Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.22.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
 
Income from continuing operations before provision (benefit) for income taxes are taxed under the following jurisdictions (dollar amounts in thousands):
Year Ended December 31, 2022 2021
Domestic $ (7,505) $ 14,932 
Foreign 22,720  16,890 
Total $ 15,215  $ 31,822 
 
Components of the provision (benefit) for income taxes for each of the two years in the period ended December 31, 2022 are as follows (dollar amounts in thousands):
Year Ended December 31, 2022 2021
Current:    
Federal $ 2  $ — 
State (48) 54 
Foreign 6,725  5,690 
Subtotal 6,679  5,744 
Deferred:    
Federal 5,792  (5,679)
State (13) 146 
Foreign 2,207  1,404 
Subtotal 7,986  (4,129)
Total provision (benefit) for income taxes $ 14,665  $ 1,615 
 
The provision (benefit) for income taxes, as a percentage of income from continuing operations before provision (benefit) for income taxes, differs from the statutory U.S. federal income tax rate due to the following:
Year Ended December 31, 2022 2021
Statutory U.S. federal income tax rate 21.0  % 21.0  %
State income taxes, net of U.S. federal income tax benefit (0.5) 0.4 
U.S. tax impact of foreign operations (8.6) (6.3)
Valuation allowance change 64.3  (19.7)
Unrecognized tax benefits 1.4  0.5 
Permanent foreign items 4.3  2.4 
Withholding tax on royalties 4.2  3.4 
Executive compensation 2.7  4.9 
Stock compensation (2.4) (4.0)
Tax return to provision differences (3.4) 0.4 
Income eliminated in consolidation 13.1  1.7 
Other 0.3  0.4 
Effective income tax rate 96.4  % 5.1  %

Adjustments relating to the U.S. impact of foreign operations decreased the effective tax rate by 8.6 percentage points and 6.3 percentage points in 2022 and 2021, respectively. The components of this calculation were:
Components of U.S. tax impact of foreign operations 2022 2021
Foreign tax credits (19.4) % (7.4) %
Foreign tax rate differentials 1.5  0.6 
Foreign withholding taxes 2.6  1.9 
Transfer pricing adjustment 1.2  0.6 
Impact of Subpart F 1.8  — 
Impact of GILTI 3.7  0.7 
Impact of FDII —  (2.7)
Total (8.6) % (6.3) %
The significant components of the deferred tax assets (liabilities) are as follows (dollar amounts in thousands):
As of December 31, 2022 2021
Inventory $ 1,612  $ 1,173 
Accrued liabilities 2,859  2,364 
Operating lease liabilities 2,667  2,871 
Deferred compensation 160  228 
Share-based compensation 797  877 
Intangible assets 115  131 
Bad debts 9  30 
Net operating losses 5,060  4,861 
Foreign tax and withholding credits 15,392  14,116 
Accrued compensation 304  1,726 
Other deferred tax assets 1,960  2,160 
Valuation allowance (18,049) (8,650)
Total deferred tax assets 12,886  21,887 
Accelerated depreciation (4,029) (5,171)
Right of use assets (2,365) (2,544)
Tax on unremitted earnings (1,032) (2,107)
Other deferred tax liabilities (40) (41)
Total deferred tax liabilities (7,466) (9,863)
Total deferred taxes, net $ 5,420  $ 12,024 

The components of deferred tax assets (liabilities), net are as follows (dollar amounts in thousands):
As of December 31, 2022 2021
Net deferred tax assets $ 6,859  $ 13,590 
Net deferred tax liabilities (1,439) (1,566)
Total deferred taxes, net $ 5,420  $ 12,024 

We have elected the period cost method (costs are treated as a current period expense when incurred) under U.S. GAAP as it relates to GILTI income inclusions in U.S. taxable income. Each reporting period we analyze our indefinite reinvestment assertions with respect to undistributed foreign earnings. As of December 31, 2022, we continue to assert that we do not intend to reinvest undistributed foreign earnings indefinitely in our foreign subsidiaries.
 
We have provided a valuation allowance of $18.0 million and $8.7 million as of December 31, 2022 and 2021, respectively, for certain deferred tax assets, including foreign net operating losses, for which we cannot conclude it is more likely than not that they will be realized. We reviewed our tax positions and increased the valuation allowance by approximately $9.4 million in 2022 primarily due to a domestic increase of $7.5 million and a foreign increase of $1.9 million. For financial reporting purposes, the increase in valuation allowances increases income tax expenses in the year recorded. At December 31, 2022, we had approximately $15.4 million of foreign tax and withholding credits. Of the $15.4 million credits, $15.0 million are foreign tax credits, most of which expire in 2024 and a majority of which are offset by a valuation allowance.
 
At December 31, 2022, foreign subsidiaries had unused operating loss carryovers for tax purposes of approximately $5.1 million, tax effected. The net operating losses will expire at various dates from 2023 through 2034, with the exception of those in some foreign jurisdictions where there is no expiration. The foreign net operating losses have a valuation allowance recorded against the portion expected to expire before utilization.
 
We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. We believe we have appropriately provided for income taxes for all years. Several factors drive the calculation of our tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) the issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to our reserves, which would impact our reported financial results.
 
Our U.S. federal income tax returns for 2019 through 2021 are open to examination for federal tax purposes. We have several foreign tax jurisdictions that have open tax years from 2017 through 2021.

The total outstanding balance for liabilities related to unrecognized tax benefits at December 31, 2022 and 2021 was $0.2 million and $0, respectively, all of which would favorably impact the rate if recognized. Included in these amounts is approximately $0.1 million and $0, respectively, of combined interest and penalties. We increased interest and penalties approximately $0.1 million for the year ended December 31, 2022 and decreased interest and penalties approximately $36,000 for the year ended December 31, 2021. We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision.
 
During the years ended December 31, 2022 and 2021, we added approximately $0.2 million and $0, respectively to our liability for unrecognized tax benefits. In addition, we recorded a benefit related to the lapse of applicable statute of limitations of approximately $0 and $0.1 million for the years ended December 31, 2022 and 2021, respectively, all of which favorably impacted our effective tax rate.
 
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits, excluding interest and penalties, is as follows for the years (dollar amounts in thousands):
Year Ended December 31, 2022 2021
Unrecognized tax benefits, opening balance $ —  $ 56 
Settlement of liability reclassified as income tax payable —  — 
Payments on liability (5) (175)
Tax positions taken in a prior period    
Gross increases 120  412 
Gross decreases —  (237)
Tax positions taken in the current period    
Gross increases —  — 
Gross decreases —  — 
Lapse of applicable statute of limitations —  (52)
Currency translation adjustments (5) (4)
Unrecognized tax benefits, ending balance $ 110  $ — 
 
We do not anticipate a significant change to liabilities related to unrecognized tax benefits within the next twelve months and do not have any unrecognized tax benefits that, if recognized, would affect the effective tax rate.

Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such determination.