Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

18. Income Taxes

Income (loss) from continuing operations, inclusive of equity-method earnings and before income taxes, includes the following components (in thousands):

	Year Ended
	December 31,		January 1,		January 2,
	2022		2022		2021
Domestic	$	32,088	$	(15,384)	$	(55,988)
Foreign		97,764		(29,063)		(74,099)
	$	129,852	$	(44,447)	$	(130,087)

The provision (benefit) for income taxes consists of the following (in thousands):

	Year Ended
	December 31,		January 1,		January 2,
	2022		2022		2021
Current:
Domestic	$	52,834	$	(12,630)	$	(9,740)
Foreign		3,856		9,447		1,656
Total Current		56,690		(3,183)		(8,084)
Deferred:
Domestic		(17,728)		17,873		(4,031)
Foreign		(512)		(1,263)		(2,487)
Total Deferred		(18,240)		16,610		(6,518)
Provision (benefit) for income taxes	$	38,450	$	13,427	$	(14,602)

The reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:

	Year Ended
	December 31,		January 1,		January 2,
	2022		2022		2021
Federal statutory rate	21.0	%	21.0	%	21.0	%
Foreign tax rate benefit	(6.2)		(16.4)		(11.1)
Research and development tax credits	(5.3)		0.1		4.2
Return to provision adjustments	(2.0)		0.8		—
Excess tax benefit of stock-based compensation	(1.1)		3.7		0.4
Change in prior period valuation allowance	(0.3)		(10.5)		(0.3)
Net operating loss not benefited	—		(6.0)		—
Nondeductible (nontaxable) domestic items	0.7		(2.8)		(1.4)
State tax expense	1.2		(0.8)		(0.1)
Nondeductible officer compensation	2.0		(10.3)		(1.7)
Nondeductible (nontaxable) foreign items	4.4		(7.2)		(0.2)
GILTI and Subpart F income	16.5		(2.4)		0.6
Other	(1.3)		0.6		(0.2)
Effective tax rate	29.6	%	(30.2)	%	11.2	%

18. Income Taxes (Continued)

The increase in the effective tax rate for fiscal 2022 was primarily due to the recognition of certain tax benefits for fiscal 2021 in discontinued operations under FASB ASU 2019-12, Simplifying the Accounting for Income Taxes, and the required adoption of new U.S. tax rules regarding the capitalization of research and experimental costs in fiscal 2022. The effective tax rate for fiscal 2021 decreased from fiscal 2020 primarily due to the adoption of ASU 2019-12 in 2021 and an increase in the beginning of year valuation allowance on deferred tax assets for state attribute carryforwards.

Under ASU 2019-12, the income tax benefit of a loss from continuing operations should be recognized in discontinued operations if the Company would be unable to benefit from the loss without considering the income from discontinued operations. As such, tax benefits associated with losses incurred for fiscal 2021 were recognized in discontinued operations. Additionally, for fiscal 2021 there was an increase in the beginning of year valuation allowance on deferred tax assets for state attribute carryforwards as a result of changes in state tax estimates, primarily due to the divestiture of the infrastructure and automotive business.

In fiscal 2021, tax on the gain from the divestiture of the infrastructure and automotive business of $346.9 million was recorded in discontinued operations, as well as additional tax benefits associated with discontinued operations of $7.2 million. In fiscal 2022, the Company revised its estimate of tax on the gain from the divestiture and recorded an associated net tax benefit of $2.2 million, which comprises the majority of the return to provision adjustment in the effective tax rate.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Under the Act, research and experimental expenditures incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted. The Company has elected to treat global intangible low-taxed income (GILTI) as a period cost, so the capitalization of research and experimental costs in GILTI increases the Company’s provision for income taxes.

Additionally, the Act required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred from U.S. income tax under U.S. tax law. The Company elected to pay the transition tax over the eight-year period provided in the Act. As of December 31, 2022, the unpaid balance of its transition tax obligation was $19.0 million, which is payable between April 2023 and April 2025. This was recorded as components of other current liabilities and other non-current liabilities in the Consolidated Balance Sheet in the amounts of $4.8 million and $14.2 million, respectively.

18. Income Taxes (Continued)

Deferred Income Taxes

Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. Significant components of the Company’s deferred taxes as of December 31, 2022 and January 1, 2022 were as follows (in thousands):

	December 31,		January 1,
	2022		2022
Deferred tax assets:
Capitalized research and development	$	15,188	$	981
Tax credit carryforwards		13,334		12,247
Intangible assets		7,938		8,687
Accrued liabilities		6,809		6,078
Deferred income on shipments to distributors		6,726		4,588
Leases		5,517		6,033
Net operating loss carryforwards		4,965		5,803
Other		7,118		3,199
		67,595		47,616
Less: Valuation allowance		(9,409)		(9,529)
		58,186		38,087
Deferred tax liabilities:
Intangible assets		13,789		14,479
Fixed assets		8,518		8,692
Prepaid expenses and other		5,460		6,049
Leases		5,189		5,664
Unrealized gain on equity-method investment		4,120		3,342
Debt		177		16,399
		37,253		54,625
Net deferred tax assets (liabilities)	$	20,933	$	(16,538)

As of December 31, 2022, the Company had federal net operating loss and research and development tax credit carryforwards of approximately $14.6 million and $1.6 million, respectively. These carryforwards expire in fiscal years 2023 through 2031. Recognition of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used.

The Company also had state loss, state tentative minimum tax credit, and state research and development tax credit carryforwards of approximately $29.3 million, $0.1 million, and $12.2 million, respectively. Certain of these carryforwards expire in fiscal years 2025 through 2036, and others do not expire. Recognition of some of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used.

18. Income Taxes (Continued)

A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The Company maintains a valuation allowance with respect to certain deferred tax assets relating to state research and development tax credits, state net operating loss carryforwards and state alternative minimum tax credits. The following table summarizes the activity related to the valuation allowance for deferred tax assets (in thousands):

	Balance at		Additions
	Beginning of		Charged to				Balance at
	Period		Expenses		Deductions		End of Period
Year ended December 31, 2022	$	9,529	$	792	$	(912)	$	9,409
Year ended January 1, 2022	$	5,311	$	5,370	$	(1,152)	$	9,529
Year ended January 2, 2021	$	4,486	$	847	$	(22)	$	5,311

At the end of fiscal 2022, undistributed earnings of certain of the Company’s foreign subsidiaries of approximately $136.8 million are intended to be permanently reinvested outside the U.S. Accordingly, no provision for foreign withholding tax and state income taxes associated with a distribution of these earnings has been made. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable.

Uncertain Tax Positions

The following table summarizes the activity related to gross unrecognized tax benefits (in thousands):

	Year Ended
	December 31,		January 1,		January 2,
	2022		2022		2021
Beginning balance	$	3,677	$	2,853	$	2,276
Additions based on tax positions related to current year		872		830		577
Reductions based on tax positions related to prior years		(6)		(6)		—
Reductions for tax positions as a result of a lapse of the applicable statute of limitations		(434)		—		—
Ending balance	$	4,109	$	3,677	$	2,853

As of December 31, 2022, January 1, 2022 and January 2, 2021, the Company had gross unrecognized tax benefits, inclusive of interest, of $4.4 million, $3.9 million and $3.0 million, respectively, of which $4.4 million, $3.9 million and $2.1 million, respectively, would affect the effective tax rate if recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. These amounts were not material for any of the periods presented.

Following the completion of the Norwegian Tax Administration (“NTA”) examination of the Company’s Norwegian subsidiary for income tax matters relating to fiscal years 2013 – 2016, the Company received an assessment from the NTA in December 2017 concerning an adjustment to its 2013 taxable income related to the pricing of an intercompany transaction. The Company is currently appealing the assessment. The adjustment to the pricing of the intercompany transaction results in approximately 141.3 million Norwegian kroner, or $14.3 million, additional Norwegian income tax. The Company disagrees with the NTA’s assessment and believes the Company’s position on this matter is more likely than not to be sustained. The Company plans to exhaust all available administrative remedies, and if unable to resolve this matter through administrative remedies with the NTA, the Company plans to pursue judicial remedies.

The Company believes that it has accrued adequate reserves related to all matters contained in tax periods open to examination. Should the Company experience an unfavorable outcome in the NTA matter, however, such an outcome could have a material impact on its financial statements.

18. Income Taxes (Continued)

Tax years 2015 through 2022 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company is not currently under audit in any major taxing jurisdiction.

The Company does not expect material changes to its gross unrecognized tax benefits in the next 12 months.