Income Taxes

9 Months Ended

Sep. 28, 2024

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The income tax provision for interim periods is generally determined using an estimate of the Company’s annual effective tax rate adjusted for discrete items. Each quarter the estimate of the annual effective tax rate is updated, and if the Company’s estimated tax rate changes, a cumulative adjustment is made.

The effective tax rate for the thirteen weeks ended September 28, 2024 and September 30, 2023 was 38.8% and (69.4)%, respectively. The effective tax rates differed from the federal statutory rate primarily due to Internal Revenue Code Section 162(m) (“Section 162(m)”) excess compensation, changes in the valuation allowance, Foreign Derived Intangible Income (“FDII”), tax credits, withholding taxes and stock-based compensation.

The effective tax rate for the thirty-nine weeks ended September 28, 2024 and September 30, 2023 was 33.5% and 60.2%, respectively. The effective tax rates differed from the federal statutory rate primarily due to Section 162(m) excess compensation, changes in the valuation allowance, FDII, tax credits, withholding taxes and stock-based compensation.

In the normal course of business, the Company is required to make estimated tax payments throughout the year based on the expected tax liability for the full year. This results in a prepaid balance during the first half of the year, as the Company earns most of its profit in the second half of the year. As of September 28, 2024, the Company had a $7.6 million balance in prepaid income taxes, which is classified in prepaid expenses and other current assets in the unaudited interim condensed consolidated balance sheets.

The Organization for Economic Cooperation and Development (“OECD”) proposed model rules to ensure a minimal level of taxation (commonly referred to as Pillar II) and the European Union member states have agreed to implement Pillar II’s proposed global corporate minimum tax rate of 15%. Many countries are actively considering, have proposed or have enacted, changes to their tax laws based upon the Pillar II proposals, which could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. To mitigate the administrative burden for multinational enterprises in complying with the OECD Global Anti-Base Erosion rules during the initial years of implementation, the OECD developed the temporary “Transitional Country-by-Country Safe Harbor.” We considered the applicable tax law changes from Pillar II implementation in the relevant countries in which we operate, and there is no material impact to our tax provision for the thirteen and thirty-nine weeks ended September 28, 2024. We will continue to evaluate the impact of these tax law changes in future reporting periods.