Note 10 - Income Taxes

6 Months Ended

Jul. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

10. INCOME TAXES

In determining the provision for income taxes for the first six months of fiscal 2022, the Company calculated income tax expense based on the estimated annual effective tax rate for the year for all jurisdictions except the U.S. We calculated tax expense for the U.S. based on actual year-to-date tax expense since this yielded a more accurate representation of tax expense through the second quarter of fiscal 2022. In the prior year, the Company calculated income tax expense based on actual quarterly results. The annual effective tax rate is adjusted for discrete items recorded during the period. Actual results were used in fiscal 2021 since the Company was expecting near breakeven results and actuals provided a more reliable estimate of the quarterly tax expense.  

The Company recorded income tax expense of $1.0 million and $0.4 million in the second quarter of fiscal 2022 and 2021, respectively. The Company’s effective tax rate was (18%) during the second quarter of fiscal 2022 compared to 88% for the same period in the prior year. The change in the effective tax rate was primarily due to the change in method of calculating tax expense, a planned intercompany sale of intellectual property and jurisdictional mix.

The Company recorded income tax (benefit) expense of $(0.4) million and $1.4 million for the first six months of fiscal 2022 and 2021, respectively. The Company’s effective tax rate was 8% during the first six months of fiscal 2022 compared to 132% for the same period in the prior year. The change in the effective tax rate for the six months ending July 31, 2021, compared to the six months ending July 31, 2020, was primarily due to the change in method of calculating tax expense, a planned intercompany sale of intellectual property and the release of $2.0 million of the Company’s valuation allowance as an indirect result of the acquisition of FTZ Corp.

At July 31, 2021 and  January 31, 2021, the gross amount of unrecognized tax benefits was $1.4 million and $1.3 million respectively, including interest and penalties. The unrecognized tax benefits for the first six months of fiscal 2022 and fiscal 2021 were reduced by $1 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 July 31, 2021 and 2020, 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 six 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 (including the impact of COVID-19) in which the entity operates, 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	July 31, 2021		January 31, 2021
U.S. federal and state	$	29.7	$	30.3
Ireland		12.3		12.0
Brazil		6.1		6.1
South Africa		0.2		0.2
Total valuation allowance	$	48.3	$	48.6

At July 31, 2021 and  January 31, 2021, the worldwide valuation allowance attributable to deferred tax assets was $48.3 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, 2018 and 2020

● Indonesia for fiscal years ended January 31, 2019

During the fiscal year 2022, the Company closed the following audits with no adjustment:

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