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Note 11 - Income Taxes
 12 Months Ended
Jun. 30, 2023
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

11. Income Taxes

 

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

  

2023

  

2022

  

2021

 

U.S. Operations

 $52,091  $11,885  $4,997 

Non-U.S. Operations

  111,858   69,404   47,703 

Total

 $163,949  $81,289  $52,700 

 

 

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:

 

  

2023

  

2022

  

2021

 

Current:

            

Federal

 $7,207  $935  $(2,592)

State

  4,242   (651)  307 

Non-U.S.

  20,472   21,490   15,606 

Total Current

 $31,921  $21,774  $13,321 

Deferred:

            

Federal

 $(6,978) $486  $1,469 

State

  (489)  (892)  374 

Non-U.S.

  342   (1,561)  (1,007)

Total Deferred

  (7,125)  (1,967)  836 

Total

 $24,796  $19,807  $14,157 

 

 

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

 

  

2023

  

2022

  

2021

 

Provision at statutory tax rate

  21.0%  21.0%  21.0%

State taxes

  1.7%  (1.4%)  1.4%

Impact of foreign operations

  (2.6%)  5.3%  4.0%

Federal tax credits

  (8.7%)  (2.7%)  (1.0%)

Cash repatriation

  1.0%  1.1%  4.6%

SubF/GILTI

  6.9%  0.0%  0.0%

Uncertain Tax Positions

  (0.1)%  1.3%  1.5%

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

  0.0%  0.0%  (1.8%)

Tax expense on Enginetics disposal

  0.0%  0.0%  2.0%

Return to provision

  (1.3%)  (1.6%)  (3.2%)

Valuation allowance release

  (3.1%)  0.0%  (2.3%)

Tax expense on Procon Pumps disposal

  0.2%  0.0%  0.0%

Other

  0.1%  1.3%  0.8%

Effective income tax provision

  15.1%  24.4%  26.9%

 

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 income tax provision from continuing operations for the fiscal year ended June 30, 2023 was impacted by the following items: (i) a tax benefit of $4.3 million due to the mix of income in various jurisdictions, (ii) tax benefits of $14.3 million primarily related to foreign tax credits of $11.6 million, as well as Federal R&D tax credits of $2.7 million, (iii) a tax provision of $11.3 million related to the U.S. tax effects of international operations, and (iv) a tax benefit of $5.0 million relating to the partial release of the valuation allowance on capital loss carryforwards, which were utilized against the capital gain recognized on the divestiture of the Procon business.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2022 was impacted by the following items: (i) a tax provision of $4.3 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $2.2 million related to Federal R&D credit and Foreign Tax Credit, (iii) a tax benefit of $1.3 million related to return-to-accrual adjustments to true-up prior-period provision amounts, and (iv) a tax expense of $1.0 million related to uncertain tax position.

 

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.

 

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

 

  

2023

  

2022

 

Deferred tax liabilities:

        

Depreciation and amortization

 $(25,951) $(25,758)

Withholding taxes

  (4,773)  (4,245)

Other

  -   (420)

Operating lease right-of-use-asset

  (4,495)  (4,867)

Total deferred tax liability

 $(35,219) $(35,290)
         

Deferred tax assets:

        

Accrued compensation

 $3,633  $3,020 

Accrued expenses and reserves

  1,765   2,138 

Pension

  8,814   8,383 

Inventory

  942   1,023 

Lease liabilities

  4,671   4,985 

Section 174 Capitalization

  9,401   - 

Other

  950   - 

Net operating loss and credit carry forwards

  14,302   21,344 

Total deferred tax asset

 $44,478  $40,893 
         

Less: Valuation allowance

  (9,562)  (14,932)

Net deferred tax asset (liability)

 $(303) $(9,329)

 

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, 2022 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.

 

As of June 30, 2023, the Company had gross state net operating loss ("NOL") and credit carry forwards of approximately $34.9 million and $4.9 million, respectively, which may be available to offset future state income tax liabilities and expire at various dates from 2023 through 2043. In addition, the Company had foreign NOL carry forwards of approximately $3.2 million, all of which carry forward indefinitely.

 

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 statement of operations.  Accordingly, we recorded an income tax provision in the consolidated statement of operation of $0.1 million during the fiscal year ended June 30, 2023 for the shortfall of tax benefits related to equity compensation.

 

U.S. tax law allows a 100% 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, 2023, the Company maintained the assessment that previously undistributed earnings of certain foreign subsidiaries no longer meet the requirements for indefinite reinvestment under applicable accounting guidance.  Therefore, the Company recognized deferred tax liabilities of approximately $1.7 million that relate to withholding taxes on the current earnings of various foreign subsidiaries.  It is expected that 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 total provision (benefit) for income taxes included in the consolidated financial statements was as follows (in thousands):

 

  

2023

  

2022

  

2021

 

Continuing operations

 $24,796  $19,807  $14,157 

Discontinued operations

  (43)  (24)  (550)

Total provision (benefit)

 $24,753  $19,783  $13,607 

 

 

The changes in the amount of gross unrecognized tax benefits were as follows (in thousands):

 

  

2023

  

2022

  

2021

 

Beginning Balance

 $9,559  $9,412  $9,286 

Additions based on tax positions related to the current year

  -   762   5 

Additions for tax positions of prior years

  219   443   121 

Reductions for tax positions of prior years

  (208)  (1,058)  - 

Settlements

  (77)  -   - 

Ending Balance

 $9,493  $9,559  $9,412 

 

At June 30, 2023, we had $9.5 million of non-current liabilities, included in accrued pension and other non-current liabilities on the consolidated balance sheet 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 state R&D tax credit exposures. The Company decreased its uncertain tax position during the year due to the settlement of an assessment from the Canada Revenue Agency regarding Canadian withholding tax exposures and due to the reduction of federal R&D tax credit exposures.

 

If the unrecognized tax benefits in the table above were recognized in a future period, $9.5 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. The Company does not reasonably expect any significant changes relating to the net unrecognized tax benefits 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

 2020 to 2023 

Canada

 2019 to 2023 

Germany

 2020 to 2023 

Ireland

 2023 

Portugal

 2022 to 2023 

United Kingdom

 2019 to 2023 

 

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, 2023 and 2022, the company had $1.2 million and $1.1 million for accrued interest expense on unrecognized tax benefits.