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INCOME TAXES

12 Months Ended

Oct. 31, 2020

7. INCOME TAXES

We account for income taxes using the asset and liability method. Under this method, the (benefit) provision for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year. On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to COVID-19 pandemic. The CARES Act, among other things, allows net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes, permits net operating loss carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before January 1, 2021. Any net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, are created in years that have a 21.0% federal income tax rate. If these net operating losses are carried back to years prior to December 31, 2017, the resulting refund would be in years with a 34.0% federal income tax rate. We are planning to carry back our taxable loss in the U.S. for fiscal 2020 under the provisions of the CARES Act and has recorded a tax benefit in the current year at 34%.

The 2019 rate and 2018 rate reflect several effects associated with the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”), which was enacted in December 2017. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, implemented a modified territorial tax system from a global system by adding provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign-derived Intangible Income (”FDII”) among other provisions. These provisions under the Tax Reform Act became effective for our fiscal 2019. The Tax Reform Act also imposed a one-time transition tax which was

recorded in the fiscal 2018, on deemed repatriation of historical earnings of foreign subsidiaries.

The components of income (loss) before taxes are (in thousands):


	Year Ended October 31,
	2020		2019		2018
Income (loss) before income taxes:
Domestic	$	(11,681)	$	9,793	$	14,101
Foreign		878		13,531		18,395
	$	(10,803)	$	23,324	$	32,496

The components of income tax provision (benefit) are (in thousands):


	Year Ended October 31,
	2020		2019		2018
Current:
U.S. taxes	$	(4,932)	$	1,854	$	6,333
Foreign taxes		923		3,715		5,203
		(4,009)		5,569		11,536
Deferred:
U.S. taxes		(256)		(31)		(326)
Foreign taxes		(291)		291		(204)
		(547)		260		(530)
	$	(4,556)	$	5,829	$	11,006

A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as follows:


	Year Ended October 31,
	2020			2019			2018

U.S. statutory rate		21	%		21	%		23	%
Effect of tax rate of international jurisdictions different than U.S. statutory rates		3	%		4	%		2	%
Valuation allowance		0	%		1	%		0	%
State taxes		2	%		1	%		0	%
Tax credits		1	%		(2)	%		(1)	%
Effect of tax rate changes		0	%		0	%		4	%
Transition tax		0	%		(1)	%		7	%
US tax on distributed and undistributed earnings		0	%		3	%		0	%
US benefit of foreign intangible income		0	%		(3)	%		0	%
Impact of CARES act		16	%		0	%		0	%
Other		(1)	%		1	%		(1)	%
Effective tax rate		42	%		25	%		34	%

The Tax Reform Act also made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S federal income tax. On October 31, 2020, undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested or otherwise retained for continuing operations. Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries beginning January 1, 2018.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances

are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements.

As of October 31, 2020, we had deferred tax assets established for accumulated net operating loss carryforwards of $2.0 million, primarily related to certain states in the U.S. and foreign jurisdictions. We also had deferred tax assets for tax credits of $0.9 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2020 and 2019, the balance of this valuation allowance was $2.2 million for each fiscal year.

Significant components of our deferred tax assets and liabilities at October 31, 2020 and 2019 were as follows (in thousands):


	October 31,
	2020		2019
Deferred Tax Assets:
Accrued inventory reserves	$	1,241	$	1,224
Accrued warranty expenses		248		363
Compensation related expenses		1,849		2,723
Unrealized exchange gain/loss		14		143
Other accrued expenses		226		170
Net operating loss carryforwards		1,957		1,380
Other credit carryforwards		887		766
Operating lease liabilities		2,736		—
Goodwill and intangibles		1,019		99
Other		183		194
		10,360		7,062
Less: Valuation allowance – net operating loss and other credit carryforwards		(2,164)		(2,227)
Deferred tax assets		8,196		4,835

Deferred Tax Liabilities:
Net derivative instruments		(305)		(313)
Property and equipment and capitalized software development costs		(2,563)		(2,632)
Operating lease - right of use assets		(2,666)		—
Other		(314)		(204)
Net deferred tax assets	$	2,348	$	1,686

As of October 31, 2020, we had net operating loss carryforwards for international and U.S. income tax purposes of $6.8 million, of which $5.1 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2021 and $1.7 million will expire between 5 and 20 years. We also had tax credits of $0.9 million that will expire between years 2021 and 2030.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):


	2020		2019		2018
Balance, beginning of year	$	193	$	180	$	1,101
Additions based on tax positions related to the current year		9		36		37
Additions (reductions) related to prior year tax positions		(2)		—		(945)
Reductions due to statute expiration		(32)		(23)		(18)
Other		—		—		5
Balance, end of year	$	168	$	193	$	180

The entire balance of the unrecognized tax benefits and related interest at October 31, 2020, if recognized, could affect the effective tax rate in future periods.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision. As of October 31, 2020, the amount of interest accrued, reported in other liabilities, was approximately $36,000 which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between August 2021 and August 2024.

We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions. Currently, our subsidiary in France is under tax audit for fiscal years 2018 and 2019.

A summary of open tax years by major jurisdiction is presented below:


United States federal		Fiscal 2017 through the current period
Germany¹		Fiscal 2018 through the current period
Taiwan		Fiscal 2018 through the current period

¹	Includes federal as well as state, provincial or similar local jurisdictions, as applicable.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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