INCOME TAXES

12 Months Ended

Jan. 31, 2024

INCOME TAXES

INCOME TAXES

NOTE 12 – INCOME TAXES

Income Tax Expense Reconciliations

The components of the amounts of income tax expense for Fiscal 2024, Fiscal 2023 and Fiscal 2022 are presented below:

	2024		2023		2022
Current:
Federal	$	10,870	$	12,776	$	10,921
State		1,835		1,012		643
Foreign		2,537		740		—
		15,242		14,528		11,564
Deferred:
Federal		(923)		(803)		(341)
State		301		23		133
Foreign		1,955		(2,452)		—
		1,333		(3,232)		(208)
Income tax expense	$	16,575	$	11,296	$	11,356

The amounts of interest and penalties related to income taxes that were incurred by the Company during Fiscal 2024, Fiscal 2023 and Fiscal 2022 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 consolidated amount of income before income taxes for Fiscal 2024, Fiscal 2023 and Fiscal 2022 as presented below:

	2024		2023		2022
Computed expected income tax expense	$	10,276	$	9,660	$	9,883
Difference resulting from:
Unrecognized tax loss benefit		3,858		—		—
Foreign tax rate differential		(2,294)		(441)		(352)
State income taxes, net of federal tax effect		1,688		860		614
Excess executive compensation		1,040		1,397		1,296
Adjustment to valuation for foreign NOLs		2,083		(2,574)		—
Net benefit related to Solar Tax Credit investments		(646)		—		—
Meals and entertainment expense		626		83		58
Research and development tax credits adjustment		—		6,181		—
Recognition of research and development tax credit benefits		—		(3,430)		—
Other permanent differences and adjustments, net		(56)		(440)		(143)
Income tax expense	$	16,575	$	11,296	$	11,356

Net Operating Loss (“NOL”) Carryback

In March 2020, the Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. 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 the appropriate 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 the fiscal year ended January 31, 2021 (“Fiscal 2021”). At the instruction of the IRS, amended income tax returns for Fiscal 2016 and Fiscal 2015 were filed during the second quarter of Fiscal 2024; the IRS has not completed the examination and approval of the Company’s amended tax returns and refund request.

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 prior fiscal years $16.2 million, against which the Company recorded a corresponding liability for uncertain income tax return positions 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 years ending January 31, 2018, 2017 and 2016, with its focus on the research and development tax credits included therein. The final revenue agents reports disagreed with the Company’s treatment of a substantial amount of the costs that supported the Company’s claims. The Company submitted a formal protest of the findings of the IRS examiner and requested an appeal hearing. At the conclusion of the hearing, the Company accepted a settlement offer from the IRS in the amount of approximately $7.9 million, before interest. As a result, during Fiscal 2023, 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.

Research and Development Credits

During Fiscal 2022, 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 filed amended federal income tax returns for those years including research and development tax credits in the total amount of $5.8 million, which was netted with a provision for uncertain tax return positions in the amount of $2.4 million, and recorded during Fiscal 2023. In May 2023, the Company received notification that its amended federal income tax returns for Fiscal 2021 and Fiscal 2022 were selected for examination. At January 31, 2024, the examination was in its early stages.

Unrecognized Income Tax Benefits

Changes in the balances of contra-asset established for uncertain income tax positions for Fiscal 2024, Fiscal 2023 and Fiscal 2022 are presented below:

	2024		2023		2022
Unrecognized income tax benefits, beginning of fiscal year	$	2,882	$	4,937	$	4,895
Increases related to prior period income tax positions		78		—		42
Increases related to current period income tax positions		—		2,359		—
Expirations of statutes of limitations		(407)		—		—
Settlements		—		(4,414)		—
Unrecognized income tax benefits, end of fiscal year	$	2,553	$	2,882	$	4,937

Gross unrecognized income tax benefits totaled $2.6 million for the fiscal year ended January 31, 2024, all of which would affect the Company’s effective income tax rate if recognized. The Company does not expect its unrecognized income tax benefits to change significantly within the next 12 months.

Recognition of Foreign NOL Income Tax Benefits

The Company has deferred tax assets in a total amount of approximately $13.8 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 believed that it had a stable earnings history upon which APC UK could reliably forecast future profitable operations. Based on the forecast that rested on the belief that meaningful investments would be made in the power infrastructure of the U.K. for the foreseeable future, the Company believed that it would be more likely than not that a certain portion of the deferred tax assets would be realized. Accordingly, the Company reversed a portion of the corresponding allowance during Fiscal 2023 in the amount of $2.6 million. However, the unexpected difficulties with one construction project and the loss that was incurred by APC UK related to it caused management to lower its estimates of the amount of future net earnings of APC UK available to offset its net operating loss carryforwards. As a result, the Company increased the allowance by $2.1 million in Fiscal 2024.

Income Tax Refunds

As of January 31, 2024 and 2023, the balances of other current assets in the consolidated balance sheet included income tax refunds receivable and prepaid income taxes in the total amounts of approximately $18.3 million and $15.3 million, respectively. The income tax refunds included the amount expected to be received from the IRS upon its review and approval of the Company’s NOL carryback refund request and the completion of its examination of the amended tax returns for Fiscal 2022 and Fiscal 2021 as described above.

Deferred Taxes

The tax effects of temporary differences that are reflected in deferred taxes as of January 31, 2024 and 2023 included the following:

	2024		2023
Assets:
Net operating loss carryforwards	$	19,772	$	13,964
Stock awards		2,726		2,726
Accrued expenses		1,955		1,480
Lease liabilities		1,383		1,189
Research and development costs deferral		1,622		1,015
Research and development credit carryforwards		—		269
Other		148		337
		27,606		20,980
Liabilities:
Intangibles		(3,819)		(3,674)
Property and equipment		(893)		(1,033)
Construction contracts		(839)		(1,229)
Right-of-use assets		(1,378)		(1,184)
Other		(619)		(431)
		(7,548)		(7,551)
Valuation allowances		(17,799)		(9,740)
Deferred tax assets, net	$	2,259	$	3,689

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 Fiscal 2024 and 2023, the Company did estimate an amount of such expenses which resulted in the deferred tax asset balances presented in the table above.

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 the application of significant judgment. The Company is no longer subject to income tax examinations by authorities for its fiscal years ended on or before January 31, 2020, except for several notable exceptions including Ireland, the U.K. and several states where the open periods are one year longer.

Solar Energy Projects

The Company holds equity investments in Solar Tax Credit (“STC”) investments. Primarily, the STC investments are structured as limited liability companies that invest in solar energy projects that are eligible to receive energy tax credits.

During Fiscal 2024 and Fiscal 2022, the Company made investments of approximately $5.1 million and $5.0 million in STC investments. As of January 31, 2024, the Company had $3.3 million remaining of cash investment commitments related to its STC investments, which are expected to be paid in Fiscal 2025. At January 31, 2024 and 2023, the investment account balances were $2.1 million and $1.2 million, respectively, which are included in other assets in the consolidated balance sheets. These investments are expected to provide positive overall returns over their expected lives.

The Company has elected to use the proportional amortization method (“PAM”) for STC investments that qualify. Under PAM, an investment is amortized in proportion to the allocation of tax benefits received in each period, and the investment amortization and tax benefit amounts are presented net within income tax expense in the Company’s consolidated statements of earnings. Only the Company’s STC investment made in Fiscal 2024 qualifies for PAM. During Fiscal 2024, the Company recognized $8.1 million of income tax credits and other income tax benefits and recorded $7.4 million of investment amortization related to this STC investment. The amount of non-income tax-related activity and other returns related to this investment was not material for Fiscal 2024.

Not all of the Company’s STC investments qualify for PAM. For STC investments that do not qualify for PAM, the Company accounts for the investment using the equity method of accounting and includes income and losses related to the investment in other income in the Company’s consolidated statements of earnings. Tax credits, when recognized, are recorded as a reduction of the corresponding investment balance with an offsetting reduction to accrued taxes payable in accordance with the deferral method. For these STC investments that do not qualify for PAM, income tax credits in the approximate amount of $4.5 million were recognized during Fiscal 2022; no income tax credits were recognized in Fiscal 2024 and Fiscal 2023. For Fiscal 2024, Fiscal 2023 and Fiscal 2022, the Company recorded its share of losses of less than $0.1 million, income of $1.1 million and losses of $0.4 million, respectively, from these STC investments.