Note 8 - Income Taxes

12 Months Ended

May 28, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

8 . Income Taxes

The provision for income taxes consisted of the following (in thousands):

	Year Ended
	May 28, 2017		May 29, 2016			May 31, 2015
Current:
Federal	$	1,690	$	2,382		$	3,480
State		57		(82	)		43
Foreign		82		83			71
Total		1,829		2,383			3,594
Deferred:
Federal		2,244		(9,177	)		3,789
State		262		(610	)		363
Total		2,506		(9,787	)		4,152
Income tax expense (benefit)	$	4,335	$	(7,404	)	$	7,746

The actual provision for income taxes differs from the statutory U.S.

federal income tax rate of

35%

for all years presented as follows (in thousands):

	Year Ended
	May 28, 2017			May 29, 2016			May 31, 2015
Provision at U.S. statutory rate of 35%	$	5,224		$	(6,666	)	$	7,451
State income taxes, net of federal benefit		325			(504	)		566
Change in valuation allowance		85			6			353
Tax credits		(834	)		(156	)		(375	)
S tock-based compensation		(365	)		173			142
Domestic manufacturing deduction		(243	)		(307	)		(369	)
Other		143			50			(22	)
Total	$	4,335		$	(7,404	)	$	7,746

Significant components of deferred tax assets and liabilities consisted of the following (in thousands):

	Year Ended
	May 28, 2017			May 29, 2016
Deferred tax assets:
Accruals and reserves	$	3,242		$	1,836
Net operating loss carryforwards		2,766			3,030
Stock-based compensation		2,032			1,436
Research and AMT credit carryforwards		1,050			468
Other		661			926
Gross deferred tax assets		9,751			7,696
Valuation allowance		(1,325	)		(1,240	)
Net deferred tax assets		8,426			6,456
Deferred tax liabilities:
Basis difference in investment in non-public company		(11,495	)		(11,125	)
Goodwill and other indefinite life intangibles		(11,119	)		(8,015	)
Depreciation and amortization		(10,393	)		(9,758	)
Deferred tax liabilities		(33,007	)		(28,898	)
Net deferred tax liabilities	$	(24,581	)	$	(22,442	)

The increase in the income tax expense for fiscal year

2017

was

primarily due the Company’s overall net income before tax position in fiscal year

2017

in comparison to an income tax benefit position in fiscal year

2016,

which was primarily due to the Company’s

$34

million impairment of its GreenLine trade name in fiscal year

2016,

which resulted in an overall net loss before taxes for fiscal year

2016.

Additionally, the effective tax rate for fiscal year

2017

decreased to

29%

from

39%

 in fiscal year

2016.

During the fiscal year ended

May 28, 2017,

excess tax benefits related to stock-based compensation of

$19

2,000

were reflected in the consolidated statements of comprehensive income as a component of income tax expense as a result of the early adoption of ASU

2016

-

09,

specifically related to the prospective application of excess tax benefits and tax deficiencies related to stock-based compensation.

The Company elected to early adopt the new guidance of ASU

2016

-

09,

Compensation – Stock Compensation (Topic

718

)

:

Improvements to Employee Share-Based Payments Accounting

, in the quarter beginning

May 30, 2016.

Accordingly the primary effects of the adoption are as follows: (

1

) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of

$549

,000

as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same, (

2

) using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a

$200

,000

increase to additional paid in capital, a

$126

,000

reduction to retained earnings, and a

$74

,000

reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance, and (

3

)

$150,000

and

$463,000

in excess tax benefits from stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for the fiscal years ended

May 29, 2016

and

May 31, 2015,

respectively, in the Consolidated Statements of Cash Flows.

As of

May 2

8,

2017,

the Company had federal, Indiana, and other state net operating loss carryforwards of approximately

$6.8

million,

$5.7

million, and

$3.0

million respectively. These losses expire in different periods through

2032

if

not

utilized. The Company acquired additional net operating losses through the acquisition of GreenLine in

2012.

Utilization of these acquired net operating losses in a specific year is limited due to the “change in ownership” provision of the Internal Revenue Code of

1986

and similar state provisions. The net operating losses presented above for federal and state purposes is net of any such limitation.

The Company has California research and development tax credits carryforwards of approximately

$1.2

million. The research and development tax credit carryforwards have an unlimited carryforward period for California purposes.

Valuation allowances are reviewed each period on a tax jurisdiction by

jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. Based on this analysis and considering all positive and negative evidence, the Company determined that a valuation allowance of

$1.3

million should be recorded as a result of uncertainty around the utilization of certain state net operating losses, and a capital loss on the Company’s investment in Aesthetic Sciences as it is more likely than

not

that a portion of the deferred tax asset will

not

be realized in the foreseeable future. The valuation allowance increased by an immaterial amount from the prior year primarily due to uncertainty around the utilization of certain state net operating losses and credits.

The accounting for uncertainty in income taxes recognized

in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	As of
	May 28 , 2017			May 29, 2016			May 31, 2015
Unrecognized tax benefits – beginning of the period	$	842		$	987		$	1,035
Gross increases – tax positions in prior period		11			1			17
Gross decreases – tax positions in prior period		(90	)		(223	)		(141	)
Gross increases – current-period tax positions		93			77			76
Lapse of statute of limitations		(319	)		—			—
Unrecognized tax benefits – end of the period	$	537		$	842		$	987

As of

May 28, 2017,

the total amount of net unrecognized tax benefits was

$537

,000,

of which

$419

,000,

if recognized, would affect the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest was

not

material as of

May 28, 2017.

Additionally, the Company expects its unrecognized tax benefits to decrease by approximately

$215

,000

within the next

12

months

.

Due to tax attribute carryforwards, the Company is subject to examination for tax years

2013

forward for U.S. tax purposes. The Company is also subject to examination in various state ju

risdictions for tax years

1998

forward,

none

of which were individually material.