Income Taxes

9 Months Ended

Oct. 03, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax.

For the three and nine months ended October 3, 2020, the Company recorded an expense for income taxes of $4.0 million and a benefit for income taxes of $125.6 million, respectively, for an effective tax rate of (7.9)% and 47.6%, respectively. The effective tax rate for the three and nine months ended October 3, 2020 was different than the statutory federal tax rate primarily due to the impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which enables the Company to carry back current year, 2018 and 2019 net operating losses into prior taxable periods. As a result, the Company released valuation allowance on deferred tax assets related to those net operating losses that can be carried back and benefited in the prior years at the U.S. tax rate of 35%. The tax expense for the three months ended October 3, 2020 was primarily from a true-up to the tax benefit recorded through the second quarter of 2020 due to changes in the mix of income/losses between the Company’s jurisdictions in the third quarter of 2020.

For the three and nine months ended September 28, 2019, the Company recorded an expense for income taxes of $1.7 million and $4.0 million, respectively, for an effective tax rate of (3.3)% and (2.0)%, respectively. The effective tax rate for the three and nine months ended September 28, 2019 was different than the statutory federal tax rate primarily due to the impact of a full valuation allowance on the Company’s U.S. and certain of its foreign deferred tax assets, the mix of income/ losses between the Company’s foreign jurisdictions, and pretax losses in jurisdictions for which no tax benefit will be recognized.

On March 27, 2020, the CARES Act was signed into law. The CARES Act includes, among other items, provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

The CARES Act allows losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding tax years and to offset 100% of regular taxable income in such years.

Accounting for income taxes for interim periods generally requires the provision for income taxes to be determined by applying an estimate of the annual effective tax rate for the full fiscal year to income or loss before income taxes, excluding unusual or infrequently occurring discrete items (“Ordinary” income), for the reporting period. The Company anticipates that some of the net operating losses generated in 2020 can be carried back to prior taxable years, and recognizes the benefit in its annual effective tax rate. The Company has also recorded the tax benefit of carrying back 2018 and 2019 net operating losses as a discrete tax benefit. The Company will continue to evaluate the potential impact of the CARES Act.

The U.S. Treasury Department has adopted regulations requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation in proportion to the economic activity of the related parties. On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Altera Corp. v. Commissioner upholding these regulations, which reversed the prior decision of the U.S. Tax Court. On November 12, 2019, the Ninth Circuit Court of

Appeals denied the plaintiff’s request for an en banc rehearing. The plaintiff filed a petition for a writ of certiorari in the U.S. Supreme Court on February 10, 2020. On June 22, 2020, the U.S. Supreme Court declined to issue a writ of certiorari in the Altera v. Commissioner case. The actions of the U.S. Supreme Court did not have a material impact on the Company’s consolidated financial statements.

The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes,” which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of October 3, 2020, the Company maintains a valuation allowance against all of its U.S. deferred tax assets and against certain of its foreign deferred tax assets. The Company will continue to assess the realizability of its deferred tax assets in each of the applicable jurisdictions going forward.

As of October 3, 2020, the total amount of gross unrecognized tax benefits was $83.1 million, of which $46.3 million would affect the effective tax rate if recognized. The Company did not have any tax positions as of October 3, 2020 which it is reasonably possible that the total amount of gross unrecognized tax benefits will increase or decrease within the following 12 months.

The material jurisdictions in which the Company is subject to potential examination include the United States and Ireland. The Company believes that adequate amounts have been reserved for these jurisdictions. For the United States, the Company is currently under examination by the Internal Revenue Service ("IRS") for fiscal 2015 to 2019. For state and non-U.S. tax returns, the Company is generally no longer subject to tax examinations for years prior to 2014.