Income Taxes

12 Months Ended

Feb. 28, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 19 - Income Taxes

We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results and transfer pricing and tax regulations in the related jurisdictions.

On December 15, 2022, the European Union agreed to implement the Organization for Economic Co-operation and Development's Inclusive Framework project's global minimum tax rules starting in 2024. We will continue to monitor whether, and to what extent, the Inclusive Framework project's rules are implemented consistently across jurisdictions and evaluate any potential impact to our global effective tax rate.

On August 16, 2022, the Inflation Reduction Act (the “Act”) was enacted and signed into law. The Act is a budget reconciliation package that includes significant law changes relating to tax, climate change, energy, and health care. The tax provisions include, among other items, a corporate alternative minimum tax of 15%, an excise tax of 1% on corporate stock buy-backs, energy-related tax credits, and additional IRS funding. We currently do not expect these tax provisions to have a material impact to our consolidated financial statements. We will continue to monitor and evaluate impact as further regulatory guidance becomes available.

On March 11, 2021, the American Rescue Plan Act (the “ARP”) was enacted and signed into law. The ARP is an economic stimulus package in response to the COVID-19 outbreak, which contains tax provisions that did not have a material impact to our consolidated financial statements.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak that contains numerous tax provisions. Among other things, the CARES Act

included technical corrections to the effective date language in the Tax Cuts and Jobs Act, enacted into law on December 22, 2017 (the “Tax Act”), related to net operating loss carrybacks.

Upon the enactment of the Tax Act in fiscal 2018, there was a net operating loss on our balance sheet, which was measured using the U.S. statutory tax rate in effect prior to enactment. As a result of the Tax Act, we were required to record a one-time charge of $17.9 million in fiscal 2018, which included a charge of $9.4 million to remeasure the net operating loss at the reduced rate at which it was expected to reverse in the future. The CARES Act effectively reversed the impact of the Tax Act on our net operating loss, resulting in a corresponding tax benefit of $9.4 million recorded in the first quarter of fiscal 2021.

The Tax Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company continues to elect to account for the tax on GILTI as a period cost and therefore has not recorded deferred taxes related to GILTI on its foreign subsidiaries.

In connection with the Tax Act, we repatriated $48.3 million of cash held in our U.S. owned foreign subsidiaries without such funds being subject to further U.S. federal income tax. As of February 28, 2023, we had approximately $40.7 million of undistributed earnings in U.S. owned foreign subsidiaries. While U.S. federal tax expense has been recognized as a result of the Tax Act, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized.

No deferred taxes have been provided on the undistributed earnings of our foreign owned subsidiaries since these earnings will continue to be permanently reinvested. Due to the number of legal entities and jurisdictions involved, our legal entity structure, and the tax laws in the relevant jurisdictions, we believe it is not practicable to estimate the amount of additional taxes which may be payable upon distribution of these undistributed earnings.

Our components of income before income tax expense are as follows:

	Fiscal Years Ended Last Day of February,
(in thousands)	2023		2022		2021
U.S.	$	41,738	$	63,653	$	48,693
Non-U.S.	129,551		196,313		220,737
Total	$	171,289	$	259,966	$	269,430

Our components of income tax expense (benefit) are as follows:

	Fiscal Years Ended Last Day of February,
(in thousands)	2023		2022		2021
Current:
U.S. federal	$	13,472	$	20,907	$	4,340
State	3,417		6,283		5,892
Non-U.S.	13,369		17,883		9,652
	30,258		45,073		19,884
Deferred:
U.S. federal	(3,337)		(5,269)		(3,828)
State	(1,815)		(1,766)		(1,795)
Non-U.S.	2,910		(1,836)		1,223
	(2,242)		(8,871)		(4,400)
Total	$	28,016	$	36,202	$	15,484

Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. An income tax rate reconciliation of these differences are as follows:

	Fiscal Years Ended Last Day of February,
	2023		2022		2021
Effective income tax rate at the U.S. statutory rate	21.0	%	21.0	%	21.0	%
Impact of U.S. state income taxes	0.3	%	1.4	%	0.6	%
Effect of statutory tax rate in Macau	(5.4)	%	0.1	%	(0.7)	%
Effect of statutory tax rate in Barbados	(3.3)	%	(11.0)	%	(15.4)	%
Effect of statutory tax rate in Switzerland	(2.0)	%	(1.2)	%	(1.5)	%
Effect of income from other non-U.S. operations subject to varying rates	2.1	%	1.2	%	1.1	%
Effect of foreign exchange fluctuations	2.5	%	0.5	%	(0.1)	%
Effect of asset impairment charges	—	%	—	%	0.3	%
Effect of U.S. tax reform	—	%	—	%	(3.5)	%
Effect of uncertain tax positions	0.2	%	0.6	%	3.2	%
Effect of non-deductible executive compensation	1.2	%	1.1	%	1.0	%
Effect of base erosion and anti-abuse tax	—	%	—	%	(0.6)	%
Other items	(0.2)	%	0.2	%	0.3	%
Effective income tax rate	16.4	%	13.9	%	5.7	%

Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell.  We previously had an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain employment and investment thresholds.  The Macau Offshore Law and its supplementary regulations that grant tax incentives to approved offshore institutions was abolished on January 1, 2021. Existing approved offshore institutions such as ours continued to operate under the offshore regime until the end of the calendar year 2020. Beginning in calendar year 2021, our Macau subsidiary transitioned to onshore status and became subject to a statutory corporate income tax of approximately 12%. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau.

Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:

	Fiscal Years Ended Last Day of February,
(in thousands)	2023		2022
Deferred tax assets, gross:
Operating loss carryforwards and tax credits	$	10,882	$	13,195
Accounts receivable	9,674		11,144
Inventories	20,541		19,619
Operating lease liabilities	11,658		11,494
Research and development expenditures	5,722		—
Interest limitation	1,932		—
Accrued expenses and other	4,676		10,364
Total gross deferred tax assets	65,085		65,816
Valuation allowance	(10,706)		(11,673)
Deferred tax liabilities:
Operating lease assets	(8,997)		(8,635)
Depreciation	(9,397)		(10,589)
Amortization	(61,252)		(52,873)
Total deferred tax liabilities, net	$	(25,267)	$	(17,954)

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not be recoverable. In fiscal 2023, the $1.0 million net decrease in our valuation allowance was principally due to changes in the operating loss carryforwards available to be used in the future.

The composition of our operating loss carryforwards and tax credits at the end of fiscal 2023 is as follows:

		February 28, 2023
(in thousands)	Tax Year  Expiration Date Range	Deferred Tax Assets		Operating Loss Carryforward
U.S. state operating loss carryforwards	2032-2041	$	520	$	11,495
Non-U.S. operating loss carryforwards with definite carryover periods	2024-2040	4,304		17,197
Non-U.S. operating loss carryforwards with indefinite carryover periods	Indefinite	5,374		17,360
Subtotal		10,198		$	46,052
Less portion of valuation allowance established for operating loss carryforwards		(9,677)
Total operating loss carryforwards, net of valuation allowance		521
U.S. state tax credits	2037	684
Total operating loss carryforwards, net of valuation allowance and tax credits		$	1,205

Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced.

During fiscal 2023 and 2022, changes in the total amount of unrecognized tax benefits (excluding interest and penalties) were as follows:

	Fiscal Years Ended Last Day of February,
(in thousands)	2023		2022
Total unrecognized tax benefits, beginning balance	$	5,623	$	5,436
Tax positions taken during the current period	644		949
Changes in tax positions taken during a prior period	(249)		1,409
Impact of foreign currency remeasurement	—		50
Settlements	—		(2,221)
Total unrecognized tax benefits, ending balance	6,018		5,623
Less current unrecognized tax benefits	—		—
Non-current unrecognized tax benefits	$	6,018	$	5,623

If we are able to sustain our positions with the relevant taxing authorities, approximately $6.0 million (excluding interest and penalties) of uncertain tax position liabilities as of February 28, 2023 would favorably impact our effective tax rate in future periods. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities.

We classify interest and penalties on uncertain tax positions as income tax expense. At the end of fiscal 2023 and 2022, the liability for tax-related interest and penalties associated with unrecognized tax benefits was $3.1 million and $3.2 million, respectively. Additionally, during fiscal 2023 and 2022, we recognized tax benefits of $0.1 million and tax expense of $0.3 million, respectively, from tax-related interest and penalties in the consolidated statements of income.

We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. As of February 28, 2023, tax years under examination or still subject to examination by material tax jurisdictions are as follows:

Jurisdiction	Tax Years Under Examination	Open Tax Years
Barbados	- None -	2018	—	2023
China	2009-2018	2009	—	2023
Germany	2014-2021	2014	—	2023
Hong Kong	2014-2017	2014	—	2023
Macao	- None -	2021	—	2023
Switzerland	2017-2021	2017	—	2023
United Kingdom	- None -	2021	—	2023
U.S.	- None -	2017	—	2023