INCOME TAXES

12 Months Ended

Dec. 31, 2021

INCOME TAXES

INCOME TAXES

9. INCOME TAXES

The provision for income taxes is based on income before income taxes as follows (in thousands):

	For the year ended
	December 31,		December 31,		December 31,
	2021		2020		2019
Domestic	$	10,642	$	8,478	$	17,188
Foreign		12,471		10,298		6,653
Income before income taxes	$	23,113	$	18,776	$	23,841

Components of the total income tax (benefit) provision are as follows (in thousands):

	For the year ended
	December 31,		December 31,		December 31,
	2021		2020		2019
Current provision
Domestic	$	1,866	$	2,167	$	4,313
Foreign		3,288		3,485		2,618
Total current provision		5,154		5,652		6,931
Deferred (benefit) provision
Domestic		649		288		199
Foreign		(6,784)		(807)		(311)
Total deferred (benefit) provision		(6,135)		(519)		(112)
Income tax (benefit) provision	$	(981)	$	5,133	$	6,819

The (benefit) provision for income taxes differs from the amount determined by applying the federal statutory rate as follows:

	For the year ended
	December 31,		December 31,		December 31,
	2021		2020		2019
Tax provision, computed at statutory rate	21.0	%	21.0	%	21.0	%
State tax, net of federal impact	2.2	%	4.2	%	4.5	%
Change in valuation allowance	7.2	%	0.0	%	0.3	%
Effect of foreign tax rate differences	3.9	%	4.3	%	1.5	%
Permanent items, other	0.2	%	(0.2)	%	1.4	%
Section 162(m) compensation	3.0	%	2.2	%	1.1	%
R&D tax credits	(2.8)	%	(3.6)	%	(2.5)	%
Effect of Tax Cuts and Jobs Act	1.2	%	(1.3)	%	(0.4)	%
Subpart F income	(1.0)	%	1.3	%	0.0	%
Tax examinations	0.0	%	0.0	%	1.8	%
Investment tax credits	(5.6)	%	0.0	%	0.0	%
Net operating loss carryforwards	(37.2)	%	0.0	%	0.0	%
Unrecognized tax benefits	4.9	%	0.0	%	0.0	%
Other	(1.2)	%	(0.6)	%	(0.1)	%
Income tax (benefit) provision	(4.2)	%	27.3	%	28.6	%

The tax effects of significant temporary differences and credit and operating loss carryforwards that give rise to the net deferred tax assets and tax liabilities are as follows (in thousands):

	December 31,		December 31,
	2021		2020
Noncurrent deferred tax assets:
Employee benefit plans	$	2,085	$	2,500
Net operating loss and tax credit carryforwards		9,802		2,217
Accrued expenses and reserves		915		969
Other		218		697
Total noncurrent deferred tax assets		13,020		6,383
Valuation allowance		(2,896)		(1,176)
Net noncurrent deferred tax assets:	$	10,124	$	5,207
Net noncurrent deferred tax liabilities:
Property and equipment	$	3,238	$	3,448
Goodwill and intangibles		6,484		5,629
Other		121		459
Total noncurrent deferred tax liabilities	$	9,843	$	9,536
Net deferred tax asset/(deferred tax liability)	$	281	$	(4,329)
Presented as follows:
Noncurrent deferred income tax assets	$	5,321	$	330
Noncurrent deferred income tax liabilities		(5,040)		(4,659)
Net deferred tax asset (liability)	$	281	$	(4,329)

As of December 31, 2021, the Company has the following gross carryforwards available (in thousands):

			Amount
Jurisdiction	Tax Attribute		(in thousands)	Begin to expire
U.S. State	Net Operating Losses (1)	$	4,812	2025
International	Net Operating Losses (1)	$	1,678	2025
International	Net Operating Losses - Unlimited Carryforward (1)	$	22,886	No expiration
U.S. Federal	Foreign Tax Credits	$	1,003	2027
International	R&D Tax Credits	$	513	2026

(1) Net operating losses (NOL’s) are presented as pre-tax amounts.

Realization of the Company’s recorded deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses and tax credit carryforwards. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

The Company generated excess foreign tax credits in 2017 due to the one-time transition tax required by enactment of the Tax Cuts and Jobs Act in the amount of $910 and foreign tax credits were generated in the amount of $92 as a result of a dividend paid from Canada. The Company determined it is more likely than not that it will not realize a tax benefit from these credits. The Company has incurred net operating losses in certain states with a tax effected benefit of $201 that it is more likely than not will not be realized. Additionally, the Company has carryforwards of net operating losses

and tax credits generated in foreign jurisdictions and has determined it is more likely than not it would not realize a tax benefit of $1,692. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. The Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets, net of valuation allowances as of December 31, 2021.

The Company files income tax returns in various U.S. and foreign taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before 2018. With few exceptions, the Company is no longer subject to tax examinations in the foreign jurisdictions for tax periods prior to 2016.

Due to a New Zealand tax legislation change in 2021 allowing for the use of pre-acquisition net operating loss carryforwards to be utilized on the acquirer's future period tax returns, the Company recognized $8,328 of net operating loss carryforwards generated in pre-acquisition periods by the Dynamic Controls New Zealand entities. The net operating loss carryforwards are now available for use by the Company beginning with the New Zealand tax returns filed for the 2020 tax period. The Company evaluated the tax legislation and considered the tax periods open for adjustment by the tax authorities which include the 2016-2020 tax years and has determined it is more likely than not it will not realize a benefit on $1,125 of the net operating loss carryforwards. The Company reduced the unrecognized tax benefit in 2021 as a result of the seller filing its 2020 New Zealand tax return and utilizing $68 of the net operating loss carryforwards. The Company will adjust this unrecognized tax benefit in light of changing facts and circumstances and with the lapse of the statute of limitations. The lapse of the statute of limitations would be recorded as an adjustment to the provision for income taxes in the period of the statute closure.

The summary of changes to the unrecognized tax benefit for the year ended December 31, 2021 is as follows (in thousands):

	December 31,
	2021 (1)
Beginning balance	$	—
Additions from tax legislation changes for net operating loss carryforwards		1,125
Reductions related to net operating loss usage on 2020 tax returns		(68)
Ending balance	$	1,057
___________________________
(1)     No other unrecognized tax benefits were recognized in periods prior to the year ended December 31, 2021 that, if recognized, would reduce the effective tax rate.

It is the Company’s policy to include interest and penalties related to income tax liabilities in income tax expense in the consolidated statements of income and comprehensive income. In addition, the Company records uncertain tax positions in accordance with ASC 740. No interest or penalties related to income tax liabilities were recognized for the years ended December 31, 2021, 2020 and 2019.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-domestic subsidiaries in activities outside the United States. Exceptions may be made on a year-by-year basis to repatriate earnings of certain foreign subsidiaries based on cash needs in the United States. In 2021, the Company distributed a portion of these foreign earnings which have been previously taxed in the United States and remitted $236 of foreign withholding taxes.

In 2021, the Company made distributions between its German subsidiaries and remitted $1,493 of foreign withholding taxes. No deferred tax liabilities have been recorded for these distributions as the foreign withholding taxes are refundable on the German income tax return anticipated to be filed in 2022. No further withholding taxes are anticipated to be paid in future years related to this distribution and it is not anticipated to be remitted to the United States.

The Company does not intend to distribute the remaining previously taxed earnings resulting from the one-time

transition tax under the Tax Cuts and Jobs Act or capital in foreign subsidiaries, and has not recorded any deferred taxes related to such amounts. The remaining excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries is permanently reinvested, and the determination of any deferred tax liability on this amount is not practicable.