Income Taxes

9 Months Ended

Oct. 02, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. Federal statutory rate, primarily due to research and development (“R&D”) tax credits. Our effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of R&D tax credits, valuation allowances against deferred tax assets, recognition or derecognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. Also, excess tax benefits and tax detriments related to our equity compensation recognized in the condensed consolidated income statement could result in fluctuations in our effective tax rate period-over-period depending on the volatility of our stock price, number of restricted or performance stock units that vests, and stock options exercised during the period. We recognize deferred tax assets and liabilities, using enacted tax rates, for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers.

We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce our valuation allowances against our deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period when that determination is made.

We recorded income tax expense of $1.2 million for the three months ended October 2, 2021 compared to $0.8 million for the three months ended September 26, 2020. The increase in income tax expense for the third quarter of 2021 compared to the third quarter of 2020 was primarily due to higher pre-tax income for the third quarter of 2021 compared to the third quarter of 2020. The increase in income tax expense was partially offset by higher income tax benefits recognized in the third quarter of 2021 related to the U.S. Federal research and development tax credit.

We recorded income tax expense of $4.1 million for the nine months ended October 2, 2021, compared to $3.4 million for the nine months ended September 26, 2020. The increase in income tax expense for the first nine months of 2021 compared to the first nine months of 2020 was primarily due to higher pre-tax income for the first nine months of 2021 compared to the first nine months of 2020. The increase in income tax expense was partially offset by higher income tax benefits related to the U.S. Federal research and development tax credit and higher discrete income tax benefits related to net tax windfalls from stock-based compensation.

On March 11, 2021, the U.S. enacted the American Rescue Plan Act of 2021 (“Rescue Plan”) aimed at mitigating the continuing effects of the COVID-19 pandemic. We considered the provisions of the Rescue Plan and determined they do not have a material impact on our income taxes.

Our total amount of unrecognized tax benefits was $4.5 million and $4.1 million as of October 2, 2021 and December 31, 2020, respectively. If recognized, $2.8 million would affect the effective tax rate. We record interest and penalty charges, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for

interest and penalty charges as of October 2, 2021 and December 31, 2020 were not significant. We do not expect the total amount of unrecognized tax benefits to increase or decrease by a material amount in the next twelve months.

We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 2016 and by state taxing authorities for tax years after 2015. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.