14. Income Taxes

Components of Income Before Income Taxes

The components of income before income taxes consist of the following:

	For the Fiscal Year Ended
	June 25, 2017		June 26, 2016		June 28, 2015
United States	$	2,689	$	21,679	$	36,430
Foreign		40,586		26,564		17,382
Income before income taxes	$	43,275	$	48,243	$	53,812

Components of Provision for Income Taxes

Provision for income taxes consists of the following:

	For the Fiscal Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
Current:
Federal	$	(6,082	)	$	1,545		$	8,748
State		(130	)		764			1,369
Foreign		10,224			6,781			7,025
Total current tax expense		4,012			9,090			17,142
Deferred:
Federal		6,602			6,304			(4,006	)
State		162			255			(112	)
Foreign		122			(576	)		322
Total deferred tax expense		6,886			5,983			(3,796	)
Provision for income taxes	$	10,898		$	15,073		$	13,346

Utilization of Net Operating Loss Carryforwards

In fiscal 2017, UNIFI generated a U.S. federal net operating loss (“NOL”) of $25,500 that it expects to carryback to fiscal 2015 and 2016. Foreign deferred tax expense includes the utilization of NOL carryforwards of $756, $0 and $147 for fiscal 2017, 2016 and 2015, respectively. State deferred tax expense includes the utilization of NOL carryforwards of $26, $42 and $196 for fiscal 2017, 2016 and 2015, respectively.

Effective Tax Rate

Reconciliation from the federal statutory tax rate to the effective tax rate is as follows:

	For the Fiscal Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Foreign income taxed at different rates		(10.2	)		(7.7	)		(3.2	)
Repatriation of foreign earnings and withholding taxes		1.4			(1.0	)		(0.3	)
Change in valuation allowance		(0.5	)		(3.7	)		(5.6	)
Domestic production activities deduction		2.0			(0.5	)		(1.3	)
Research and other credits		(5.1	)		4.8			(0.4	)
State income taxes, net of federal tax benefit		0.2			1.5			1.8
Change in uncertain tax positions		1.8			1.2			5.4
Settlement of certain intercompany foreign currency transactions		—			—			5.6
Indefinite reinvestment assertion		—			—			(14.2	)
Renewable energy credits		—			—			(1.9	)
Nondeductible expenses and other		0.6			1.6			3.9
Effective tax rate		25.2	%		31.2	%		24.8	%

The effective tax rate for fiscal 2017 benefited from, among other things, (i) a lower overall effective tax rate for UNIFI’s foreign earnings (reflecting free-trade zone sales in El Salvador and lower statutory tax rates in both Brazil and China), (ii) increased research and development credits, (iii) a decrease in the valuation allowance reflecting the recognition of lower taxable income versus book income for UNIFI’s investment in PAL (for which UNIFI maintains a full valuation allowance) and (iv) a reduction in the valuation allowance related to foreign NOLs utilized in 2017. These benefits were partially offset by (a) a reduction in the domestic production activities deduction due to the carryback of certain losses, (b) a change in uncertain tax positions and (c) withholding taxes on repatriation of foreign earnings.

The effective tax rate for fiscal 2016 benefited from, among other things, (i) a lower overall effective tax rate for UNIFI’s foreign earnings (reflecting free-trade zone sales in El Salvador and lower statutory tax rates in both Brazil and China), (ii) a decrease in the valuation allowance reflecting the recognition of lower taxable income versus book income for UNIFI’s investment in PAL (for which UNIFI maintains a full valuation allowance) and (iii) a reduction in the valuation allowance related to foreign tax credits utilized in fiscal 2016. These benefits were partially offset by (a) utilization of foreign tax credits, (b) an increase in the valuation allowance for NOLs, including Renewables, for which no tax benefit could be recognized, (c) state and local taxes net of the assumed federal benefit and (d) a change in uncertain tax positions.

The effective tax rate for fiscal 2015 benefited from, among other things, (i) a lower overall effective tax rate for UNIFI’s foreign earnings (reflecting free-trade zone sales in El Salvador and lower statutory tax rates in both Brazil and China), (ii) the reversal of the indefinite reinvestment assertion which provided for indefinitely reinvested foreign earnings at June 28, 2015, (iii) a decrease in the valuation allowance reflecting the recognition of lower taxable income versus book income for UNIFI’s investment in PAL (for which UNIFI maintains a full valuation allowance), (iv) benefits from federal and state credits, especially renewable energy credits in connection with the installation of a solar farm, and (v) the domestic production activities deduction. These benefits were partially offset by (a) the change in uncertain tax positions, (b) an increase in the valuation allowance related to Renewables, (c) certain nondeductible expenses, (d) state income taxes (net of federal benefit) and (e) the settlement of certain intercompany foreign currency transactions.

Deferred Income Taxes

The significant components of UNIFI’s deferred tax assets and liabilities consist of the following:

	June 25, 2017			June 26, 2016
Deferred tax assets:
Investments, including unconsolidated affiliates	$	7,737		$	8,337
State tax credits		338			361
Accrued liabilities and valuation reserves		3,952			3,660
NOL carryforwards		7,854			3,952
Intangible assets, net		3,932			4,349
Incentive compensation plans		2,487			3,297
Foreign tax credits		789			—
Capital loss carryforward		1,746			—
Research credit carryforward		1,115			—
Other items		5,224			4,668
Total gross deferred tax assets		35,174			28,624
Valuation allowance		(17,957	)		(13,550	)
Net deferred tax assets		17,217			15,074
Deferred tax liabilities:
Property, plant and equipment		(26,417	)		(17,098	)
Other		(63	)		(580	)
Total deferred tax liabilities		(26,480	)		(17,678	)
Net deferred tax liabilities	$	(9,263	)	$	(2,604	)

Deferred Income Taxes - Valuation Allowance

In assessing the realizability of deferred tax assets, UNIFI considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. UNIFI considers the scheduled reversal of taxable temporary differences, taxable income in carryback years, projected future taxable income and tax planning strategies in making this assessment. Since UNIFI operates in multiple jurisdictions, the assessment is made on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law.

The balances and activity for UNIFI’s deferred tax valuation allowance are as follows:

	For the Fiscal Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
Balance at beginning of year	$	(13,550	)	$	(15,606	)	$	(18,615	)
(Increase) decrease in valuation allowance		(4,407	)		2,056			3,009
Balance at end of year	$	(17,957	)	$	(13,550	)	$	(15,606	)

Components of UNIFI’s deferred tax valuation allowance are as follows:

	For the Fiscal Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
Investment in a former domestic unconsolidated affiliate	$	(6,269	)	$	(6,418	)	$	(6,503	)
Equity-method investment in PAL		(1,520	)		(2,102	)		(3,261	)
Certain losses carried forward ⁽¹⁾		(5,924	)		(5,030	)		(4,162	)
State NOLs		(108	)		—			—
Other foreign NOLs ⁽²⁾		(3,347	)		—			—
Foreign tax credits		(789	)		—			(1,680	)
Total deferred tax valuation allowance	$	(17,957	)	$	(13,550	)	$	(15,606	)

(1)	Certain U.S. NOLs and capital losses outside the U.S. consolidated tax filing group.

(2)	Presented net of certain NOL carryforward deferred tax assets.

During fiscal 2017, UNIFI’s valuation allowance increased by $4,407. This increase consisted primarily of $4,241 of foreign losses, and $789 of foreign tax credit carryforwards for which no benefit can be recognized. The increase was partially offset by a net decrease of $582 related to UNIFI’s investment in PAL due to the timing of PAL’s taxable income versus book income.

During fiscal 2016, UNIFI’s valuation allowance decreased by $2,056. This decrease consisted primarily of $1,159 related to UNIFI’s investment in PAL due to the timing of PAL’s taxable income versus book income and the utilization of $1,680 of foreign tax credits. The decrease was partially offset by a net increase of $858 related to UNIFI’s investment in Renewables and related NOLs as a result of its continued losses.

During fiscal 2015, UNIFI’s valuation allowance decreased by $3,009. This decrease relates to the timing of taxable income versus book income for PAL, partially offset by a net increase in NOLs for Renewables which were deemed unrealizable, and the disposal of certain miscanthus grass.

Unrecognized Tax Benefits

A reconciliation of beginning and ending gross amounts of unrecognized tax benefits is as follows:

	For the Fiscal Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
Balance at beginning of year	$	4,532		$	4,029		$	983
Gross increases related to current period tax positions		473			110			3,469
Gross increases related to tax positions in prior periods		711			1,058			18
Gross decreases related to settlements with tax authorities		(480	)		(274	)		(178	)
Gross decreases related to lapse of applicable statute of limitations		—			(391	)		(263	)
Balance at end of year	$	5,236		$	4,532		$	4,029

Unrecognized tax benefits would generate a favorable impact of $5,236 on UNIFI’s effective tax rate when recognized. UNIFI does not expect material changes in uncertain tax positions within the next 12 months. The reversal of interest and penalties recognized by UNIFI within the provision for income taxes were $(42), $(23) and $(95) for fiscal 2017, 2016 and 2015, respectively. UNIFI had $773, $279 and $23 accrued for interest and/or penalties related to uncertain tax positions as of June 25, 2017, June 26, 2016 and June 28, 2015, respectively.

Expiration of Net Operating Loss Carryforwards and Foreign Tax Credits

As of June 25, 2017, UNIFI had U.S. federal NOLs held outside the U.S. consolidated tax filing group of $10,430, which carry a full valuation allowance. These carryforwards, if unused, will begin to expire in 2030. As of June 25, 2017, UNIFI had U.S. federal capital loss carryforwards held outside the U.S. consolidated tax filing group of $4,489, which carry a full valuation allowance. These carryforwards, if unused, will begin to expire in 2027.

As of June 25, 2017, UNIFI had $10,325 of state NOL carryforwards in the United States that may be used to offset future taxable income, $6,666 of which are offset by a valuation allowance. These carryforwards, if unused, will begin to expire in 2022. As of June 25, 2017, the Company also had U.S. state NOLs held outside the U.S. consolidated tax filing group of $12,796, which are offset by a full valuation allowance. These carryforwards, if unused, will begin to expire in 2028.

As of June 25, 2017, UNIFI had foreign NOL carryforwards of $13,468, offset by a full valuation allowance, which, if unused, will begin to expire in 2019.

As of June 25, 2017, UNIFI had research and development credit carryforwards of $1,274, which, if unused, will begin to expire in 2036.

As of June 25, 2017, UNIFI had foreign tax credits in foreign jurisdictions of $789 with no expiration, which are offset by a full valuation allowance.

Tax Years Subject to Examination

Unifi, Inc. and its domestic subsidiaries file a consolidated federal income tax return, as well as income tax returns in multiple state and foreign jurisdictions. The tax years subject to examination vary by jurisdiction. UNIFI regularly assesses the outcomes of both completed and ongoing examinations to ensure that UNIFI’s provision for income taxes is sufficient.

In fiscal 2016, the Internal Revenue Service (the “IRS”) examined UNIFI’s federal income tax return for fiscal 2013. The examination closed with no material assessment. On June 29, 2017, UNIFI received a notice of audit from the IRS covering the amended tax returns filed for fiscal 2013, 2014 and 2015.

In fiscal 2016, the North Carolina Department of Revenue initiated an audit for tax periods ending June 24, 2012 to June 29, 2014. The audit was not concluded at the end of fiscal 2017. No material assessment is anticipated.

UNIFI is currently under appeal in Colombia for tax years 2006 and 2007. UNIFI believes it is more-likely-than-not to conclude the appeal with no material assessment.

Statutes related to material foreign jurisdictions are open from January 1, 2012 and material state jurisdictions from June 30, 2013. Certain carryforward tax attributes generated in years prior remain subject to examination and could change subsequent tax years.

Indefinite Reinvestment Assertion

UNIFI provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the United States.

As of June 25, 2017, U.S. income taxes were not provided for on a cumulative total of approximately $80,300 of undistributed earnings and profits of UNIFI’s foreign subsidiaries as UNIFI currently intends to reinvest these earnings in these foreign operations indefinitely. If at a later date, these earnings were repatriated to the United States, UNIFI would be required to pay taxes on these amounts. Nevertheless, in future periods, UNIFI will continue to assess the existing circumstances, including any changes in tax laws, and reevaluate the necessity for any deferred tax liability. Determination of the amount of any deferred tax liability on these undistributed earnings is not practicable.