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Income Taxes | 12 Months Ended
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Feb. 29, 2024
Income Tax Disclosure [Abstract] |
Income Taxes | Note 18 - Income Taxes We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results and transfer pricing and tax regulations in the related jurisdictions. The Organisation for Economic Co-operation and Development has introduced a framework to implement a global minimum corporate income tax of 15%, referred to as “Pillar Two.” Many aspects of Pillar Two are effective for tax years beginning after January 1, 2024, with certain remaining aspects to be effective for tax years beginning January 1, 2025 or later. Certain countries have adopted legislation to implement Pillar Two, and other countries are in the process of introducing legislation to implement Pillar Two. Based on the countries in which we operate and those that have adopted legislation that is already effective (or with effective dates during our fiscal 2025), we currently do not expect the global minimum tax rules will have a material impact to our global effective tax rate in fiscal 2025. We will continue to assess the impact of Pillar Two and monitor developments in legislation, regulation, and interpretive guidance. In response to Pillar Two, on December 27, 2023, Bermuda enacted a corporate income tax effective for fiscal years beginning on or after January 1, 2025. The 15% corporate income tax regime applies to Bermuda businesses that are part of multinational enterprise groups with annual revenue of €750 million or more and is effective for us in fiscal 2026. The Bermuda corporate income tax allows for a beginning net operating loss balance related to the five years preceding the effective date. Accordingly, during fiscal 2024, we recorded a deferred tax asset of $9.3 million for the Bermuda net operating losses generated from fiscal 2021 through 2024 with an offsetting valuation allowance of $9.3 million. Although we currently do not expect the tax regime to have a material impact to our consolidated financial statements, we will continue to monitor and evaluate impact as further regulatory guidance becomes available. On August 16, 2022, the Inflation Reduction Act (the “Act”) was enacted and signed into law. The Act is a budget reconciliation package that includes significant law changes relating to tax, climate change, energy, and health care. The tax provisions include, among other items, a corporate alternative minimum tax of 15%, an excise tax of 1% on corporate stock buy-backs, energy-related tax credits, and additional IRS funding. We do not expect these tax provisions to have a material impact to our consolidated financial statements. On March 11, 2021, the American Rescue Plan Act (the “ARP”) was enacted and signed into law. The ARP is an economic stimulus package in response to the COVID-19 outbreak, which contains tax provisions that did not have a material impact to our consolidated financial statements. The Company continues to elect to account for U.S. tax on global intangible low-taxed income (“GILTI”) as a period cost and therefore has not recorded deferred taxes related to GILTI on its foreign subsidiaries. While U.S. federal tax expense has been recognized on the undistributed earnings of our U.S. owned foreign subsidiaries, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. No deferred taxes have been provided on the undistributed earnings of our foreign-owned subsidiaries as these earnings will continue to be permanently reinvested. Due to the number of legal entities and jurisdictions involved, our legal entity structure, and the tax laws in the relevant jurisdictions, we believe it is not practicable to estimate the amount of additional taxes which may be payable upon distribution of these undistributed earnings. Our components of income before income tax expense are as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2024 |  | 2023 |  | 2022
U.S. | $ | 68,957 |  |  | $ | 41,738 |  |  | $ | 63,653 |
Non-U.S. | 140,085 |  |  | 129,551 |  |  | 196,313 |
Total | $ | 209,042 |  |  | $ | 171,289 |  |  | $ | 259,966 |
Our components of income tax expense (benefit) are as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2024 |  | 2023 |  | 2022
Current: |  |  |  |  |
U.S. federal | $ | 9,259 |  |  | $ | 13,472 |  |  | $ | 20,907 |
State | 2,704 |  |  | 3,417 |  |  | 6,283 |
Non-U.S. | 15,275 |  |  | 13,369 |  |  | 17,883 |
| 27,238 |  |  | 30,258 |  |  | 45,073 |
Deferred: |  |  |  |  |
U.S. federal | 9,449 |  |  | (3,337) |  |  | (5,269) |
State | 3,252 |  |  | (1,815) |  |  | (1,766) |
Non-U.S. | 509 |  |  | 2,910 |  |  | (1,836) |
| 13,210 |  |  | (2,242) |  |  | (8,871) |
Total | $ | 40,448 |  |  | $ | 28,016 |  |  | $ | 36,202 |
Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. An income tax rate reconciliation of these differences are as follows:
| Fiscal Years Ended Last Day of February,
| 2024 |  | 2023 |  | 2022
Effective income tax rate at the U.S. statutory rate | 21.0 | % |  | 21.0 | % |  | 21.0 | %
Impact of U.S. state income taxes | 2.2 | % |  | 0.3 | % |  | 1.4 | %
Effect of statutory tax rate in Macau | (4.0) | % |  | (5.4) | % |  | 0.1 | %
Effect of statutory tax rate in Barbados | (2.4) | % |  | (3.3) | % |  | (11.0) | %
Effect of statutory tax rate in Switzerland | (1.8) | % |  | (2.0) | % |  | (1.2) | %
Effect of income from other non-U.S. operations subject to varying rates | 2.3 | % |  | 2.1 | % |  | 1.2 | %
Effect of foreign exchange fluctuations | (0.3) | % |  | 2.5 | % |  | 0.5 | %
Effect of stock compensation | 1.2 | % |  | — | % |  | — | %
Effect of uncertain tax positions | 0.4 | % |  | 0.2 | % |  | 0.6 | %
Effect of non-deductible executive compensation | 1.9 | % |  | 1.2 | % |  | 1.1 | %
Effect of changes in valuation allowance | 3.9 | % |  | (0.5) | % |  | 0.5 | %
Effect of changes in tax rates | (4.4) | % |  | (0.4) | % |  | (0.1) | %
Other items | (0.7) | % |  | 0.7 | % |  | (0.2) | %
Effective income tax rate | 19.3 | % |  | 16.4 | % |  | 13.9 | %
Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2024 |  | 2023
Deferred tax assets, gross: |  |  |
Operating loss carryforwards and tax credits | $ | 19,345 |  |  | $ | 10,882 |
Accounts receivable | 6,877 |  |  | 9,674 |
Inventories | 26,498 |  |  | 20,541 |
Operating lease liabilities | 10,329 |  |  | 11,658 |
Research and development expenditures | 2,847 |  |  | 5,722 |
Interest limitation | 7,561 |  |  | 1,932 |
Accrued expenses and other | 5,953 |  |  | 4,676 |
Total gross deferred tax assets | 79,410 |  |  | 65,085 |
Valuation allowance | (19,044) |  |  | (10,706) |
Deferred tax liabilities: |  |  |
Operating lease assets | (8,119) |  |  | (8,997) |
Depreciation | (28,433) |  |  | (9,397) |
Amortization | (61,405) |  |  | (61,252) |
Total deferred tax liabilities, net | $ | (37,591) |  |  | $ | (25,267) |
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not be recoverable. In fiscal 2024, the $8.3 million net increase in our valuation allowance was principally due to net operating loss carryforwards recorded in fiscal 2024 as a result of the Bermuda corporate income tax enactment that are not expected to be recoverable. The composition of our operating loss carryforwards and tax credits at the end of fiscal 2024 is as follows:
|  | February 29, 2024
(in thousands) | Tax Year Expiration Date Range | Deferred Tax Assets |  | Operating Loss Carryforward
U.S. state operating loss carryforwards | 2032-2038 | $ | 414 |  |  | $ | 9,489 |
Non-U.S. operating loss carryforwards with definite carryover periods | 2024-2041 | 4,210 |  |  | 16,874 |
Non-U.S. operating loss carryforwards with indefinite carryover periods | Indefinite | 14,721 |  |  | 79,224 |
Subtotal |  | 19,345 |  |  | $ | 105,587 |
Less portion of valuation allowance established for operating loss carryforwards |  | (18,931) |  |  |
Total operating loss carryforwards, net of valuation allowance |  | $ | 414 |  |  |
Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced. During fiscal 2024 and 2023, changes in the total amount of unrecognized tax benefits (excluding interest and penalties) were as follows:
| Fiscal Years Ended Last Day of February,
(in thousands) | 2024 |  | 2023
Total unrecognized tax benefits, beginning balance | $ | 6,018 |  |  | $ | 5,623 |
Tax positions taken during the current period | 806 |  |  | 644 |
Changes in tax positions taken during a prior period | — |  |  | (249) |
Total unrecognized tax benefits, ending balance | 6,824 |  |  | 6,018 |
Less current unrecognized tax benefits | — |  |  | — |
Non-current unrecognized tax benefits | $ | 6,824 |  |  | $ | 6,018 |
If we are able to sustain our positions with the relevant taxing authorities, approximately $6.8 million (excluding interest and penalties) of uncertain tax position liabilities as of February 29, 2024 would favorably impact our effective tax rate in future periods. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities. We classify interest and penalties on uncertain tax positions as income tax expense. At the end of fiscal 2024 and 2023, the liability for tax-related interest and penalties associated with unrecognized tax benefits was $3.2 million and $3.1 million, respectively. Additionally, during fiscal 2024 and 2023, we recognized a de minimus amount of tax expense and tax benefits of $0.1 million, respectively, from tax-related interest and penalties in the consolidated statements of income. We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. As of February 29, 2024, tax years under examination or still subject to examination by material tax jurisdictions are as follows:
Jurisdiction |  | Tax Years Under Examination |  | Open Tax Years
Barbados |  | - None - |  | 2019 | — | 2024
China |  | 2009-2018 |  | 2009 | — | 2024
Germany |  | 2014-2021 |  | 2014 | — | 2024
Hong Kong |  | 2014-2018 |  | 2014 | — | 2024
Macao |  | - None - |  | 2021 | — | 2024
Switzerland |  | - None - |  | 2017 | — | 2024
United Kingdom |  | - None - |  | 2022 | — | 2024
U.S. |  | 2021 |  | 2020 | — | 2024

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