130) |  |  | 592 |
Income tax expense | $ | 19,137 |  |  | $ | 22,357 |  |  | $ | 17,399 |
On August 16, 2022, the Inflation Reduction Act of 2022 (“Inflation Reduction Act”) was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income (“AFSI”) for corporations with average AFSI exceeding $1 billion over a three-year period, a 1% excise tax on share repurchases and various climate and clean energy tax incentives. The Inflation Reduction Act did not have a material impact on the Company’s financial statements for the year ended December 31, 2023. On December 20, 2021, the Organization for Economic Co-operation and Development (“OECD”) published Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large corporations at a minimum rate of 15%. The OECD has since issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar Two global minimum tax. Many non-U.S. tax jurisdictions have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 (including the European Union Member States) with the adoption of additional components in later years or announced their plans to enact legislation in future years. We are still closely monitoring developments and evaluating the potential impact on future periods. Deferred income taxes for the years ended December 31, 2023 and January 1, 2023, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
| End of Fiscal Year
| 2023 |  | 2022
| (in thousands)
Deferred tax assets |  |  |
Lease liability | $ | 25,164 |  |  | $ | 23,649 |
Net operating loss and interest carryforwards | 9,587 |  |  | 7,616 |
Federal tax credit carryforwards | 7,876 |  |  | 10,904 |
Derivative instruments | — |  |  | 295 |
Deferred compensation | 16,517 |  |  | 16,577 |
Inventory | 3,041 |  |  | 3,521 |
Prepaids, accruals and reserves | 8,147 |  |  | 6,947 |
Capitalized costs | 9,442 |  |  | 7,467 |
Other | — |  |  | 58 |
Deferred tax asset, gross | 79,774 |  |  | 77,034 |
Valuation allowance | (17,357) |  |  | (18,236) |
Deferred tax asset, net | $ | 62,417 |  |  | $ | 58,798 |
Deferred tax liabilities |  |  |
Property and equipment | $ | 24,662 |  |  | $ | 25,319 |
Intangible assets | 24,411 |  |  | 25,533 |
Lease asset | 23,868 |  |  | 22,811 |
Pensions | 5 |  |  | 4,284 |
Foreign currency | 686 |  |  | 600 |
Foreign withholding and U.S. state taxes on unremitted earnings | 725 |  |  | 1,146 |
Other | 171 |  |  | — |
Deferred tax liabilities | 74,528 |  |  | 79,693 |
Net deferred tax liabilities | $ | 12,111 |  |  | $ | 20,895 |
Management believes, based on the Company’s history of taxable income and expectations for the future, that it is more likely than not that future taxable income will be sufficient to fully utilize the federal deferred tax assets at December 31, 2023. As of December 31, 2023, the Company has approximately $7.9 million of foreign tax credit carryforwards with expiration dates through 2033. A full valuation allowance has been provided as the Company does not expect to utilize these foreign tax credits before the expiration dates. As of December 31, 2023, the Company has approximately $192.1 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2043 and has provided a valuation allowance against $129.6 million of such losses, which the Company does not expect to utilize. In addition, as of December 31, 2023, the Company has approximately $15.6 million in state net operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided. During fiscal year 2023, the Company had approximately $3.8 million in tax attributes with a full valuation allowance related to foreign tax credit carryforwards and foreign net operating loss carryforwards that expired. As a result, the expiration of these tax attributes did not have an impact on the Company’s effective tax rate for fiscal year 2023. As of December 31, 2023, and January 1, 2023, non-current deferred tax assets were reduced by approximately $2.8 million of unrecognized tax benefits. Historically, the Company has not provided for U.S. income taxes and foreign withholding taxes on the undistributed accumulated earnings of its foreign subsidiaries, with the exception of its Canada subsidiaries and a specific portion of the undistributed earnings of foreign subsidiaries outside of Canada, because such earnings were deemed to be permanently reinvested. In September of 2021, as part of an overall restructuring plan, the Company made the decision to close its manufacturing facility in Thailand. As a result, the Company is no longer asserting that the undistributed earnings in its Thailand subsidiaries are permanently reinvested. The Company provided for U.S. income taxes and foreign withholding taxes on these earnings at December 31, 2023 and January 1, 2023. Although the Tax Act created a dividends received deduction that generally eliminates additional U.S. federal income taxes on dividends from our foreign subsidiaries, the Company continues to assert that all of its undistributed earnings in its non-U.S. subsidiaries, excluding undistributed earnings for which U.S. income taxes and foreign withholding taxes have been provided, are indefinitely reinvested outside of the U.S. The Company expects that domestic cash resources will be sufficient to fund its domestic operations and cash commitments in the future. In the event the Company determines not to continue to assert that all or part of its undistributed earnings in its non-U.S. subsidiaries are permanently reinvested, an actual repatriation of earnings from its non-U.S. subsidiaries could still be subject to additional foreign withholding and U.S. state taxes, the determination of which is not practicable. The Company’s federal income tax returns are subject to examination for the years 2020 to the present. The Company files returns in numerous state and local jurisdictions and in general it is subject to examination by the state tax authorities for the years 2018 to the present. The Company files returns in numerous foreign jurisdictions and in general it is subject to examination by the foreign tax authorities for the years 2012 to the present. As a result of an audit of the Company’s U.K. subsidiaries, Her Majesty’s Revenue & Customs (“HMRC”) issued notices of amendment to the Company’s U.K. tax returns for the years 2012 through 2017. The adjustments result from the interest rate applied in the intra-group financing arrangement between a Company subsidiary in the U.K. and another in the Netherlands. In April of 2021, the Company filed requests with both the Competent Authority in the Netherlands and in the U.K. to initiate a mutual agreement procedure (“MAP”) related to the double taxation arising from the HMRC adjustments. In June of 2022, the Competent Authorities reached an agreement on the interest rate to be applied for the years 2012 through 2017. The Company recognized the adjustments from the 2012-2017 MAP in 2022. In March of 2023, the Company filed requests with both the Competent Authority in the Netherlands and in the U.K. to initiate a MAP for tax years 2018 through 2020 related to the double taxation arising from the application of the HMRC interest rate adjustments that were the subject of the 2012-2017 MAP. In September 2023, the Competent Authorities reached an agreement on the interest rate to be applied for the years 2018 through 2020. The Company recognized the adjustments from the 2018-2020 MAP in 2023. The recognition of the adjustments in both 2022 and 2023 did not have a material impact on the Company’s effective tax rate or its financial position. As of December 31, 2023, and January 1, 2023, the Company had $4.9 million and $5.7 million, respectively, of unrecognized tax benefits. For the years ended December 31, 2023 and January 1, 2023, the Company recognized as income tax benefits $0.1 million and $2.5 million, respectively, of previously unrecognized tax benefits. While it is reasonably possible that some of the unrecognized tax benefits will be recognized within the next 12 months, the Company does not expect the recognition of such amounts will have a material impact on the Company’s financial results. If any of the $4.9 million of unrecognized tax benefits as of December 31, 2023 are recognized, there would be a favorable impact on the Company’s effective tax rate of approximately $4.9 million in future periods. If the unrecognized tax benefits are not favorably settled, $2.1 million of the total amount of unrecognized tax benefits would require the use of cash in future periods. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties were $0.4 million as of December 31, 2023 and were included in the total unrecognized tax benefit noted above. The timing of the ultimate resolution of the Company’s tax matters and the payment and receipt of related cash is dependent on a number of factors, many of which are outside the Company’s control. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:
| Fiscal Year
| 2023 |  | 2022 |  | 2021
| (in thousands)
Balance at beginning of year | $ | 5,743 |  |  | $ | 8,220 |  |  | $ | 10,799 |
Increases related to tax positions taken during the current year | 320 |  |  | 342 |  |  | 265 |
Increases related to tax positions taken during the prior years | 140 |  |  | 204 |  |  | 198 |
Decreases related to tax positions taken during the prior years | (54) |  |  | (447) |  |  | — |
Decreases related to lapse of applicable statute of limitations | (1,218) |  |  | (2,574) |  |  | (2,309) |
Changes due to settlements | — |  |  | — |  |  | (836) |
Changes due to foreign currency translation | 17 |  |  | (2) |  |  | 103 |
Balance at end of year | $ | 4,948 |  |  | $ | 5,743 |  |  | $ | 8,220 |

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