Income Taxes | Income Taxes For financial reporting purposes, income before taxes includes the following components (in thousands) : Years ended December 31, 2021 2020 2019 Domestic $ (5,956) $ (9,476) $ (7,405) Foreign 31,868 27,785 33,845 $ 25,912 $ 18,309 $ 26,440 The expense (benefit) for income taxes is comprised of (in thousands) : Years ended December 31, 2021 2020 2019 Current: Federal $ 245 $ 106 $ 453 State and local 38 (18) (130) Foreign 8,442 6,268 6,378 8,725 6,356 6,701 Deferred: Federal (2,992) 1,718 (2,638) State and local (588) (422) (123) Foreign 324 (143) 205 (3,256) 1,153 (2,556) Total income tax expense $ 5,469 $ 7,509 $ 4,145 A reconciliation of income tax expense (benefit) at the U.S. federal statutory income tax rate to the actual income tax provision is as follows (in thousands) : Years ended December 31, 2021 2020 2019 Tax at statutory rate $ 5,441 $ 3,845 $ 5,553 State income taxes, net of U.S. federal tax benefit (391) (176) (21) U.S. GILTI tax, net of foreign tax credits 77 — — Effect of foreign operations 2,096 729 (109) Change in valuation allowance (1,204) 2,448 (646) Change in unrecognized tax benefits, net 107 (32) 650 Impairment of goodwill 237 507 — Specialty tax credits (333) (249) (176) Statutory rate changes (282) (119) (249) Effect of foreign exchange (35) (346) (1,152) Loss of benefit of U.S. net operating loss — 1,064 967 Excess tax benefits related to share based compensation — (168) (357) Other (244) 6 (315) Total income tax expense $ 5,469 $ 7,509 $ 4,145 The 2017 Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in the future years or provide for tax expense related to GILTI in the year the tax is incurred. The Company has elected to recognize tax expense related to GILTI in the year the tax is incurred. The Company recognized approximately $11.9 million and $14.3 million of GILTI income for the years ended December 31, 2021 and 2020, respectively. The U.S. tax on the GILTI income, net of foreign tax credits, was $0.1 million for the year ended December 31, 2021 and was fully offset by foreign tax credits associated with GILTI and U.S. operating losses exclusive of GILTI for the year ended December 31, 2020. Any excess foreign tax credits associated with GILTI are lost and cannot be carried forward to future years. For the year ended December 31, 2020, the Company would have generated a net operating loss for U.S. federal income tax purposes but for the effects of the GILTI provision. Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands) : December 31, 2021 2020 Deferred tax assets: Pension and other postretirement costs $ 3,580 $ 4,296 Inventories 2,659 2,327 Net operating/capital loss and interest carryforwards 13,562 13,082 Tax credit carryforwards 3,026 1,994 Deferred compensation 3,267 2,930 Other accruals and reserves 4,425 3,420 Book over tax depreciation 93 Total gross deferred tax assets 30,519 28,142 Less: valuation allowance (16,486) (16,946) 14,033 11,196 Deferred tax liabilities: Tax over book depreciation (780) — Investment in subsidiary (1,958) (1,927) Intangible assets, including tax deductible goodwill (11,106) (5,657) Total gross deferred tax liabilities (13,844) (7,584) Net deferred tax assets $ 189 $ 3,612 In 2015, the Company established a valuation allowance with respect to substantially all of its U.S. deferred tax assets due to uncertainty regarding the realization of these assets. Throughout 2021 and 2020, the Company reassessed its ability to realize its U.S. and other deferred tax assets by considering both positive and negative evidence regarding realization. The most significant negative evidence is continuing cumulative operating losses in the U.S. The impact of the acquisitions of Stress-Tek, Pacific Instruments, DSI and DTS was also considered in determining the realization of the U.S. deferred tax assets. Other aspects, such as operating results, additional interest expense and additional tax deductions related to the Stress-Tek acquisition, were also considered. The Company also considered positive evidence such as tax planning strategies and the projected benefits of our restructuring efforts. However, there was insufficient positive evidence to overcome the negative evidence. In November 2019, the Company acquired DSI. DSI's opening balance sheet included $17 million of gross deferred tax liabilities, including $4.1 million of indefinite-lived liabilities. The acquisition contributed to a $2.5 million net reduction in valuation allowance and current tax benefit for the Company in 2019. In the fourth quarter of 2020, the Company completed the purchase accounting for the acquisition of DSI, which resulted in the recognition of additional deferred tax assets of $1.7 million and a corresponding increase in valuation allowance. In June 2021, the Company acquired DTS. DTS's opening balance sheet included $26.4 million of gross deferred tax liabilities, including $2.4 million of indefinite-lived liabilities. The acquisition contributed to a $1.6 million net reduction in valuation allowance and deferred tax benefit for the Company in 2021. The Company has one year from the date of acquisition to finalize the purchase accounting for DTS. Overall, the cumulative losses and the acquisition impacts still indicate that realization of our U.S. deferred tax assets remains uncertain such that the Company cannot conclude that it is "more likely than not" that the deferred tax assets will be recoverable. We will continue to monitor the realization of U.S. deferred tax assets and reduce the valuation allowance if, and when, sufficient positive evidence of realization exists. At December 31, 2021 and 2020, the valuation allowance on U.S. deferred tax assets was approximately $13.9 million and $14.9 million, respectively. The net change in valuation allowance was approximately $1.0 million. The change in valuation allowance related to state taxes was $0.6 million and $0.7 million expense for the years ended December 31, 2021 and 2020, respectively. The Company also has valuation allowances of $2.6 million and $2.0 million at December 31, 2021 and 2020, respectively, with respect to certain foreign net operating loss and capital loss carryforwards. Significant valuation allowances are as follows (in thousands) : December 31, Jurisdiction 2021 2020 U.S. federal $ 4,233 $ 5,816 U.S. state (net of U.S. federal tax benefit) 9,648 9,090 Israel - capital losses 1,537 1,390 The following table summarizes significant net operating losses and credit carryforwards as of December 31, 2021 (in thousands): December 31, Jurisdiction 2021 Expiring U.S. federal net operating losses $ 5,097 No expiration U.S. federal interest expense carryover 4,169 No expiration U.S. foreign tax credit 2,336 2024 - 2031 U.S. state net operating losses 110,725 2023 - 2041 Israel capital losses 6,681 No expiration Utilization of U.S. federal net operating losses is taken into account before the GILTI deduction allowable by IRC Section 250. Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $213.9 million at December 31, December 31, 2021 compared to $178.2 million at December 31, 2020. As a result of the 2017 Tax Act, in 2017 the Company had provided for a deferred tax liability of approximately $1.8 million of withholding tax associated with a planned cash distribution of approximately $25.5 million. As of December 31, 2021, other than the planned cash distribution of $14.1 million, substantially all of the remaining undistributed earnings are considered to be indefinitely reinvested and accordingly no provision has been made with respect to these earnings for incremental foreign income taxes, state income taxes or foreign withholding taxes. If those earnings were distributed to the U.S., the Company could be subject to incremental foreign income taxes, state income taxes, and withholding taxes. Determination of the amount of unrecognized deferred tax liability is not practicable because of the uncertainty regarding the timing of any such distribution and the impact on existing valuation allowances. In addition to the $1.5 million, additional withholding taxes of approximately $22.5 million are estimated to be payable upon remittance of the remaining previously unremitted earnings as of December 31, 2021. Net income taxes paid were $7.7 million, $4.3 million, and $11.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction establishes rules that set forth the years which are subject to examination by its tax authorities. While the Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a final tax liability in a jurisdiction to be determined, particularly in the event of an audit. If an uncertain matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment, including interest and penalties. The following table summarizes changes in the Company's gross liabilities, excluding interest and penalties, associated with unrecognized tax benefits (in thousands) : December 31, 2021 2020 2019 Balance at beginning of year $ 1,244 $ 1,355 $ 912 Addition based on tax positions related to current year 52 51 144 Addition based on tax positions related to prior years — — 668 Reduction based on tax positions related to prior years — (57) (32) Currency translation adjustments 41 92 3 Reduction for settled tax examinations — (73) — Reduction for payments made — (22) (134) Reduction for lapses of statute of limitations (55) (102) (206) Balance at end of year $ 1,282 $ 1,244 $ 1,355 The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Related to the unrecognized tax benefits noted above, for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, the Company accrued total penalties and interest of $0.1 million, $0.0 million and $0.0 million, respectively. As of December 31, 2021, December 31, 2020 and December 31, 2019, accrued penalties and interest were $0.2 million, $0.1 million and $0.1 million, respectively. Included in the balance of unrecognized tax benefits as of December 31, 2021, 2020, and 2019 is $1.3 million, $1.2 million, and $1.4 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The Company believes that it is reasonably possible that an increase in unrecognized tax benefits related to foreign exposures of between $0.1 million and $0.2 million may be necessary in 2022. As of December 31, 2021, the Company anticipates that it is reasonably possible that it will reverse $0.3 million of its current unrecognized tax benefits within the next calendar year due to the expiration of the statute of limitations in certain jurisdictions. None of the unrecognized tax benefits the Company expects to reverse in 2022 due to statute lapses are covered by the Tax Matters Agreement. The Company and its subsidiaries file U.S. federal income tax returns, as well as income tax returns in various state, local, and foreign jurisdictions. The Company files federal, state, and local income tax returns on a combined, unitary, or stand-alone basis. The statute of limitations in those jurisdictions generally ranges from 3 to 4 years. Additionally, the Company's foreign subsidiaries file income tax returns in the countries in which they have operations and the statutes of limitations in those jurisdictions generally range from 3 to 10 years. During the fourth quarters of 2020 and 2021, the Company concluded tax examinations in Israel for one of its subsidiaries covering 2015 and 2016, respectively. The conclusions of the audits resulted in no significant changes in tax and a releases of less than $0.1 million of reserves for uncertain tax positions for each of those years, including accrued interest. During the second and third quarters of 2019, the Company concluded tax examinations in Taiwan and Belgium, respectively, for two of its subsidiaries, covering the years 2016 and 2017. The conclusion of the tax examinations resulted in no significant change in tax. The Company is subject to ongoing income tax audits, administrative appeals and judicial proceedings in India spanning a number of years. |