INCOME TAXES

12 Months Ended

Jan. 31, 2023

INCOME TAXES

INCOME TAXES

NOTE 13 – INCOME TAXES

Reconciliations of Income Tax Expense

The components of the amounts of income tax expense for Fiscal 2023, Fiscal 2022 and Fiscal 2021 are presented below:

	2023		2022		2021
Current:
Federal	$	12,776	$	10,921	$	(6,805)
State		1,012		643		83
Foreign		740		—		151
		14,528		11,564		(6,571)
Deferred:
Federal		(803)		(341)		7,732
State		23		133		(75)
Foreign		(2,452)		—		(12)
		(3,232)		(208)		7,645
Income tax expense	$	11,296	$	11,356	$	1,074

The amounts of interest and penalties related to income taxes that were incurred by the Company during Fiscal 2023, Fiscal 2022 and Fiscal 2021 were not material.

The Company’s income tax expense amounts differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to the income before income taxes for Fiscal 2023, Fiscal 2022 and Fiscal 2021 as presented below:

	2023		2022		2021
Computed expected income tax expense	$	9,660	$	9,883	$	5,226
Difference resulting from:
State income taxes, net of federal tax effect		860		614		7
Research and development credits adjustment (see discussion below)		6,181		—		—
Recognition of research and development credit benefits (see discussion below)		(3,430)		—		—
Recognition of foreign net operating loss benefits (see discussion below)		(2,574)		—		—
Excess executive compensation		1,397		1,296		420
Bad debt loss		(167)		425		(160)
Foreign tax rate differential		(441)		(352)		(173)
Net operating loss carryback benefit (see discussion below)		—		—		(4,392)
Other permanent differences and adjustments, net		(190)		(510)		146
Income tax expense	$	11,296	$	11,356	$	1,074

Net Operating Loss (“NOL”) Carryback

In an effort to combat the adverse economic impacts of the COVID-19 crisis, the U.S. Congress passed the Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”) that was signed into law on March 27, 2020. This wide-ranging legislation was an emergency economic stimulus package that included spending and tax breaks aimed at strengthening the U.S. economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19.

The tax changes of the CARES Act included a temporary suspension of the limitations on the future utilization of certain NOLs and re-established a carryback period for certain losses to five years. The NOLs eligible for carryback under the CARES Act include the Company’s domestic NOL for Fiscal 2020, which was approximately $39.5 million. The Company made an initial filing with the Internal Revenue Service (“IRS”) requesting carryback refunds of income taxes paid for the years ended January 31, 2016 and 2015 in the total amount of approximately $12.7 million during Fiscal 2021 and an

updated filing was made subsequent to the end of Fiscal 2023; the IRS has not completed the processing of the Company’s refund request.

The carryback provided a favorable rate benefit for the Company as the loss, which was incurred in a year where the statutory federal tax rate was 21%, has been carried back to tax years where the tax rate was higher. The net amount of this additional income tax benefit, approximately $4.4 million, was recorded in Fiscal 2021.

Research and Development Tax Credit Adjustments

During Fiscal 2019, the Company completed a detailed review of the activities of its engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development tax credits that may have been available to reduce prior year income taxes. This study focused on project costs incurred during the three-year period ended January 31, 2018. Based on the results of the study, management identified and estimated significant amounts of income tax benefits that were not previously recognized in the Company’s operating results for any prior year reporting period. The net amount of federal and state research and development tax credit benefit recognized in Fiscal 2019 was $16.6 million. During Fiscal 2020, deferred tax assets related to the research and development tax credits were reduced by $0.4 million. The Company recorded a corresponding liability for uncertain income tax return positions related to identified but unrecognized research and development tax credit benefits in the amount of $5.0 million.

During Fiscal 2021, the IRS concluded examinations of the Company’s consolidated federal income tax returns for the year ending January 31, 2016, as amended; the year ending January 31, 2017, as amended; and the year ended January 31, 2018 with its focus on the research and development tax credits included therein.

In January 2021, the IRS issued its final revenue agents reports that documented its understanding of the facts, attempted to summarize the Company’s arguments in support of the research and development claims and stated its position which disagreed with the Company’s treatment of a substantial amount of the costs that supported the Company’s claims. In March 2021, the Company submitted a formal protest of the findings of the Internal Revenue Service (“IRS”) examiner and requested an appeal hearing.

At the conclusion of the hearing that occurred in May 2022, the Company agreed to accept a settlement offer from the IRS in the amount of approximately $7.9 million, before interest. As a result, during the three-month period ended July 31, 2022, the Company made an unfavorable adjustment to income tax expense in the approximate amount of $6.2 million; the accounting for this adjustment reduced the contra-asset balance by approximately $4.4 million.

The Company has also formally protested the conclusions reached by two states, where the Company filed tax returns reflecting the benefits of certain research and development credits, that the credits are not allowable. The Company expects that any unfavorable adjustments related to the ultimate settlement of the income tax disputes with the states will not be significant.

Research and Development Credits

In a manner similar to the process described above, the Company completed a detailed review of the activities of its engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development tax credits that may have been available to reduce federal income taxes for Fiscal 2022 and Fiscal 2021. As a result, the Company has filed amended federal income tax returns for those years, including research and development tax credits in the total amount of $5.8 million. Net of a corresponding reduction to reflect uncertain income tax return positions in the amount of $2.4 million, the tax benefit recorded in Fiscal 2023 for these tax credits was approximately $3.4 million.

Recognition of Foreign NOL Income Tax Benefits

The Company has deferred tax assets in a total amount of approximately $7.9 million related to prior year NOLs of its foreign subsidiaries, primarily the operation of APC located in the U.K (“APC UK). The Company has established a valuation allowance against a substantial portion of these NOLs. For Fiscal 2023, APC UK continued a turnaround of its operating results such that the Company believes that it has a stable earnings history upon which APC UK can reliably forecast future profitable operations. Based on the forecast that rests on the belief that meaningful investments will be made in the power infrastructure of the U.K. for the foreseeable future, the Company now believes that it is more likely than not that a certain portion of the deferred tax assets will be realized. Accordingly, the Company reversed a portion of the corresponding allowance during Fiscal 2023 in the amount of $2.6 million.

Unrecognized Income Tax Benefits

As a result of the activity described above primarily, the balances of the contra-asset established for uncertain income tax return positions were $2.9 million, $4.9 million and $4.9 million as of January 31, 2023, 2022 and 2021, respectively. No other material adjustment or transaction has affected the balance of this account since January 31, 2020.

Income Tax Refunds

As of January 31, 2023 and 2022, the balances of other current assets in the consolidated balance sheet included total income tax refunds receivable and prepaid income taxes in the amounts of approximately $15.3 million and $29.5 million, respectively. The balance as of January 31, 2023 includes primarily the amount expected to be received from the IRS upon its processing of the Company’s NOL carryback refund request discussed above.

Deferred Taxes

The tax effects of temporary differences that are reflected in deferred taxes as of January 31, 2023 and 2022 included the following:

	2023		2022
Assets:
Net operating loss carryforwards	$	13,964	$	14,360
Stock awards		2,726		2,325
Accrued expenses		1,480		515
Lease liabilities		1,189		772
Research and development costs deferral		1,015		—
Research and development credit carryforwards		269		269
Other		337		1,332
		20,980		19,573
Liabilities:
Purchased intangibles		(3,674)		(3,533)
Property and equipment		(1,033)		(1,334)
Construction contracts		(1,229)		(1,034)
Right-of-use assets		(1,184)		(768)
Other		(431)		(43)
		(7,551)		(6,712)
Valuation allowances		(9,740)		(12,404)
Deferred tax assets, net	$	3,689	$	457

Taxpayers are now required to capitalize and amortize research and experimental expenses over five or 15 years for tax years beginning in 2022 or later. Accordingly, for the Company’s fiscal year that commenced on February 1, 2022, the Company did determine an estimated amount of such expenses which resulted in the deferred tax asset balance of $1.0 million presented in the table above as of January 31, 2023. Of course, due to the effective date of this tax change, there is no comparable balance as of January 31, 2022.

The Company acquired unused NOLs for federal income tax reporting purposes from TRC that are subject to limitations imposed by Section 382 of the Internal Revenue Code of 1986, as amended. These losses are subject to annual limits that reduce the aggregate amount of NOLs available to the Company in the future to approximately $5.5 million. These NOLs are available to offset future taxable income and, if not utilized, begin expiring during 2032. The NOL carryforwards related to APC UK do not expire. The Company also has certain NOLs that will be available to the Company for state income tax reporting purposes that are substantially similar to the federal NOLs.

The Company’s ability to realize deferred tax assets, including those related to the NOLs discussed above, depends primarily upon the generation of sufficient future taxable income to allow for the Company’s use of temporarily deferred deductions and tax planning strategies. If such estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against some or all of its deferred tax assets resulting in additional

income tax expense in the future. At this time, based substantially on the strong earnings performance of the Company’s power industry services reporting segment, management believes that it is more likely than not that the Company will realize the benefit of significantly all of its deferred tax assets, net of valuation allowances.

Income Tax Returns

The Company is subject to federal and state income taxes in the U.S., and income taxes in Ireland and the U.K. Tax treatments within each jurisdiction are subject to the interpretation of the related tax laws and regulations which require significant judgment to apply. The Company is no longer subject to income tax examinations by authorities for its fiscal years ended on or before January 31, 2019, except for several notable exceptions including Ireland, the U.K. and several states where the open periods are one year longer.

Solar Energy Projects

During Fiscal 2022 and Fiscal 2021, the Company invested approximately $5.0 million and $1.3 million, respectively, in limited liability companies that make equity investments in solar energy projects that are eligible to receive energy tax credits. The passive investments have been accounted for under the equity method; the balances are included in other assets in our consolidated balance sheets. Each tax credit, when recognized, is recorded as a reduction of the corresponding investment balance with an offsetting reduction in the balance of accrued taxes payable in accordance with the deferral method. Investment tax credits in the approximate amounts of $4.5 million and $1.1 million were recognized during Fiscal 2022 and Fiscal 2021, respectively. As of January 31, 2023, the Company’s had no remaining cash investment commitments related to these projects. At January 31, 2023 and 2022, the investment account balances were $1.2 million and $0.2 million, respectively. These investments are expected to provide positive overall returns over their six-year expected lives.

During Fiscal 2023, the investment balance was adjusted to reflect the Company’s share of the income of the investment entities in the amount of approximately $1.1 million, which amount has been included as other income in the Company’s consolidated statement of earnings for the corresponding period. During Fiscal 2022, the investment balance was adjusted to reflect the Company’s share of the losses of the investment entities in the amount of $0.4 million, which was included as other expense in the Company’s consolidated statement of earnings.

Supplemental Cash Flow Information

The amounts of cash paid for income taxes during Fiscal 2023, Fiscal 2022 and Fiscal 2021 were $6.7 million, $14.0 million and $5.5 million, respectively, including the solar energy investments identified above. During Fiscal 2023, Fiscal 2022 and Fiscal 2021, the Company received cash refunds of previously paid income taxes from various taxing authorities in the total amounts of $0.3 million, $0.2 million and $1.0 million, respectively.