INCOME TAXES

12 Months Ended

Dec. 31, 2024

INCOME TAXES

INCOME TAXES

9. INCOME TAXES

The provision for income taxes is based on income before income taxes as follows (in thousands):

	For the year ended
	December 31,		December 31,		December 31,
	2024		2023		2022
Domestic	$	3,951	$	18,630	$	7,707
Foreign		12,907		11,070		15,974
Income before income taxes	$	16,858	$	29,700	$	23,681

Components of the total income tax provision are as follows (in thousands):

	For the year ended
	December 31,		December 31,		December 31,
	2024		2023		2022
Current provision
Domestic	$	2,523	$	7,805	$	5,903
Foreign		3,522		2,834		4,111
Total current provision		6,045		10,639		10,014
Deferred benefit
Domestic		(1,453)		(4,087)		(3,915)
Foreign		(900)		(949)		193
Total deferred benefit		(2,353)		(5,036)		(3,722)
Income tax provision	$	3,692	$	5,603	$	6,292

The provision for income taxes differs from the amount determined by applying the federal statutory rate as follows:

	For the year ended
	December 31,		December 31,		December 31,
	2024		2023		2022
Tax provision, computed at statutory rate	21.0	%	21.0	%	21.0	%
State tax, net of federal impact	1.0	%	1.7	%	1.3	%
Change in valuation allowance	(2.9)	%	(1.5)	%	(0.1)	%
Effect of foreign tax rate differences	2.4	%	1.9	%	3.9	%
Section 162(m) compensation	4.8	%	2.4	%	3.1	%
R&D Credit and incentives	(7.9)	%	(6.1)	%	(3.9)	%
Effect of Tax Cuts and Jobs Act	1.6	%	0.3	%	0.1	%
Subpart F income	0.0	%	0.0	%	(0.1)	%
Unrecognized tax benefits	(1.1)	%	(0.7)	%	0.0	%
Other	0.9	%	(0.1)	%	1.3	%
Withholding tax on foreign distributions	2.1	%	0.0	%	0.0	%
Provision for income taxes	21.9	%	18.9	%	26.6	%

The tax effects of significant temporary differences and credit and operating loss carryforwards that give rise to the net deferred tax assets and tax liabilities are as follows (in thousands):

	December 31,		December 31,
	2024		2023
Noncurrent deferred tax assets:
Employee benefit plans	$	1,735	$	2,241
Net operating loss and tax credit carryforwards		6,711		7,277
Accrued expenses and reserves		2,997		2,494
Research and development costs		11,069		8,363
Other		439		502
Total noncurrent deferred tax assets		22,951		20,877
Valuation allowance		(2,262)		(2,648)
Net noncurrent deferred tax assets:	$	20,689	$	18,229
Net noncurrent deferred tax liabilities:
Property and equipment	$	2,812	$	2,949
Goodwill and intangibles		11,762		10,754
Interest rate swap derivatives		570		1,019
Other		71		84
Total noncurrent deferred tax liabilities	$	15,215	$	14,806
Net deferred tax asset	$	5,474	$	3,423
Presented as follows:
Noncurrent deferred income tax assets	$	9,116	$	7,760
Noncurrent deferred income tax liabilities		(3,642)		(4,337)
Net deferred tax asset	$	5,474	$	3,423

As of December 31, 2024, the Company has the following gross carryforwards available (in thousands):

			Amount
Jurisdiction	Tax Attribute		(in thousands)	Begin to expire
U.S. State	Net Operating Losses (1)	$	10,265	2024
International	Net Operating Losses - Unlimited Carryforward (1)	$	16,730	No expiration
U.S. Federal	Foreign Tax Credits	$	1,002	2028
International	Investment Tax Credits	$	449	2030
U.S. Federal	R&D Tax Credits	$	9	2036
U.S. State	R&D and Manufacturing Credits	$	507	2031

(1) Net operating losses (NOL’s) are presented as pre-tax amounts.

Realization of the Company’s recorded deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses and tax credit carryforwards. Management considers the scheduled reversal of deferred tax liabilities, projected verifiable future taxable income and tax planning strategies in making this assessment.

Starting in 2022, noncurrent deferred tax assets includes the effects of capitalization and amortization of R&D expenses as required by the 2017 Tax Cuts and Jobs Act. The Company generated excess foreign tax credits in 2017 due to the one-time transition tax required by enactment of the Tax Cuts and Jobs Act in the amount of $910 and foreign tax credits were generated in the amount of $92 as a result of a dividend paid from Canada and, at that time, determined it was more likely than not that it will not realize a tax benefit from these credits. The Company has incurred net operating losses in certain states with a tax effected benefit of $756 as of December 31, 2024 that it is more likely than not will not be realized. Additionally, the Company has deferred tax assets (including net operating loss carryforwards and tax credits) in certain foreign jurisdictions for which it has determined it is more likely than not it would not realize a tax benefit of $504 as of December 31, 2024. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. The Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets, net of valuation allowances as of December 31, 2024.

The Company files income tax returns in various U.S. and foreign taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before 2021. With few exceptions, the Company is no longer subject to tax examinations in the foreign jurisdictions for periods prior to 2019.

Due to a New Zealand tax legislation change in 2021 allowing for the use of pre-acquisition net operating loss carryforwards to be utilized on the acquirer's future period tax returns, the Company recognized, in 2021, $8,328 of net operating loss carryforwards generated in pre-acquisition periods by the Dynamic Controls New Zealand entities. The net operating loss carryforwards are now available for use by the Company beginning with the New Zealand tax returns filed for the 2020 tax period. The Company evaluated the tax legislation and considered the tax periods open for adjustment by the tax authorities which include the 2016-2020 tax years and has determined it is more likely than not it will not realize a benefit on $1,125 of the net operating loss carryforwards. The Company will adjust this unrecognized tax benefit in light of changing facts and circumstances and with the lapse of the statute of limitations. The lapse of the statute of limitations would be recorded as an adjustment to the provision for income taxes in the period of the statute closure.

The summary of changes to the unrecognized tax benefit for the year ended December 31, 2023 is as follows (in thousands):

	December 31,		December 31,		December 31,
	2024		2023		2022
Beginning balance	$	586	$	786	$	1,057
Additions from tax legislation changes for net operating loss carryforwards		—		—		—
Reductions related to the lapse of the statute of limitations		(193)		(207)		(192)
Effect of foreign currency translation		(43)		7		(79)
Ending balance	$	350	$	586	$	786

It is reasonably possible that a reduction of approximately $200 of the balance of unrecognized tax benefits may occur within the next twelve months as a result of the lapse of the statute of limitations. As of December 31, 2024, approximately $400 of unrecognized tax benefits would favorably impact the effective tax rate, if recognized.

It is the Company’s policy to include interest and penalties related to income tax liabilities in income tax expense in the

consolidated statements of income and comprehensive income. In addition, the Company records uncertain tax positions in accordance with ASC 740. No material interest or penalties related to income tax liabilities were recognized for the years ended December 31, 2024, 2023, and 2022.

In general, it is the practice and intention of the Company to reinvest the earnings of its non-domestic subsidiaries in activities outside the United States. Exceptions may be made on a year-by-year basis to repatriate earnings of certain foreign subsidiaries based on cash needs in the United States. Certain foreign subsidiaries made distributions to other foreign subsidiaries which required a withholding tax remittance of $328. In 2024, the Company distributed a portion of these foreign earnings which have been previously taxed in the United States and remitted $28 of foreign withholding taxes.

The Company does not intend to distribute the remaining previously taxed earnings resulting from the one-time transition tax under the Tax Cuts and Jobs Act or capital in foreign subsidiaries, and has not recorded any deferred taxes related to such amounts. The remaining excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries is permanently reinvested, and the determination of any deferred tax liability on this amount is not practicable.