Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES
NOTE 11: INCOME TAXES
The Company’s provision for income taxes consists of U.S. federal, state and local, and foreign taxes. The Company has significant operations in various locations outside the U.S. The annual effective tax rate is a composite rate reflecting the earnings in the various locations at their applicable statutory tax rates.
On October 8, 2021 the Organization for Economic Co-operation and Development “OECD”) released a statement on the OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing, which agreed to a two-pillar solution to address tax challenges of the digital economy. On December 20, 2021, the OECD released Pillar Two model rules defining a 15 percent global minimum tax rate for large multinational corporations with consolidated revenue above €750 million. The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected by calendar year 2024. The Company continues to evaluate the Pillar Two Framework and its potential impact on future periods, however based on the current proposed revenue thresholds, the Company does not expect to be subject to tax changes associated with Pillar Two.
Components of the income tax provision (benefit) were as follows (in thousands):
Year Ended
December 31, 2023 December 31, 2022 December 31, 2021
Current:
Federal $ 1,912  $ (364) $ 916 
State and local 725  419  283 
Foreign 4,746  6,190  3,957 
7,383  6,245  5,156 
Deferred:
Federal (1,082) (2,944) (6,498)
State and local (70) (581) (2,801)
Foreign 98  3,069  (3,001)
(1,054) (456) (12,300)
Total provision (benefit) for income taxes $ 6,329  $ 5,789  $ (7,144)
The following is a reconciliation of income tax provision (benefit) computed at the U.S. federal statutory rate to income tax provision (benefit) in the consolidated statements of operations (in thousands):
Year Ended
December 31, 2023 December 31, 2022 December 31, 2021
(Loss) income before income taxes:
Domestic $ (43,041) $ (86,952) $ (36,205)
Foreign 11,274  33,989  29,144 
Total (loss) income before income taxes $ (31,767) $ (52,963) $ (7,061)
Federal income tax rate 21.0% 21.0% 21.0%
Federal income taxes $ (6,671) $ (11,122) $ (1,483)
State and local taxes (1,449) (1,666) (3,572)
Foreign rate differential (325) (545) (1,431)
Change in tax rates (5) 295  225 
Change in uncertain tax positions 9  6  (1,005)
Change in valuation allowance 12,480  4,588  2,657 
Goodwill impairment 1,531  9,765  — 
U.S. effects of international operations 3,263  5,603  3,041 
Tax credits (3,667) (3,250) (2,763)
Section 162(m) limitation 475  87  206 
Transaction costs —  31  385 
Stock-based compensation 929  422  502 
Switzerland tax ruling —  —  (4,057)
Foreign withholding taxes 128  1,043  350 
Other (369) 532  (199)
Total provision (benefit) for income taxes $ 6,329  $ 5,789  $ (7,144)
Effective tax rate (19.9)% (10.9)% 101.2%
Significant components of the Company’s net deferred tax assets and liabilities were as follows (in thousands):
December 31, 2023 December 31, 2022
Deferred tax assets:
Accounts receivable $ 354  $ 441 
Accrued expenses 5,442  4,938 
Inventory 3,450  4,112 
Deferred rent
 24  — 
Other assets 1,690  1,184 
Pension asset 2,466  2,320 
Hedging
 275  — 
Capitalized research and development expense 979  445 
Lease accounting 5,695  5,458 
U.S. and foreign net operating losses 19,568  19,150 
Deferred interest expense 21,280  11,241 
Tax credits 1,028  887 
Total deferred tax assets 62,251  50,176 
Less valuation allowance (27,747) (16,592)
Net deferred tax assets $ 34,504  $ 33,584 
Deferred tax liabilities:
Property, plant and equipment (6,714) (6,270)
Operating lease right-of-use asset (4,971) (4,621)
Intangible assets (43,477) (45,964)
Deferred rent —  (63)
Unremitted earnings (2,447) (2,295)
Other liabilities (7,974) (6,417)
Total deferred tax liabilities (65,583) (65,630)
Net deferred tax liability $ (31,079) $ (32,046)
In assessing the recoverability of its deferred tax assets within the jurisdiction from which they arise, management considers whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of any net operating loss and tax credit carry forwards. The Company evaluates all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.
Based on the weight of available evidence, including the scheduling of existing taxable temporary differences into future taxable income, the Company determined that as of December 31, 2023 its deferred tax assets were realizable on a more-likely-than not basis with the exception of certain U.S. federal and state interest carryforward deductions of $12.8 million for which the tax deduction is generally restricted to 30% of future tax adjusted earnings before interest and taxes (“EBIT”), foreign tax credits of $1.0 million, certain state net operating loss carry forwards of $10.4 million predominately related to Illinois, and $3.5 million of foreign net operating loss carry forwards in India, Luxembourg, Mexico, China and Argentina. The Company’s valuation allowance during 2023 increased by approximately $11.2 million, of which $12.5 million was charged to income tax expense in 2023 (as shown in the rate reconciliation table above), partially offset by foreign exchange translation adjustments.
The Company received a beneficial Switzerland tax ruling in 2021 permitting a step up in the tax basis of intangible assets. The Company will be able to amortize the intangible assets over a 10-year period for Swiss tax purposes, resulting in future cash tax savings. The Company recognized a discrete tax benefit of $4.1 million in 2021 related to this change.
As of December 31, 2023, the Company had net operating loss carry forwards and tax credits which will expire if not utilized, including: $123.7 million in Illinois state net operating losses expiring between 2029 and 2043, $1.0 million of U.S. federal foreign tax credits expiring in 2030 through 2033, $86.8 million of federal deferred interest carryforward under IRC Section 163(j) that can be carried forward indefinitely but is limited to 30% tax adjusted EBIT, $1.2 million of net operating losses in Mexico substantially expiring in 2023 and through 2032, $9.8 million of net operating losses in Luxembourg substantially expiring in 2035 and through 2040, $1.1 million of net operating losses in India expiring in 2024 through 2028, $0.4 million of net operating losses in China expiring in 2023 through 2026 and $1.6 million of net operating losses in Argentina expiring in 2027 through 2028.
As of December 31, 2023 and 2022, the Company had accrued future income taxes and withholding taxes for future remittances to its Switzerland and Hong Kong affiliates of $2.4 million and $2.3 million, based on foreign earnings of $57.1 million and $56.1 million, respectively.
As of both December 31, 2023 and 2022, the Company had a liability for unrecognized tax positions of $0.1 million. As of December 31, 2023, the entire amount if recognized, would reduce the Company’s effective tax rate. The Company records both accrued interest and penalties related to income tax matters in the provision for income taxes in the accompanying consolidated statements of operations. The Company’s accrued interest and penalties related to uncertain tax positions is not material. The Company does not expect its unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s U.S. federal and state income tax periods are generally open to examination for the tax years 2019 through 2023. The Company’s French, Argentina, Luxembourg and Swiss tax years 2018 through 2023 also remain open for examination. In addition, open tax years related to the Company’s other foreign jurisdictions remain subject to examination but are not considered material.