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Note 11 - Income Taxes
 12 Months Ended
Jun. 30, 2021
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

11. Income Taxes

 

On March 27, 2020, the CARES Act was enacted to address the economic impact of the COVID-19 pandemic in the United States. Among other things, the CARES Act allows a five-year carryback period for tax losses generated in 2019 through 2021. The June 30, 2021 tax provision includes benefits of $0.2 million and $0.8 million from tax losses in the years ended June 30, 2019 and June 30, 2020, respectively, that the CARES Act allows to be carried back to the years ended June 30, 2014 and June 30, 2015, when the U.S. federal income tax rate was 35%.

 

U.S. tax law allows a one-hundred percent dividend received deduction for foreign dividends and the Company has begun to bring back cash from foreign subsidiaries.  However, the permanent reinvestment assertion must still be assessed and made regarding potential liabilities for foreign withholding taxes.  As of June 30, 2021, we maintained the assessment that previously undistributed earnings of certain foreign subsidiaries no longer meet the requirements for indefinite reinvestment under applicable accounting guidance.  Therefore, we recognized deferred tax liabilities of approximately $2.4 million that relate to withholding taxes on the current earnings of various foreign subsidiaries.  It is expected deferred tax liabilities will continue to be recorded on current earnings in future periods from these subsidiaries.  The Company maintains the permanent reinvestment assertion on earnings in certain foreign jurisdictions. It is not practicable to estimate the amount of tax that might be payable on the remaining undistributed earnings.

 

The components of income from continuing operations before income taxes are as follows (in thousands):

  

2021

  

2020

  

2019

 

U.S. Operations

 $4,997  $11,890  $6,794 

Non-U.S. Operations

  47,703   42,184   60,180 

Total

 $52,700  $54,074  $66,974 

 

 

The Company utilizes the asset and liability method of accounting for income taxes.  Deferred income taxes are determined based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities given the provisions of the enacted tax laws.  The components of the provision for income taxes on continuing operations (in thousands) were as shown below:

 

  

2021

  

2020

  

2019

 

Current:

            

Federal

 $(2,592) $(870) $648 

State

  307   70   190 

Non-U.S.

  15,606   13,963   21,288 

Total Current

 $13,321  $13,163  $22,126 

Deferred:

            

Federal

 $1,469  $2,743  $277 

State

  374   885   207 

Non-U.S.

  (1,007)  (3,731)  (3,922)

Total Deferred

  836   (103)  (3,438)

Total

 $14,157  $13,060  $18,688 

 

 

A reconciliation from the U.S. Federal income tax rate on continuing operations to the total tax provision is as follows:

 

  

2021

  

2020

  

2019

 

Provision at statutory tax rate

  21.0%  21.0%  21.0%

State taxes

  1.4%  1.1%  0.5%

Impact of foreign operations

  4.0%  0.7%  4.9%

Federal tax credits

  (1.0%)  (3.5%)  (1.5%)

Tax Reform

  0.0%  0.0%  (1.2%)

Cash repatriation

  4.6%  2.2%  3.2%

SubF/GILTI

  0.0%  1.4%  0.4%

Uncertain Tax Positions

  1.5%  (1.3%)  0.0%

Benefit from U.S. tax loss carryback to prior years

  (1.8%)  0%  0.0%

Tax expense on Enginetics disposal

  2.4%  0%  0.0%

Return to provision

  (3.2%)  1.0%  (0.1%)

Valuation allowance release

  (2.3%)  0%  0.0%

Other

  0.8%  1.7%  0.7%

Effective income tax provision

  26.9%  24.3%  27.9%

 

Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, size of the Company’s income or loss and any one-time activities occurring during the period.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2021 was impacted by the following items: (i) a tax provision of $5.1 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $1.0 million from our 2019 and 2020 tax losses that the CARES Act allows to be carried back to 2014 and 2015, when the U.S. federal income tax rate was 35%, (iii) a tax benefit of $0.8 million related to Federal R&D credits and Foreign Tax credits, (iv) a tax benefit of $1.7 million related to return to provision adjustments, and (v) tax expense of $1.2 million attributable to the divestiture of Enginetics Corporation during the year.

 

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2020 was impacted by the following items: (i) a tax benefit of $1.2 million related to the Federal R&D credit, (ii) a tax provision of $1.4 million due to the mix of income in various jurisdictions, (iii) a tax benefit of $0.7 million related to the release of uncertain tax provision reserves, and (iv) a tax provision of $0.8 million related to GILTI.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2019 was impacted by the following items: (i) a tax benefit related to the impact of the Sec. 965 toll tax of $0.8 million, (ii) a tax provision of $0.3 million related to the elimination of the performance based compensation exception for executive compensation under Sec. 162(m) of the Internal Revenue Code, and (iii) a tax provision related to expected foreign withholding taxes on cash repatriation of $2.1 million.

 

Significant components of the Company’s deferred income taxes are as follows (in thousands):

 

  

2021

  

2020

 

Deferred tax liabilities:

        

Depreciation and amortization

 $(28,997) $(34,422)

Withholding taxes

  (4,497)  (4,295)

Other

  (302)  - 

Operating lease right-of-use-asset

  (4,711)  (11,384)

Total deferred tax liability

 $(38,507) $(50,101)
         

Deferred tax assets:

        

Accrued compensation

 $2,610  $2,410 

Accrued expenses and reserves

  2,610   4,117 

Pension

  12,653   19,847 

Inventory

  769   588 

Lease liabilities

  4,783   11,446 

Other

  -   127 

Net operating loss and credit carry forwards

  16,127   22,676 

Total deferred tax asset

 $39,552  $61,211 
         

Less: Valuation allowance

  (12,191)  (15,172)

Net deferred tax asset (liability)

 $(11,146) $(4,062)

 

 

The Company estimates the degree to which deferred tax assets, including net operating loss and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction and provides a valuation allowance for tax assets and loss carry forwards that it believes will more likely than not go unrealized.  The valuation allowance at June 30, 2021 applies to federal capital loss, state loss, foreign loss, and state R&D credit carryforwards, which management has concluded that it is more likely than not that these tax benefits will not be realized.  The increase (decrease) in the valuation allowance from the prior year was due to the current year activity in those same federal, state and foreign jurisdictions.

 

In addition, the sale of the Enginetics Corporation in the fiscal year generated a capital loss for tax purposes.  As of June 30, 2021, the Company expects that it is more likely than not that this loss will not be realizable in future years.  As such, the valuation allowance increased by $1.8 million. In addition, the Company decreased the valuation allowance by $5.1 million due to a return to provision adjustment on the RSG Group capital loss carryforward.

 

As of June 30, 2021, the Company had gross state net operating loss ("NOL") and credit carry forwards of approximately $88.8 million and $3.2 million, respectively, which may be available to offset future state income tax liabilities and expire at various dates from 2021 through 2040. In addition, the Company had foreign NOL carry forwards of approximately $4.7 million, $3.7 million of which carry forward indefinitely and $1.0 million that carry forward for 10 years.

 

Under ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement.  Accordingly, we recorded an income tax provision in the consolidated statements of income of $0.4 million during the fiscal year ended June 30, 2021, for the shortfall of tax benefits related to equity compensation.

 

The total provision (benefit) for income taxes included in the consolidated financial statements was as follows (in thousands):

 

  

2021

  

2020

  

2019

 

Continuing operations

 $14,157  $13,060  $18,688 

Discontinued operations

  (550)  (2,613)  (2,453)

Total provision

 $13,607  $10,447  $16,235 

 

The tax benefit for discontinued operations relates mostly to the write-off of deferred tax liabilities from the sale of the RSG Group, and the sale of the assets of Master-Bilt.

 

The changes in the amount of gross unrecognized tax benefits during 2021, 2020 and 2019 were as follows (in thousands):

 

  

2021

  

2020

  

2019

 

Beginning Balance

 $9,286  $11,251  $3,003 

Additions based on tax positions related to the current year

  5   4   4 

Additions for tax positions of prior years

  121   -   8,281 

Reductions for tax positions of prior years

  -   (1,641)  (37)

Settlements

  -   (328)  - 

Ending Balance

 $9,412  $9,286  $11,251 

 

At June 30, 2021, we had $9.4 million of non-current liabilities for uncertain tax positions. We are not able to provide a reasonable estimate of the timing of future payments related to these obligations. The Company increased its uncertain tax position during the year due to Canadian withholding tax exposures.

 

If the unrecognized tax benefits in the table above were recognized in a future period, $8.6 million of the unrecognized tax benefit would impact the Company’s effective tax rate.

 

Within the next twelve months, the statute of limitations will close in various U.S., state and non-U.S. jurisdictions.  As a result, it is reasonably expected that net unrecognized tax benefits from these various jurisdictions would be recognized within the next twelve months.  The recognition of these tax benefits is expected to have an impact of $8.6 million to the Company's financial statements.  The Company does not reasonably expect any other significant changes in the next twelve months.  The following tax years, in the major tax jurisdictions noted, are open for assessment or refund:

 

Country

 

Years Ending June 30,

 

United States

 2018 to 2021 

Canada

 2017 to 2021 

Germany

 2018 to 2021 

Ireland

 2021 

Portugal

 2020 to 2021 

United Kingdom

 2017 to 2021 

 

The Company’s policy is to include interest expense and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations.  At June 30, 2021 and 2020, the company had $0.8 million and $0.1 million for accrued interest expense on unrecognized tax benefits.