Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES

12. INCOME TAXES

For financial reporting purposes, income before income taxes includes the following components:

 

 

For the year ended

 

 

 

December 31, 2022

 

 

January 1, 2022

 

 

January 2, 2021

 

United States

 

$

71.3

 

 

$

87.1

 

 

$

30.6

 

Foreign

 

 

50.5

 

 

 

44.1

 

 

 

(6.6

)

Total

 

$

121.8

 

 

$

131.2

 

 

$

24.0

 

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 $146.5, $166.9 and $106.1 for the 2022, 2021 and 2020 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

 

 

 

December 31, 2022

 

 

January 1, 2022

 

 

January 2, 2021

 

Current tax expense (benefit):

 

 

 

 

 

 

 

 

 

United States

 

$

12.3

 

 

$

10.7

 

 

$

3.3

 

State and local

 

 

0.4

 

 

 

3.1

 

 

 

1.2

 

Foreign

 

 

15.9

 

 

 

17.3

 

 

 

7.3

 

Total current

 

 

28.6

 

 

 

31.1

 

 

 

11.8

 

Deferred tax expense (benefit):

 

 

 

 

 

 

 

 

 

United States

 

 

(0.4

)

 

 

(1.1

)

 

 

3.2

 

State and local

 

 

(2.6

)

 

 

0.2

 

 

 

(0.3

)

Foreign

 

 

(2.2

)

 

 

(3.6

)

 

 

(4.9

)

Total deferred

 

 

(5.2

)

 

 

(4.5

)

 

 

(2.0

)

Total income tax provision

 

$

23.4

 

 

$

26.6

 

 

$

9.8

 

 

The reconciliation between the effective income tax rate and the U.S. federal statutory rate is as follows:

 

 

For the year ended

 

 

 

December 31, 2022

 

 

January 1, 2022

 

 

January 2, 2021

 

U.S. federal taxes at statutory rate

 

$

25.6

 

 

$

27.5

 

 

$

5.1

 

Increase (decrease)

 

 

 

 

 

 

 

 

 

Foreign withholding tax

 

 

—

 

 

 

0.1

 

 

 

0.3

 

Capitalized transaction costs

 

 

0.3

 

 

 

—

 

 

 

0.4

 

Foreign income taxed at different rate

 

 

1.7

 

 

 

3.6

 

 

 

1.4

 

FDII deduction

 

 

(2.8

)

 

 

(3.2

)

 

 

(1.3

)

Changes in estimates related to prior years including foreign

 

 

0.2

 

 

 

(0.2

)

 

 

(2.5

)

Goodwill impairment

 

 

—

 

 

 

—

 

 

 

6.7

 

State and local taxes, net

 

 

(1.0

)

 

 

2.7

 

 

 

0.6

 

Current year tax credits

 

 

(0.9

)

 

 

(0.5

)

 

 

(0.7

)

Foreign deferred other true up

 

 

(1.0

)

 

 

(1.6

)

 

 

—

 

Change in reserve

 

 

0.2

 

 

 

(1.9

)

 

 

(0.5

)

Excess officer compensation

 

 

1.4

 

 

 

—

 

 

 

—

 

Other

 

 

(0.3

)

 

 

0.1

 

 

 

0.3

 

Income tax provision

 

$

23.4

 

 

$

26.6

 

 

$

9.8

 

The effective tax rate for the year ended December 31, 2022 was lower than the rate for 2021 primarily due to a decrease in the foreign income taxed at different rates and state and local tax benefits, when compared to the year ended January 1, 2022. For the year ended December 31, 2022, the state and local taxes include a benefit for provision to return related to prior years. As a result of recent acquisitions, the Company’s state effective tax rate has decreased. The rate for all years benefited from tax deductions for foreign derived intangible income (FDII deduction).

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 December 31, 2022 and January 1, 2022, are presented below:

 

 

 

December 31, 2022

 

 

January 1, 2022

 

Deferred tax assets:

 

 

 

 

 

 

Foreign tax benefit of U.S. reserves

 

$

1.9

 

 

$

1.8

 

Net operating losses

 

 

6.2

 

 

 

5.2

 

Inventory

 

 

3.2

 

 

 

3.0

 

Intangible assets and goodwill

 

 

0.7

 

 

 

0.7

 

Accrued expenses and other

 

 

5.3

 

 

 

6.6

 

Other comprehensive income

 

 

5.6

 

 

 

3.4

 

Total deferred tax assets

 

 

22.9

 

 

 

20.7

 

Less: Valuation allowance

 

 

(1.7

)

 

 

(0.4

)

Net deferred tax assets

 

 

21.2

 

 

 

20.3

 

Deferred tax liabilities:

 

 

 

 

 

 

Depreciation

 

 

(8.6

)

 

 

(9.6

)

Intangible assets and goodwill

 

 

(71.7

)

 

 

(79.3

)

Other deferred tax liabilities

 

 

(0.3

)

 

 

(0.3

)

Total deferred tax liabilities

 

 

(80.6

)

 

 

(89.2

)

Net deferred tax liabilities

 

$

(59.4

)

 

$

(68.9

)

 

As of December 31, 2022, the Company has federal net operating loss (“NOL”) carryforwards of approximately $9.1, Oklahoma NOLs carryforwards of $5.4 and California NOL carryforwards of $36.8. The Oklahoma NOLs are expected to be fully utilized by 2023. 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 and 2021. The California NOL suspension for 2022 was lifted. Despite these limitations, the Company expects to fully utilize the federal and California NOLs by 2027 and thus has recorded a deferred tax asset of $4.9 for all NOLs after the valuation allowance. The Company has foreign NOL carryforwards of $7.2 that it does not believe will be utilized, and therefore, has not recognized a deferred tax asset for these NOLs.

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. The valuation allowance for deferred tax assets as of December 31, 2022 and January 1, 2022 was $1.7 and $0.4, respectively. The portion of valuation allowance related to capital losses was $0.4 as of December 31, 2022 and January 1, 2022. The net change in total valuation was an increase of $1.3 in 2022 and was primarily related to foreign NOL carryforwards that, in the judgment of management, are not more likely than not to be realized. The Company recognized a minimal amount in its effective tax rate in 2022, and $1.3 related to a presentational reclass within the table of deferred items from 2021.

The Company accounts for investment tax credits utilizing the deferral method. Investment tax credits generated in 2022 totaled $3.0.

The Company prescribes a recognition threshold and measurement attribute for an uncertain tax position taken or expected to be taken in a tax return.

The following is a roll-forward of the Company’s unrecognized tax benefits:

 

Unrecognized tax benefits - December 28, 2019

 

$

8.1

 

Increases from positions taken during prior periods

 

 

0.7

 

Increases from positions taken during current period

 

 

0.5

 

Current year acquisitions

 

 

3.2

 

Settled positions

 

 

(0.9

)

Unrecognized tax benefits - January 2, 2021

 

$

11.4

 

Decreases from positions taken during prior periods

 

 

(0.2

)

Increases from positions taken during current period

 

 

0.6

 

Lapse of statute of limitations

 

 

(2.8

)

Unrecognized tax benefits - January 1, 2022

 

$

9.0

 

Increases from positions taken during prior periods

 

 

0.9

 

Increases from positions taken during current period

 

 

0.2

 

Settled positions

 

 

(0.2

)

Lapse of statute of limitations

 

 

(2.0

)

Unrecognized tax benefits - December 31, 2022

 

$

7.9

 

 

At December 31, 2022, the Company had unrecognized tax benefits of $7.9 including accrued interest. If recognized, $2.7 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 December 31, 2022, is not considered material to the Company’s Consolidated Financial Statements.

The Company is currently under state audit and remains subject to income tax examinations in the U.S. and various state and foreign jurisdictions for tax years 2017-2020. During 2022, the Company resolved several U.S. and foreign examinations, including limited transfer pricing disputes that existed 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.