Income Taxes

12 Months Ended

Jan. 31, 2021

Note 16—Income Taxes

The components of income (loss) before income taxes are as follows:


	January 31
	2021			2020			2019
(In thousands)
Domestic	$	(1,193	)	$	1,930		$	6,859
Foreign		3,372			(560	)		449

	$	2,179		$	1,370		$	7,308

The components of the provision/(benefit) for income taxes are as follows:


	January 31
	2021			2020			2019
(In thousands)
Current:

Federal	$	1,272		$	660		$	1,807
State		224			221			457
Foreign		420			368			952

		1,916			1,249			3,216

Deferred:
Federal	$	(910	)	$	(1,364	)	$	(843	)
State		(189	)		(282	)		(170	)
Foreign		78			8			(625	)

		(1,021	)		(1,638	)		(1,638	)

	$	895		$	(389	)	$	1,578

Total income tax provision/(benefit)

differs from the expected tax provision/(benefit) as a result of the following:


	January 31
	2021			2020			2019
(In thousands)
Income Tax Provision at Statutory Rate	$	458		$	288		$	1,534
Denmark Statutory Audit		341			—			—
Foreign Rate Deferential		197			315			558
Share Based Compensation		171			(145	)		(127	)
Canada Withholding Taxes		62			—			—
State Taxes, Net of Federal Tax Effect		28			(48	)		226
Global Intangible Low Taxed Incom e		14			107			—
Meals and Entertainment		11			31			56
U.S. Corporate Rate Change		—			—			52
Transition Tax on Repatriated Earnings		—			—			14
Return to Provision Adjustment		(2	)		(207	)		58
Change in Reserves Related to ASC 740 Liability		(10	)		(352	)		(34	)
Change in Valuation Allowance		(81	)		256			—
R&D Credits		(157	)		(209	)		(218	)
Foreign Derived Intangible Income		(150	)		(107	)		(53	)
Foreign Tax Credits		—			(344	)		(477	)
Other		13			26			(11	)

	$	895		$	(389	)	$	1,578

Our effective tax rate for 2021 was 41.1% compared to negative 28.4% in 2020 and 21.6% in 2019. The increase in the effective tax rate in 2021 from 2020 is primarily related to the change in mix of income between relevant jurisdictions in which

are

subject to income taxes. Specific items increasing the effective tax rate include foreign rate differential, Denmark statutory audit adjustments, stock-based compensation, and Canada withholding taxes. This increase was offset by the foreign derived intangible income (“FDII”) deduction, the release of a valuation allowance in China, and R&D tax credits expected to be utilized.

The decrease in the effective tax rate in 2020 from 2019 is primarily related to lower

pre-tax

income in 2020 compared to 2019.. Specific items decreasing the effective tax rate include FDII, the release of ASC 740 liabilities, R&D credit utilization, and return to provision adjustments. This decrease was offset by valuation

allowances recorded on unbenefited losses in China and on carryforward foreign tax credits expected to expire unused.

The components of deferred income tax expense arise from various temporary differences and relate to items included in the statement of income. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are as follows:


	January 31
	2021			2020
(In thousands)
Deferred Tax Assets:

Inventory	$	2,700		$	2,094
Honeywell Royalty Liability		2,590			2,583
State R&D Credits		1,546			1,496
Share-Based Compensation		600			582
Bad Debt		245			165
Warranty Reserve		176			205
Compensation Accrual		159			159
Net Operating Loss		154			443
ASU 842 Adjustment—Lease Liability		125			—
Unrecognized State Tax Benefits		101			116
Foreign Tax Credit		83			113
Deferred Service Contract Revenue		68			111
Other		308			295

		8,855			8,362
Deferred Tax Liabilities:
Accumulated Tax Depreciation in Excess of Book Depreciation		752			1,002
Intangibles		399			776
ASU 842 Adjustment – Lease Liability		119			—
Other		307			188

		1,577			1,966

Subtotal		7,278			6,396
Valuation Allowance		(1,721	)		(1,752	)

Net Deferred Tax Assets	$	5,557		$	4,644

The valuation allowance of $1.7 million at January 31, 2021 relate

to domestic research and development tax credit carryforwards and foreign tax credit carryforwards which are expected to expire unused. The valuation allowance of $1.8 million at January 31, 2020 included a valuation allowance on China net operating losses, which was released during 2021.

At January 31, 2021, we had net operating loss carryforwards of $0.4 million in China, which expire in 2022 through 2026. We have net operating loss carryforwards of $0.2 million in Germany, which can be carried forward indefinitely. We expect to utilize the net operating loss carryforwards in China and Germany before expiration.

At January 31, 2021, we had state research credit carryforwards of approximately $1.5 million which expire in 2021 through 2028. We maintain a full valuation allowance against these credits as we expect these credits to expire unused.

We believe that it is reasonably possible that some unrecognized tax benefits, accrued interest and penalties could decrease income tax expense in the next year due to either the review of previously filed tax returns or the expiration of certain statutes of limitation. The changes in the balances of unrecognized tax benefits, excluding interest and penalties are as

follows:


	2021			2020			2019
(In thousands)
Balance at February 1	$	362		$	618		$	665
Increases in prior period tax position s		59			—			—
Increases in current period tax positions		5			2			7
Reductions related to lapse of statutes of limitations		(42	)		(26	)		(54	)
Reductions related to settlement with tax authorities		—			(232	)		—

Balance at January 31	$	384		$	362		$	618

During fiscal 2021 and 2020, we released $50,000 and $114,000, respectively, of accrued interest and penalties relating to a change in various unrecognized tax positions. During fiscal 2019, we recognized $8,000 of expense related to a change in interest and penalties, which are included as a component of income tax expense in the accompanying statements of income for the period ended January 31, 2019. The Company has accrued potential interest and penalties of $0.3 million included in Income Taxes Payable in the consolidated balance sheet at the end of both January 31, 2021 and 2020.

The Company and its subsidiaries file income tax returns in U.S. federal jurisdictions, various state jurisdictions, and various foreign jurisdictions. The Company was previously under audit by the IRS for the tax years ended January 31, 2015, 2016, and 2017, but on June 6, 2019, we received formal communication regarding the close of the audit with no additional changes made by the IRS. Therefore, the reserves for federal uncertain tax positions relating to the years in question have been released. In fiscal 2020, we released $232,000 relating to the federal tax exposure for the years previously under audit and $74,000 of related interest (net of federal benefit) and penalties.

The Company was also notified of an income tax audit from the state of Rhode Island, but no significant items have been raised at this time other than information requests. No assessments have been made as of January 31, 2021.

U.S. income taxes have not been provided on $5.7 million of undistributed earnings of our foreign subsidiaries since it is our intention to permanently reinvest such earnings offshore. If the earnings were distributed in the form of dividends, the Company would not be subject to U.S. tax as a result of the Tax Act but could be subject to foreign income and withholding taxes. Determination of the amount of this unrecognized deferred income tax liability is not practical.

- 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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