Income Taxes

6 Months Ended

Jul. 02, 2023

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The Company determines its provision for income taxes for interim periods using an estimate of its annual effective tax rate (“AETR”) and records any changes affecting the estimated AETR in the interim period in which the change occurs, including discrete tax items.

During the six months ended July 2, 2023, the Company recorded a total income tax provision of $5.5 million on pre-tax income of $20.6 million resulting in an effective tax rate of 26.7%, as compared to a total income tax provision of $16.2 million on pre-tax income of $46.3 million resulting in an effective tax rate of 35.0% during the six months ended July 3, 2022. The decrease in the effective tax rate for the period ended July 2, 2023, as compared to the period ended July 3, 2022, was primarily due to favorable changes related to the cash surrender value of Company-owned life insurance, non-recurring non-deductible charges related to the closure of the Company’s manufacturing facility in Thailand incurred in the first half of 2022 and favorable changes related to foreign exchange movements. This decrease was partially offset by a non-recurring favorable change to unrecognized tax benefits in the period ended July 3, 2022, and an increase in the valuation allowance on interest carryforwards.

In the first six months of 2023, the Company increased its liability for unrecognized tax benefits by $0.5 million. As of July 2, 2023, the Company had accrued approximately $6.2 million for unrecognized tax benefits. In accordance with applicable accounting standards, the Company’s deferred tax asset as of July 2, 2023, reflects a reduction for $2.8 million of these unrecognized tax benefits.

Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including the progress of tax audits and the closing of statutes of limitations. Based on information currently available, it is reasonably possible that approximately $1.2 million of unrecognized tax benefits may be recognized within the next 12 months, of which $0.4 million would result in a favorable impact to the effective tax rate.