Note 10 - Income Taxes

3 Months Ended

Apr. 30, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

10. INCOME TAXES

In determining the provision for income taxes for the first three months of fiscal 2022, the Company calculated income tax expense based on the estimated annual tax rate for the year, compared to the first three months of the prior year where the Company calculated income tax expense based on actual quarterly results. The annual effective tax rate was adjusted for discrete items recorded during the period. The estimated annual tax rate for the year was used in the current period because the Company is forecasting profits for the full fiscal year 2022.  Actual quarterly results were used in fiscal 2021 since they provided a more reliable estimate of quarterly tax expense since the Company was expecting near breakeven results.  

The Company recorded income tax (benefit) expense of $(1.4) million and $1.0 million for the first three months of fiscal 2022 and 2021, respectively. The Company’s estimated effective income tax rate was (302%) and 170% for the first quarter of fiscal 2022 and 2021, respectively. The effective tax rate will generally differ from the U.S. federal statutory tax rate of 21%, due to state taxes, permanent items including amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy, and tax credits. The reduction in the effective tax rate for the three months ended April 30, 2021 compared to the three months ended April 30, 2020 was primarily due to a planned intercompany sale of intellectual property and the release of $2.0 million in the Company’s valuation allowance in the three months ended April 30, 2021 as a result of the acquisition of FTZ Corporation.

At April 30, 2021 and  January 31, 2021, the gross amount of unrecognized tax benefits was $1.3 million for both periods, including interest and penalties. The unrecognized tax benefits for the first three months of fiscal 2021 and fiscal 2020 were each reduced by $1.0 million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU 2013-11. The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within twelve months of the reporting date.

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of the first quarter of fiscal 2022 and 2021, the Company accrued approximately $0.1 million of interest and penalty expense relating to unrecognized tax benefits.

The Company reviews its net deferred tax assets by entity at each balance sheet date to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. During the first three months of fiscal year 2022 management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed. Management assessed the transfer pricing methodology, the historical profits, the economics of the country in which the entity operates, the impact of COVID-19, the current and future customer base, the type and character of the deferred tax asset and any other current and relevant information by entity to draw its conclusion.

A valuation allowance has been established for select foreign jurisdictions along with U.S. federal and state net deferred tax assets. The following table discloses the Company’s valuation allowance by entity (in millions): 

Jurisdiction	April 30, 2021		January 31, 2021
U.S. federal and state	$	27.1	$	30.3
Ireland		12.1		12.0
Brazil		6.1		6.1
South Africa		0.2		0.2
Total valuation allowance	$	45.5	$	48.6

At April 30, 2021 and  January 31, 2021, the worldwide valuation allowance attributable to deferred tax assets was $45.5 million and $48.6 million, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

● India for fiscal years ended March 31, 2010, 2013 and 2018

● France for fiscal years ended January 31, 2018, 2019 and 2020