Note 10 - Income Taxes

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

10. Income taxes

The Company accounts for income taxes under ASC Topic 740 – Income Taxes. Under this standard, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company’s tax provision for interim periods is determined using an estimate of the annual effective income tax rate, adjusted for discrete items, if any, that occur in the relevant period. The income tax benefit of $17.5 million for the nine months ended September 30, 2021 resulted in an effective income tax rate of 161%. Included in the $17.5 million were discrete tax benefits of $8.5 million related to the Global Cooling acquisition on May 3, 2021 and $6.3 million related to stock compensation windfall tax benefits.

The income tax benefit of $5.0 million for the three months ended September 30, 2021 resulted in an effective income tax rate of 98%. The income tax benefit included $3.1 million of discrete tax benefits related to stock compensation windfall tax benefits.

The Company’s US projected effective income tax rate without discrete items was 18%, which is lower than the US federal statutory rate of 21% primarily due to the impact of a projected partial valuation allowance on net operating loss carryforwards, non-deductible transaction costs and executive compensation offset by state tax benefits and research tax credits.

Realization of deferred tax assets is dependent upon the generation of future taxable income, the timing and amount of which are uncertain. In determining the need for a valuation allowance, the Company’s management evaluates both positive and negative evidence when concluding whether it is more likely than not that deferred tax assets are realizable. After reviewing the evidence available, the Company’s management believes there is uncertainty regarding the future realizability of the U.S. net operating loss carryforward and is projecting a partial valuation allowance of $1.2 million by year end. If operating results improve and projections indicate future utilization of the tax attributes, all or a portion of the valuation allowance would be released, resulting in a corresponding non-cash income tax benefit. The Company will also maintain a full valuation allowance on its current losses in the Netherlands due to a lack of earnings history.

In connection with the Global Cooling acquisition on May 3, 2021, the Company recognized a deferred tax liability estimated to be $23.5 million. As a result, the Company recorded an income tax benefit of $8.5 million for the full release of the valuation allowance on our existing deferred tax assets as a result of the offset of the deferred tax liabilities established for intangible assets from the acquisition. In connection with the Sexton acquisition on August 9, 2021, the Company recorded a deferred tax liability estimated to be $1.3 million with an offset to goodwill.

Future utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation in the event of a change in ownership as set forth in Section 382 of the Internal Revenue Code of 1986, as amended. It is possible that there have been past changes in ownership as defined under Section 382, which would limit the Company’s ability to utilize NOLs and other tax attributes. The Company is currently in the process a completing a Section 382 study and a state nexus study, which may result in adjustments to the accounting for the acquisition of Global Cooling and Sexton.