XML 28 R15.htm IDEA: XBRL DOCUMENT

INCOME TAXES

12 Months Ended

Oct. 31, 2021

7. INCOME TAXES

We utilize the asset and liability method of accounting for income taxes. Under this method, the provision (benefit) for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, included tax provisions that we applied relating to refundable payroll tax credits, the deferral of employer’s social security payments, and modifications to net operating loss carryback provisions. After we filed the net operating loss carryback claims during the fourth quarter of fiscal 2021, we included the $5.4 million of tax refunds in current assets. On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”), which includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021, was signed into law and provided further COVID-19 economic relief with an expansion of the employee retention credit. As a result, we recorded operating income of $2.9 million related to the employee retention credit during fiscal 2021.

In the fiscal years set forth below, the provision (benefit) for income taxes consisted of the following (in thousands):


	Year Ended October 31,
	2021		2020		2019
Current:
U.S. taxes	$	1,763	$	(4,932)	$	1,854
Foreign taxes		1,706		923		3,715
		3,469		(4,009)		5,569
Deferred:
U.S. taxes		66		(256)		(31)
Foreign taxes		(178)		(291)		291
		(112)		(547)		260
	$	3,357	$	(4,556)	$	5,829

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


	Year Ended October 31,
	2021		2020		2019
Income (loss) before income taxes:
Domestic	$	4,340	$	(11,681)	$	9,793
Foreign		5,781		878		13,531
	$	10,121	$	(10,803)	$	23,324

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


	Year Ended October 31,
	2021				2020			2019

U.S. statutory rate		21	%			21	%		21	%
Effect of tax rate of international jurisdictions different than U.S. statutory rates		4	%			(2)	%		3	%
Valuation allowance		—	%			—	%		1	%
State taxes		1	%			2	%		1	%
Tax credits		—	%			1	%		(2)	%
Transition tax		—	%			—	%		(1)	%
US tax on distributed and undistributed earnings		—	%			—	%		3	%
US benefit of foreign intangible income		(1)	%			—	%		(3)	%
Impact of CARES act		5	%			22	%		—	%
Other		3	%	¹		(2)	%		2	%
Effective tax rate		33	%			42	%		25	%

¹ Primarily due to discrete items for unearned stock awards

The Tax Reform Act enacted on December 22, 2017, 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. As of October 31, 2021, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations. Accordingly, we did not accrue for any withholding taxes on the undistributed earnings of our foreign subsidiaries, consistent with the position adopted on 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, 2021, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.7 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for tax credits of $0.8 million. We established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2021, and 2020, the balance of this valuation allowance was $1.9 million and $2.2 million, respectively.

Significant components of our deferred tax assets and liabilities at October 31, 2021 and 2020 are as follows (in thousands):


	October 31,
	2021		2020
Deferred Tax Assets:
Accrued inventory reserves	$	973	$	1,241
Accrued warranty expenses		308		248
Compensation related expenses		2,444		1,849
Net derivative gain		49		—
Unrealized exchange gain		—		14
Other accrued expenses		282		226
Net operating loss carryforwards		1,705		1,957
Other credit carryforwards		839		887
Operating lease liabilities		2,570		2,736
Goodwill and intangibles		967		1,019
Other		215		183
		10,352		10,360
Less: Valuation allowance – net operating loss and other credit carryforwards		(1,871)		(2,164)
Deferred tax assets		8,481		8,196

Deferred Tax Liabilities:
Net derivative loss		—		(305)
Unrealized exchange loss		(15)		—
Property and equipment and capitalized software development costs		(2,533)		(2,563)
Operating lease - right of use assets		(2,495)		(2,666)
Other		(352)		(314)
Net deferred tax assets	$	3,086	$	2,348

As of October 31, 2021, we had net operating loss carryforwards for international and U.S. income tax purposes of $6.3 million, of which $3.9 million will expire within 5 years beginning in fiscal 2022 and $0.4 million are state net operating losses which will expire between 5 and 20 years. The remaining $2.0 million in net operating losses will be carried forward indefinitely based on current international tax laws. We also had tax credits of $0.8 million which will expire between years 2022 and 2031.

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):


	2021		2020		2019
Balance, beginning of year	$	168	$	193	$	180
Additions based on tax positions related to the current year		74		9		36
Additions (reductions) related to prior year tax positions		—		(2)		—
Reductions due to statute expiration		(75)		(32)		(23)
Other		—		—		—
Balance, end of year	$	167	$	168	$	193

The entire balance of the unrecognized tax benefits and related interest on October 31, 2021, 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, 2021, the amount of interest accrued, reported in other liabilities, was approximately $31,000 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 2022 and August 2025.

We file U.S. federal and state income tax returns, as well as tax returns in applicable foreign jurisdictions. Currently, our subsidiary in Taiwan is under tax audit for fiscal year 2018.

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


United States federal		Fiscal 2014 through the current period
Germany¹		Fiscal 2017 through the current period
Taiwan		Fiscal 2016 through the current period
United Kingdom		Fiscal 2015 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.

+ References + Details