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Income Taxes
 12 Months Ended
Jan. 01, 2023
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
 
Income (loss) before income taxes consisted of the following:
 
 Fiscal Year
 202220212020
 (in thousands)
U.S. operations$11,758 $4,460 $(7,104)
Foreign operations30,159 68,173 (72,316)
Income (loss) before income taxes$41,917 $72,633 $(79,420)

Provisions for federal, foreign and state income taxes in the consolidated statements of operations consisted of the following components:

 Fiscal Year
 202220212020
 (in thousands)
Current expense (benefit):   
Federal$1,624 $1,987 $(22,976)
Foreign20,903 21,372 14,822 
State1,307 1,418 529 
Current expense (benefit)23,834 24,777 (7,625)
 
Deferred expense (benefit):   
Federal346 (2,841)1,787 
Foreign(2,053)(3,846)(2,422)
State230 (691)769 
Deferred expense (benefit)(1,477)(7,378)134 
 
Total income tax expense (benefit)$22,357 $17,399 $(7,491)
 
The Company’s effective tax rate was 53.3%, 24.0% and 9.4% for fiscal years 2022, 2021 and 2020, 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 (benefit):
 
 Fiscal Year
 202220212020
 (in thousands)
Income taxes at U.S. federal statutory rate$8,803 $15,253 $(16,678)
Increase (decrease) in taxes resulting from:   
State income taxes, net of federal tax effect817 (87)(2,033)
Non-deductible business expenses237 330 1,792 
Non-deductible employee compensation1,678 1,213 (210)
Tax effects of Company-owned life insurance612 (762)(898)
Tax effects of undistributed earnings from foreign subsidiaries not deemed to be indefinitely reinvested1,123 1,219 748 
Foreign and U.S. tax effects attributable to foreign operations3,528 1,748 (11,991)
Valuation allowance effect2,898 1,349 12,927 
Research and development tax credits(917)(793)(780)
Goodwill impairment6,171 — 24,464 
Unrecognized tax benefits(2,463)(2,663)(14,962)
Other(130)592 130 
Income tax expense (benefit)$22,357 $17,399 $(7,491)

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. While we continue to evaluate the impacts of the Inflation Reduction Act, it is not expected to have a material impact on the Company’s financial statements.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic and provides certain tax relief to businesses. Tax provisions of the CARES Act include, among other things, the deferral of certain payroll taxes, relief for retaining employees, and certain income tax provisions for corporations. For the year ended January 3, 2021, the Company deferred $4.1 million in payroll taxes under the CARES Act which was paid as of January 2, 2022. In addition, for the year ended January 3, 2021, the Company benefited from the relaxed 163(j) limitation and the technical correction related to depreciation of leasehold improvements, both of which did not have a material impact on the Company’s effective tax rate for that year. Some of the provisions of the CARES Act, including the deferral of certain payroll taxes and the relaxed 163(j) limitation, are not applicable for tax years after 2020, and as a result the Company did not benefit from these provisions for the years ended January 1, 2023 and January 2, 2022.

Deferred income taxes for the years ended January 1, 2023 and January 2, 2022, 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
 20222021
 (in thousands)
Deferred tax assets
Lease liability$23,649 $25,426 
Net operating loss and interest carryforwards7,616 5,962 
Federal tax credit carryforwards10,904 10,054 
Derivative instruments295 1,126 
Deferred compensation16,577 19,487 
Inventory3,521 3,100 
Prepaids, accruals and reserves6,947 8,777 
Capitalized costs7,467 4,805 
Pensions— 6,431 
Other58 175 
Deferred tax asset, gross77,034 85,343 
Valuation allowance(18,236)(15,338)
Deferred tax asset, net$58,798 $70,005 
 
Deferred tax liabilities
Property and equipment$25,319 $25,352 
Intangible assets25,533 30,736 
Lease asset22,811 24,856 
Pensions4,284 — 
Foreign currency600 458 
Foreign withholding and U.S. state taxes on unremitted earnings1,146 1,332 
Deferred tax liabilities79,693 82,734 
 
Net deferred tax liabilities$20,895 $12,729 

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 January 1, 2023.

Beginning in 2018, the Company has elected to account for tax effects of the global intangible low-taxed income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Internal Revenue Code Section 163(j) interest limitation (“Interest Limitation”) and base-erosion and anti-abuse tax (“BEAT”) provisions included in the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) in the period when incurred, and therefore has not provided any deferred tax impacts for these provisions in its consolidated financial statements.

As of January 1, 2023, the Company has approximately $10.9 million of foreign tax credit carryforwards with expiration dates through 2032. 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 January 1, 2023, the Company has approximately $162.8 million in state net operating loss carryforwards relating to continuing operations with expiration dates through 2042 and has provided a valuation allowance against $100.3 million of such losses, which the Company does not expect to utilize. In addition, as of January 1, 2023, the Company has approximately $21.2 million in state net operating loss carryforwards relating to discontinued operations against which a full valuation allowance has been provided.

As of January 1, 2023, and January 2, 2022, 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 January 1, 2023 and January 2, 2022.

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 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 2019 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 2017 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 2011 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 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 Company was notified that the Competent Authorities had reached an agreement on the interest rate to be applied for the years 2012 through 2017. The Company recognized the adjustments in 2022, based on the outcome of the MAP. The recognition of the adjustments did not have a material impact on the Company’s effective tax rate or its financial position.

As of January 1, 2023, and January 2, 2022, the Company had $5.7 million and $8.2 million, respectively, of unrecognized tax benefits. For the years ended January 1, 2023 and January 2, 2022, the Company recognized as income tax benefits $2.5 million and $2.7 million, respectively, of previously unrecognized tax benefits. It is reasonably possible that approximately $0.9 million of unrecognized tax benefits may be recognized within the next 12 months.

If any of the $5.7 million of unrecognized tax benefits as of January 1, 2023 are recognized, there would be a favorable impact on the Company’s effective tax rate of approximately $5.0 million in future periods. If the unrecognized tax benefits are not favorably settled, $2.9 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. As of January 1, 2023, the Company had accrued interest and penalties of $0.4 million, which is 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
 202220212020
 (in thousands)
Balance at beginning of year$8,220 $10,799 $25,486 
Increases related to tax positions taken during the current year342 265 271 
Increases related to tax positions taken during the prior years204 198 536 
Decreases related to tax positions taken during the prior years(447)— (673)
Decreases related to lapse of applicable statute of limitations(2,574)(2,309)(14,992)
Changes due to settlements— (836)— 
Changes due to foreign currency translation(2)103 171 
Balance at end of year$5,743 $8,220 $10,799