MIDDLEBY CorpMIDD

MIDDLEBY Corp Income Taxes Disclosure

10-KFiled Mar 1, 20235 min read
INCOME TAXES
Earnings before taxes is summarized as follows (in thousands):
 
 202220212020
Domestic$383,813 $453,357 $178,813 
Foreign180,602 166,147 89,244 
Total$564,415 $619,504 $268,057 
 
The provision for income taxes is summarized as follows (in thousands):
 
 202220212020
Federal$62,416 $84,689 $36,908 
State and local23,892 24,363 8,815 
Foreign41,538 21,960 15,040 
Total$127,846 $131,012 $60,763 
Current$134,488 $124,149 $44,342 
Deferred(6,642)6,863 16,421 
Total$127,846 $131,012 $60,763 
 
Reconciliation of the differences between income taxes computed at the federal statutory rate to the effective rate are as follows:
 202220212020
U.S. federal statutory tax rate21.0 %21.0 %21.0 %
State taxes, net of federal benefit3.3 3.1 3.2 
Permanent differences0.9 0.5 (0.4)
Foreign income tax rate at rates other than U.S. statutory0.2 -2.20.2 0.5 
Deferred tax changes— (2.2)(0.7)
Change in valuation allowances— 0.4 (0.1)
Tax on unremitted earnings0.3 0.4 1.2 
Federal Refund— (0.7)— 
Internal restructuring(2.3)— — 
Other(0.7)(1.6)(2.0)
Consolidated effective tax22.7 %21.1 %22.7 %
(1) Net of changes in related tax attributes.

A tax provision of $127.8 million, at an effective rate of 22.7%, was recorded for fiscal 2022 as compared to $131.0 million at an effective rate of 21.1%, in fiscal 2021. The fiscal 2022 tax provision includes a deferred tax benefit of approximately $13 million associated with legal entity restructuring the company undertook to integrate and simplify the company’s business operations. The fiscal 2022 tax provision also reflects higher non-deductible stock compensation expense, where the prior year included favorable tax adjustments for deferred tax rate changes, tax refunds and adjustments for the finalization of 2020 tax returns. The effective rates in 2022 and 2021 are higher than the federal tax rate of 21.0% primarily due to state taxes and foreign tax rate differentials.
On August 16, 2022, the Inflation Reduction Act ("IRA") was enacted into law. The IRA enacted a 15% corporate minimum tax effective in 2023, a 1% tax on share repurchases after December 31, 2022, and created and extended certain tax-related energy incentives. We currently do not expect the tax-related provisions of the IRA to have a material impact on our financial results.
At December 31, 2022 and January 1, 2022, the company had recorded the following deferred tax assets and liabilities (in thousands):
 
 20222021
Deferred tax assets:  
Compensation related$26,273 $21,543 
Pension and post-retirement benefits1,640 49,072 
Inventory reserves26,134 14,453 
Accrued liabilities and reserves7,992 17,088 
Warranty reserves17,593 19,286 
Operating lease liability19,890 18,643 
Basis difference on affiliates14,473 — 
Interest rate swaps— 4,573 
Convertible debt39,388 37,034 
Net operating loss carryforwards12,964 17,083 
Other14,879 12,695 
Gross deferred tax assets181,226 211,470 
Valuation allowance(11,599)(10,222)
Deferred tax assets$169,627 $201,248 
Deferred tax liabilities:  
Intangible assets$(287,433)$(273,974)
Depreciable assets(32,267)(26,996)
Basis difference on affiliates— (18,795)
Operating lease right-of-use assets(19,240)(18,029)
Interest rate swaps(16,836)— 
Other(27,317)(17,195)
Deferred tax liabilities$(383,093)$(354,989)
Net deferred tax assets (liabilities)$(213,466)$(153,741)
Long-term deferred asset6,738 33,194 
Long-term deferred liability(220,204)(186,935)
Net deferred tax assets (liabilities)$(213,466)$(153,741)
 
The company has recorded tax reserves on undistributed foreign earnings not permanently reinvested of $10.0 million and $9.7 million at December 31, 2022 and January 1, 2022, respectively. No further provisions were made for income taxes that may result from future remittances of undistributed earnings of foreign subsidiaries that are determined to be permanently reinvested, which were $637.0 million on December 31, 2022. Determination of the total amount of unrecognized deferred income taxes on undistributed earnings net of foreign subsidiaries is not practicable.
 
The company has a deferred tax asset on net operating loss carryforwards totaling $13.0 million as of December 31, 2022. These net operating losses are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States federal loss carryforwards total $10.3 million of which $3.8 million will expire through 2036 and $6.5 million have no expiration date. State loss carryforwards total $22.6 million and expire through 2038 and international loss carryforwards total $44.4 million and expire through 2038; however, some have no expiration date. Of these carryforwards, $29.8 million are subject to full valuation allowance.
As of December 31, 2022, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $33.6 million (of which $33.6 million would impact the effective tax rate if recognized) plus approximately $8.0 million of accrued interest and $6.9 million of penalties. The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. Interest recognized in fiscal years 2022, 2021 and 2020 was $0.6 million, $0.9 million and $0.8 million, respectively. Penalties recognized in fiscal years 2022, 2021 and 2020 was $0.2 million, $(1.0) million and $(0.2) million, respectively.
    
The following table summarizes the activity related to the unrecognized tax benefits for the fiscal years ended January 2, 2021, January 1, 2022 and December 31, 2022 (in thousands):
  
Balance at January 2, 2021$30,329 
  
Increases to current year tax positions1,760 
Increase to prior year tax positions6,796 
Decrease to prior year tax positions(576)
Settlements(1,180)
Lapse of statute of limitations(920)
  
Balance at January 1, 2022$36,209 
  
Increases to current year tax positions2,195 
Increase to prior year tax positions534 
Decrease to prior year tax positions(1,709)
Settlements(1,974)
Lapse of statute of limitations(1,607)
Balance as of December 31, 2022$33,648 

It is reasonably possible that the amounts of unrecognized tax benefits associated with state, federal and foreign tax positions may decrease over the next twelve months due to expiration of a statute or completion of an audit. The company believes that it is reasonably possible that $3.2 million of its remaining unrecognized tax benefits may be recognized by the end of 2022 as a result of settlements with taxing authorities or lapses of statutes of limitations.
In the normal course of business, income tax authorities in various income tax jurisdictions both in the United States and internationally conduct routine audits of our income tax returns filed in prior years. These audits are generally designed to determine if individual income tax authorities are in agreement with our interpretations of complex tax regulations regarding the allocation of income to the various income tax jurisdictions. Income tax years are open from 2017 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2016 through the current year. Although the company believes its tax returns are correct, the final determination of tax examinations may be different than what was reported on the tax returns. In the opinion of management, adequate tax provisions have been made for the years subject to examination.
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Historical Timeline

Fiscal YearFiled
2022Mar 1, 2023Showing above
2021Mar 3, 2021
2019Feb 26, 2020
2018Feb 27, 2019
2017Feb 28, 2018
2016Mar 1, 2017

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

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