Note N - Income Taxes

12 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

N. INCOME TAXES

United States and foreign (loss) income before income taxes and minority interest were as follows:

	2022			2021
United States	$	(1,165	)	$	(15,925	)
Foreign		11,394			6,086
	$	10,229		$	(9,839	)

The provision (benefit) for income taxes is comprised of the following:

	2022			2021
Currently payable:
Federal	$	(164	)	$	28
State		(2	)		49
Foreign		2,838			1,948
		2,672			2,025
Deferred:
Federal	$	-			15,554
State		62			2,341
Foreign		(911	)		(240	)
		(849	)		17,655
	$	1,823		$	19,680

The components of the net deferred tax asset as of June 30 are summarized in the table below.

	2022			2021
Deferred tax assets:
Retirement plans and employee benefits	$	4,787		$	4,584
Foreign tax credit carryforwards		7,822			7,609
Federal tax credits, net of ASU 2013-11		1,597			1,801
State net operating loss and other state credit carryforwards, net of ASU 2013-11		2,179			2,208
Federal net operating loss		5,492			6,506
Inventory		-			-
Reserves		1,119			1,670
Foreign NOL carryforwards		-			66
Accruals		703			871
Right of use assets - operating leases		3,381			3,674
Disallowed interest		980			982
Capital loss carryforward		108			-
Other assets		358			1,033
		28,526			31,004
Valuation allowance		(23,097	)		(24,420	)
		5,429			6,584
Deferred tax liabilities:
Inventory		285			480
Property, plant and equipment		1,155			1,852
Intangibles		2,012			2,982
Long term operating lease obligations		3,352			3,622
Other liabilities		249			182
		7,053			9,118
Total net deferred tax (liabilities) assets	$	(1,624	)	$	(2,534	)

At June 30, 2022 the Company has net operating loss carryforwards (“NOLs”) of approximately $26,154 and $30,901 for federal and state income tax purposes which will expire at various dates from fiscal year 2023 – 2042.  Federal NOLs were generated subsequent to fiscal 2019 and have an indefinite carryover period. The Company has federal and state tax credit carryforwards of approximately $9,738 and $935, respectively, which will expire at various dates from fiscal 2026 – 2042.

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The Company has evaluated the likelihood of whether the net deferred tax assets would be realized and concluded that it is more likely than not that all of deferred tax assets would not be realized. Management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $23,097 and $24,420 have been recorded for fiscal year 2022 and 2021, respectively.

Following is a reconciliation of the applicable U.S. federal income taxes to the actual income taxes reflected in the statements of operations:        

	2022			2021
U.S. federal income tax at 21%	$	2,148		$	(2,066	)
Increases (reductions) in tax resulting from:
Foreign tax items		(575	)		552
State taxes		(12	)		(440	)
Change in prior year estimate		372			(1,138	)
Nondeductible PPP loan expenses		-			(1,722	)
Research and development tax credits		(10	)		(336	)
Unrecognized tax benefits		(152	)		59
Stock compensation		(46	)		252
Rate changes		121			18
Deferred tax basis adjustments		(54	)		42
Executive compensation		42			-
GILTI inclusion		920			-
Valuation allowance		(981	)		24,420
Other, net		50			39
	$	1,823		$	19,680

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the Internal Revenue Code. The Tax Act is generally applicable for tax years beginning after December 31, 2017, which is the Company’s fiscal year 2018. However, several provisions of the Tax Act have differing effective dates, meaning these provisions did not impact the Company’s financial statements until fiscal year 2019. The provisions impacting the Company’s fiscal year 2019 financial statements include the global intangible low taxed income (“GILTI”) income and foreign-derived intangible income (“FDII”) deduction and limitations on the deductibility of executive compensation.

Executive Compensation Limitations: The Tax Act substantially modifies the limitation on corporate deductibility of executive compensation under Section 162(m) of the Code. Section 162(m) limits the deduction for compensation paid by a publicly held corporation to certain of its executive employees to $1,000 per year. The Tax Act has amended the definition of “covered employee” to correspond to the general SEC reporting requirements for named executive officers. These are the corporation’s principal executive officer, principal financial officer, and the next three highest-paid executive officers. Most significantly, the Tax Act has eliminated the exemptions for commissions and performance-based compensation. This had an impact on the company’s effective tax rate in fiscal years 2022 and 2021 of $42 and $0 respectively.

Global Intangible Low Taxed Income (“GILTI”): The Tax Act changed the foreign source income calculations and related foreign tax credit amounts. The GILTI require 10% domestic shareholders (“U.S. Shareholders”) of controlled foreign corporations (“CFC’s”) to include in gross income annually the U.S. Shareholders’ pro rata share of GILTI for the year. The High Tax Exception (“HTE") rules were finalized and applicable for the Company during fiscal year 2022. Accordingly, the Company may exclude from the GILTI inclusion tested income from tested units with an effective tax rate greater than 18.9%. The Company was able to take advantage of this high tax exception, which resulted in zero GILTI inclusion in the Company’s effective tax rate for fiscal year 2021. In fiscal year 2022, the GILTI inclusion was $920. During Q4 FY2022, neither Rolla nor TD China qualified for the HTE because their effective tax rates are lower than 18.9%. This resulted in a GILTI income inclusion of approximately $4.9 million. The Rolla inclusion is largely due to the gain on the sale of their building, while TD China’s inclusion is due to a temporary tax rate decrease in China.

Foreign Derived Intangible Income (“FDII”): The Tax Act provides companies with a new permanent deduction. An incentive for C corporations to generate revenue from serving foreign markets, the provision applies a preferential tax rate to eligible income. The new tax law assumes a fixed rate of return on a corporation’s tangible assets. Any remaining income is deemed to be generated by intangible assets. This did not have an impact on the Company’s effective tax rate in fiscal year 2022 and 2021.

The Company has not provided additional U.S. income taxes on cumulative earnings of its consolidated foreign subsidiaries that are considered to be reinvested indefinitely. The Company reaffirms its position that the earnings of those subsidiaries remain permanently invested and has no plans to repatriate funds from any permanently reinvested subsidiaries to the U.S. for the foreseeable future. These earnings relate to ongoing operations and were approximately $14,175 and $10,871 at June 30, 2022 and June 30, 2021, respectively. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits.

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination are 2017 through 2022 for our major operations in Belgium, Japan, Netherlands, Singapore and Australia. The tax years open to examination in the U.S. are for years subsequent to fiscal 2017.

The Company has approximately $716 and $778 of unrecognized tax benefits as of June 30, 2022 and June 30, 2021, respectively, which, if recognized, would impact the effective tax rate. During the fiscal year the amount of unrecognized tax benefits decreased primarily due to settlements with tax authorities. No material changes are expected to the reserve during the next 12 months. The Company’s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense.

Below is a reconciliation of beginning and ending amount of unrecognized tax benefits as of June 30:

	2022			2021
Unrecognized tax benefits, beginning of year	$	778		$	918
Additions based on tax positions related to the prior year		-			-
Additions based on tax positions related to the current year		3			66
Reductions based on tax positions related to the prior year		(65	)		(21	)
Subtractions due to statutes closing		-			-
Settlements with taxing authorities		-			(185	)
Unrecognized tax benefits, end of year	$	716		$	778

Substantially all of the Company’s unrecognized tax benefits as of June 30, 3022, if recognized, would affect the effective tax rate. As of June 30, 2022 and 2021, the amounts accrued for interest and penalties totaled $38 and $141, respectively, and are not included in the reconciliation above.