Income Taxes

3 Months Ended

Mar. 28, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company has completed its accounting for the income tax effects of the Tax Act. Although the measurement period has effectively ended, additional guidance and regulations continue to be released or finalized. We have considered these ongoing developments and determined that they have no impact on our tax accounts for the three months ended March 28, 2020. Final guidance, once issued, may materially affect our conclusions regarding the net related effects of the Tax Act on our unaudited consolidated financial statements. Until then, management will continue to monitor and work with its tax advisors to interpret any guidance issued.

The effective income tax rate for continuing operations 123.8% for the three months ended March 28, 2020 compared to 39.6% for the three months ended March 30, 2019. In accordance with ASC 740-270, we recorded tax expense of $1.2 million and $10.3 million from continuing operations for the three months ended March 28, 2020 and March 30, 2019, respectively, by applying an estimated annual effective tax rate to our year-to-date income for includable entities during the respective periods. Our estimated annual effective tax rate for both years includes the impact of the tax on GILTI. The application of the estimated annual effective tax rate in interim periods may result in a significant variation in the customary relationship between income tax expense and pretax accounting income due to the seasonality of our global business. Entities that are currently generating losses and for which there is a full valuation allowance are excluded from the worldwide effective tax rate calculation and are calculated separately. The estimated annual effective tax rate for the current year is materially impacted by changes in management’s judgment regarding the realizability of deferred tax assets. Due to the ongoing financial and operational impacts on our business arising from COVID-19 focused in the current year, our ability to realize certain tax benefits related primarily to US foreign tax credits has been impacted. As such, management believes that our existing valuation allowance against these credits as well as our net operating losses at the state level will likely increase through the year as events occur. In accordance with guidance, we have factored the predicted increases as of the balance sheet date into our estimated annual effective tax rate for the current year. To the extent that actual results and/or events differ from our predicted results, we may continue to see effects on our estimated annual effective tax rate.

The impact of significant discrete items is separately recognized in the quarter in which they occur. The tax expense related to discrete items included in the tax provision for continuing operations for the three months ended March 28, 2020 and March 30, 2019 was $0.8 million and $1.3 million, respectively. The discrete tax expense of $0.8 million for the three months ended March 28, 2020 was attributable to current period interest expense on uncertain tax positions. The discrete tax expense for the three months ended March 30, 2019 was comprised primarily of $1.1 million of tax expense related to the shortfall recognized from exercises and forfeitures from share-based compensation awards and $0.4 million attributable to current period interest expense on uncertain tax positions, offset by $0.2 million for other matters.

Under ASC 740-10, we provide for uncertain tax positions and the related interest expense by adjusting unrecognized tax benefits and accrued interest accordingly. We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. We had unrecognized tax benefits of $19.8 million and $20.2 million as of March 28, 2020 and December 31, 2019, respectively.

The prior period information has been revised. Please refer to Note 25 - Revision of Prior Period Financial Statements.