TWIN DISC INC Income Taxes Disclosure

O. INCOME TAXES

 

United States and foreign (loss) income before income taxes and minority interest as of June 30 were as follows:

 

		2025				2024
United States		$	(12,329	)		$	(6,213	)
Foreign			14,098				21,580
		$	1,769			$	15,367

 

The provision (benefit) for income taxes is comprised of the following:

 

		2025				2024
Currently payable:
Federal		$	(32	)		$	7
State			62				66
Foreign			4,919				4,608
			4,949				4,681
Deferred:
Federal		$	-			$	10
State			(289	)			(2	)
Foreign			(1,292	)			(568	)
			(1,581	)			(560	)
		$	3,368			$	4,121

 

The components of the net deferred tax asset as of June 30 are summarized in the table below.

 

		2025				2024
Deferred tax assets:
Retirement plans and employee benefits		$	5,065			$	4,683
Foreign tax credit carryforwards			9,639				8,347
Federal tax credits, net of ASU 2013-11			1,645				1,683
State net operating loss and other state credit carryforwards, net of ASU 2013-11			2,651				2,226
Federal net operating loss			-				4,042
Reserves			1,053				931
Inventories			1,138				93
Research & experimental expenditure capitalization			1,118				816
Foreign net operating loss carryforwards			450				52
Accruals			620				1,081
Right of use assets - operating leases			4,629				4,038
Disallowed interest			1,751				1,384
Capital loss carryforward			108				108
Translation adjustment			1,417				565
Other assets			298				108
			31,582				30,157
Valuation allowance			(23,964	)			(24,035	)
		$	7,618			$	6,122

 

Deferred tax liabilities:
Inventories		$	59.0			$	-
Property, plant and equipment			2,719				673
Intangible assets			1,058				1,010
Long term operating lease obligations			4,917				4,034
Hedging			11				445
Step-up on fair value adjustment			-				2,530
Other liabilities			362				431
			9,126				9,123
Total net deferred tax liabilities		$	(1,508	)		$	(3,001	)

 

At June 30, 2025 the Company has net operating loss carryforwards (“NOLs”) of approximately $0 and $31,031 for federal and state income tax purposes which will expire at various dates from fiscal year 2026 – 2044.  During the year, the Company filed amended tax returns, which resulted in adjustments to certain tax attribute balances, including federal net operating loss and foreign tax credit carryforwards. The Company has federal and state tax credit carryforwards of approximately $11,718 and $1,276, respectively, which will expire at various dates from fiscal 2026 – 2044. The majority of the Company’s foreign tax credit carryforwards, which make up $9,639 of the $11,718, are scheduled to expire in fiscal year 2026.

 

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The Company has evaluated the likelihood of whether the net deferred tax assets would be realized and concluded that it is more likely than not that all of deferred tax assets would not be realized. Management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $23,964 and $24,035 have been recorded for fiscal years 2025 and 2024, respectively.

 

Following is a reconciliation of the applicable U.S. federal income taxes to the actual income taxes reflected in the statements of operations (in thousands):

 

		2025				2024
U.S. federal income tax at 21%		$	371			$	3,227
Increases (reductions) in tax resulting from:
US Foreign inclusion items			902				463
Foreign rate differences			361				555
Foreign permanent items			336				127
Foreign prior period adjustments			(79	)			118
Foreign other			5				3
Foreign bargain purchase gain			-				(782	)
Foreign tax ruling			-				(786	)
Foreign uncollectible tax receivable			-				238
State taxes			(242	)			(144	)
Change in prior year estimate			61				96
Research & development tax credits			(107	)			(47	)
Foreign tax credits			-				(480	)
Unrecognized tax benefits			-				3
Stock compensation			155				(445	)
Deferred tax basis adjustments			1,990				132
Executive compensation			372				471
FDII Deduction			(8	)			-
Valuation Allowance			(827	)			1,110
Other, net			78				262
		$	3,368			$	4,121

 

The Company has not provided additional U.S. income taxes on cumulative earnings of its consolidated foreign subsidiaries that are considered to be reinvested indefinitely. The Company reaffirms its position that the earnings of those subsidiaries remain permanently invested and has no plans to repatriate funds from any permanently reinvested subsidiaries to the U.S. for the foreseeable future. These earnings relate to ongoing operations and were approximately $30,302 and $20,977 at June 30, 2025 and June 30, 2024, respectively. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits.

 

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination are 2020 through 2025 for our major operations in Belgium, Japan, Netherlands, Singapore and Australia. The tax years open to examination in the U.S. are for years subsequent to fiscal 2020.

 

The Company has approximately $644 and $766 of unrecognized tax benefits as of June 30, 2025 and June 30, 2024 respectively, which, if recognized would impact the effective tax rate. No material changes are expected to the reserve during the next 12 months. The Company’s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense.

 

Below is a reconciliation of beginning and ending amount of unrecognized tax benefits as of June 30:

 

		2025				2024
Unrecognized tax benefits, beginning of year		$	766			$	774
Additions based on tax positions related to the prior year			95				-
Additions based on tax positions related to the current year			38				8
Reductions based on tax positions related to the prior year			(28	)			(16	)
Subtractions due to statues closing			(227	)			-
Unrecognized tax benefits, end of year		$	644			$	766

 

Substantially all of the Company’s unrecognized tax benefits as of June 30, 2025, if recognized, would affect the effective tax rate. As of June 30, 2025 and 2024, the amounts accrued for interest and penalties totaled $6 and $68, respectively, and are not included in the reconciliation above.

 

On July 4, 2025, the President signed H.R. 1, the “One Big Beautiful Bill Act,” into law. The legislation includes several changes to federal tax law that generally allow for more favorable deductibility of certain business expenses beginning in calendar year 2025, including the restoration of immediate expensing of domestic R&D expenditures, reinstatement of 100% bonus depreciation, and more favorable rules for determining the limitation on business interest expense.

 

The Act also includes certain changes to the US taxation of foreign activity, including changes to foreign tax credits, GILTI, FDII, and BEAT. These changes are generally effective for tax years beginning after December 31, 2025.

 

These changes were not reflected in the income tax provision for the period ended June 30, 2025, as enactment occurred after the balance sheet date.

 

The Company is currently evaluating the impact on future periods. This tax act may have a material impact on the company’s ability to realize it’s deferred tax assets and the need to maintain the valuation allowance.

 

The impacts of this law change is expected to be reflected in the first quarter of fiscal year 2026, the period in which the tax act was enacted into law.