Income Taxes

12 Months Ended

Jan. 01, 2022

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

Income Tax Expense

The components of income tax expense are as follows (in thousands):

	Year Ended
	January 1,		January 2,			December 28,
	2022		2021			2019
Current:
Federal	$	790	$	9,906		$	5,747
State		1,337		2,571			2,282
		2,127		12,477			8,029
Deferred:
Federal		7,142		528			3,179
State		490		(1,121	)		1,231
		7,632		(593	)		4,410
Income tax expense	$	9,759	$	11,884		$	12,439

The aggregate amount of income taxes included in the consolidated statements of operations and consolidated statements of shareholders’ equity are as follows (in thousands):

	Year Ended
	January 1,			January 2,			December 28,
	2022			2021			2019
Consolidated statements of operations:
Income tax expense relating to continuing operations	$	9,759		$	11,884		$	12,439
Consolidated statements of shareholders' equity:
Income tax expense relating to derivative financial instruments	$	(1,531	)	$	(970	)	$	(974	)

Reconciliation of the Statutory Rate to the Effective Rate

A reconciliation of the statutory federal income tax rate to our effective rate is provided below:

	Year Ended
	January 1,			January 2,			December 28,
	2022			2021			2019
Statutory federal income tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal income tax benefit		3.2	%		3.7	%		4.0	%
Non-deductible expenses		1.3	%		1.0	%		1.6	%
Eco partnership income attributable to non-controlling interest		(1.2	)%		—			—
Florida excess tax refund relating to the Tax Cuts and Jobs Act		—			(1.0	)%		—
Excess stock-based compensation tax benefits		(2.0	)%		(1.4	)%		(3.7	)%
Research activities credits		(0.8	)%		(2.3	)%		(1.2	)%
Changes related to state rate changes and U.S. tax reform		—			—			0.7	%
Other		0.2	%		(0.1	)%		(0.2	)%
Consolidated effective tax rate		21.7	%		20.9	%		22.2	%

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax liability are as follows:

	January 1,			January 2,
	2022			2021
	(in thousands)
Deferred tax assets:
Operating lease liability	$	16,949		$	10,609
Deferrals and accruals relating to ASC 606, net		6,580			3,537
State bonus depreciation and net operating loss carryforwards		3,748			2,606
Stock-based compensation expense		2,527			1,772
Accrued warranty		2,380			1,550
Acquisition costs		2,158			1,664
Advance supplier consideration		2,109			2,776
Other deferrals and accruals, net		1,848			2,206
Obsolete inventory and UNICAP adjustment		1,666			788
Allowance for credit losses		1,048			1,017
Total deferred tax assets		41,013			28,525
Deferred tax liabilities:
Property, plant and equipment		(20,958	)		(14,966	)
Trade names and other intangible assets, net		(18,162	)		(17,978	)
Goodwill		(17,102	)		(12,596	)
Operating lease right-of-use asset		(15,371	)		(9,742	)
Eco partnership basis difference		(3,110	)		—
Derivative financial instruments		(2,421	)		(892	)
Prepaid expenses		(1,378	)		(680	)
Total deferred tax liabilities		(78,502	)		(56,854	)
Total deferred tax liabilities, net	$	(37,489	)	$	(28,329	)

Tax-Deductible Goodwill

We acquired goodwill deductible for tax purposes in the CGI acquisition as the transaction was treated as an acquisition of stock for tax purposes. At the date of the acquisition, the amount of goodwill deductible for tax purposes from the CGI acquisition was $9.3 million. At the time of the acquisition, this goodwill was the same amount for both book and tax purposes and, therefore, no deferred tax asset or liability was recognized. As we amortize this goodwill for tax purposes over its remaining life, which was approximately 7.4 years at the time of the acquisition, we will recognize a deferred tax liability. The unamortized amount of this goodwill was $0.2 million and $1.5 million at January 1, 2022, and January 2, 2021, respectively.

We have goodwill deductible for tax purposes in the WinDoor acquisition as the transaction was an acquisition of stock that was treated as a step-up acquisition of assets and assumption of liabilities pursuant to our election under section 338(h)(10) of the Internal Revenue Code. We are deducting goodwill for tax purposes of $38.9 million from the WinDoor transaction. The unamortized amount of this goodwill was $23.5 million and $26.1 million at January 1, 2022, and January 2, 2021, respectively.

We have goodwill deductible for tax purposes in the US Impact acquisition as the transaction was treated as an acquisition of assets and assumption of liabilities for both book and tax purposes. We expect to be able to deduct goodwill for tax purposes of $569 thousand from the USI transaction. The unamortized amount of this goodwill was $364 thousand and $402 thousand at January 1, 2022, and January 2, 2021, respectively.

We completed the WWS Acquisition, which included its subsidiary, WWS Blocker LLC (“Blocker”), on August 13, 2018. Blocker was a single-purpose U.S. tax blocker which held a 18.06% ownership percentage of the combined ownership of WWS, and for which that portion of the fair value of assets acquired and liabilities assumed in the WWS Acquisition was not eligible for a step-up in basis. We have goodwill deductible for tax purposes in the WWS Acquisition. Goodwill relating to the 81.94% portion of the transaction treated as a step-up acquisition of assets and assumption of liabilities totaled $133.6 million. We expect to be able to deduct this goodwill for tax purposes. The unamortized amount of this goodwill was approximately $103.1 million and $112.1 million at January 1, 2022, and January 2, 2021, respectively. WWS has historical tax goodwill, of which the 18.06% portion of the Blocker treated as an acquisition of stock not eligible for step-up totaled $6.0 million. The unamortized portion of this goodwill was approximately $4.3 million and $4.8 million at January 1, 2022, and January 2, 2021, respectively. This component can continue to be deducted by the Company for tax purposes.

We have goodwill deductible for tax purposes in the NewSouth Acquisition as the transaction was treated as an acquisition of assets and assumption of liabilities for both book and tax purposes. In the transaction, there were no earn-out arrangements or separate asset allocation agreements with sellers that we believe would affect the deductibility of goodwill in the acquisition. As such, we expect to be able to deduct goodwill for tax purposes of $52.1 million. The unamortized amount of this goodwill was $45.4 million at January 1, 2022, and $48.9 million at January 2, 2021.

In February 2021, we acquired Eco in a transaction treated as a 75% investment in a partnership which we believe will elect to be treated as an asset acquisition pursuant to Section 743(b) of the Code. As such, although the Eco Acquisition created goodwill for book purposes, our share of the tax deductible goodwill created in this transaction will benefit us through our share of partnership earnings, which will include, among other things, its tax deductible goodwill.

In our acquisition of CRi, we acquired goodwill which we believe is tax deductible as the transaction was structured as a purchase of assets and assumption of certain liabilities for both book and tax. In the transaction there were no earn-out arrangements or separate asset allocation agreements with the sellers that we believe would affect the deductibility of goodwill in the transaction. as such, we believe the goodwill acquired of $3.7 million is deductible for tax purposes. The unamortized amount of this goodwill was $3.5 million at January 1, 2022.

In the Anlin Acquisition, we acquired goodwill which we believe is currently not tax deductible as a result of an earn-out agreement associated with this transaction, the fair value of which exceeds the amount of the goodwill acquired. Payments under this earn-out agreement have not been finalized as of January 1, 2022. As such, we are unable to estimate the amount of goodwill that may be deductible, if any, in the Anlin Acquisition.

Excess Tax Benefits

Excess tax benefits resulting from the exercise of stock options and lapse of restriction on stock awards are now recognized as a discrete item in tax expense, where previously such tax effects had been recognized in additional paid-in-capital. Income tax expense in the years ended January 1, 2022, January 2, 2021, and December 28, 2019, includes excess tax benefits totaling $0.9 million, $0.8 million, and $2.1 million, respectively.

Open Tax Years

The tax years 2014 to 2020 remain open for examination by the IRS and Florida due to the statute of limitations and net operating losses utilized in prior tax years.