Income Taxes

12 Months Ended

Jul. 03, 2022

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

Components of Income (Loss) Before Income Taxes

The components of income (loss) before income taxes consist of the following:

	For the Fiscal Year Ended
	July 3, 2022			June 27, 2021			June 28, 2020
U.S.	$	(18,364	)	$	(12,463	)	$	(74,905	)
Foreign		45,192			58,810			18,640
Income (loss) before income taxes	$	26,828		$	46,347		$	(56,265	)

Components of Provision for Income Taxes

Provision for income taxes consists of the following:

	For the Fiscal Year Ended
	July 3, 2022			June 27, 2021			June 28, 2020
Current:
Federal	$	(1,163	)	$	(577	)	$	282
State		2			25			(118	)
Foreign		15,935			12,739			4,819
Total current tax expense		14,774			12,187			4,983
Deferred:
Federal		(630	)		(1,564	)		(3,783	)
State		33			131			116
Foreign		(2,520	)		6,520			(344	)
Total deferred tax expense		(3,117	)		5,087			(4,011	)
Provision for income taxes	$	11,657		$	17,274		$	972

On December 22, 2017, the U.S. government enacted comprehensive tax legislation H.R. 1, formerly known as the Tax Cuts and Jobs Act.  The Global Intangible Low-Taxed Income (“GILTI”) provisions included in H.R. 1 require that certain income earned by foreign subsidiaries must be currently included in the gross income of the U.S. shareholder.  UNIFI has elected to recognize GILTI as a current-period expense. Under this policy, UNIFI has not provided deferred taxes related to temporary differences that, upon their reversal, will affect the amount of income subject to GILTI in the period.

On July 20, 2020, the U.S. Treasury issued and enacted final regulations related to GILTI that allow certain U.S. taxpayers to elect to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. The GILTI high-tax exclusion is an annual election and is retroactively available for tax years beginning after December 31, 2017. Fiscal 2021 includes a tax benefit of $4,816 related to the retroactive election.

Utilization of Net Operating Loss Carryforwards

Domestic deferred tax expense includes the utilization of federal net operating loss (“NOL”) carryforwards of $110, $5,312 and $89 for fiscal 2022, 2021, and 2020, respectively. Foreign deferred tax expense includes the utilization of NOL carryforwards of $32, $441, and $702 for fiscal 2022, 2021, and 2020, respectively. State deferred tax expense includes the utilization of NOL carryforwards of $25, $167, and $20 for fiscal 2022, 2021, and 2020, respectively.

Effective Tax Rate

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

	For the Fiscal Year Ended
	July 3, 2022			June 27, 2021			June 28, 2020
Federal statutory tax rate		21.0	%		21.0	%		21.0	%
Change in valuation allowance		12.6			5.0			0.6
Foreign income taxed at different rates		10.7			9.0			(1.2	)
Tax expense on unremitted foreign earnings		5.5			7.0			(0.9	)
Repatriation of foreign earnings and withholding taxes		3.9			1.8			(2.0	)
Change in uncertain tax positions		2.4			0.5			(0.3	)
Nondeductible compensation		2.1			1.4			(0.8	)
U.S. tax on GILTI		0.2			3.9			(5.0	)
Nontaxable income		(10.2	)		(2.4	)		1.1
Research and other business credits		(4.0	)		(3.7	)		2.0
State income taxes, net of federal tax benefit		(1.3	)		(0.2	)		2.6
Foreign tax credits		(0.5	)		(5.4	)		0.9
Deemed repatriation of foreign earnings under Subpart F		—			1.5			—
Domestic production activities deduction		—			0.6			—
Rate benefit of U.S. federal NOL carryback		—			(2.8	)		—
Valuation allowance related to loss on sale of investment in PAL		—			—			(19.3	)
Nondeductible expenses and other		1.1			0.1			(0.4	)
Effective tax rate		43.5	%		37.3	%		(1.7	)%

Deferred Income Taxes

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

	July 3, 2022			June 27, 2021
Deferred tax assets:
Capital loss carryforwards	$	16,318		$	17,429
Tax credits		12,079			18,711
Research and development costs		7,409			6,934
NOL carryforwards		6,603			3,043
Accrued compensation		2,106			4,056
Other items		4,877			4,815
Total gross deferred tax assets		49,392			54,988
Valuation allowance		(31,667	)		(36,980	)
Net deferred tax assets		17,725			18,008
Deferred tax liabilities:
PP&E		(14,952	)		(16,045	)
Unremitted earnings		(5,253	)		(3,769	)
Recovery of non-income taxes		132			(3,664	)
Other		(138	)		(8	)
Total deferred tax liabilities		(20,211	)		(23,486	)
Net deferred tax liabilities	$	(2,486	)	$	(5,478	)

Deferred Income Taxes – Valuation Allowance

In assessing its ability to realize 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, cumulative losses in recent 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. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of its deferred income tax asset balances to warrant the application of a full valuation allowance against the deferred tax assets of its U.S. consolidated group and certain foreign subsidiaries as of July 3, 2022.

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

	For the Fiscal Year Ended
	July 3, 2022			June 27, 2021			June 28, 2020
Capital loss carryforwards	$	(16,318	)	$	(17,429	)	$	(13,791	)
Tax credits		(10,779	)		(17,215	)		(17,111	)
NOL carryforwards		(4,570	)		(2,336	)		(2,542	)
Investments, including unconsolidated affiliates		—			—			(3,995	)
Total deferred tax valuation allowance	$	(31,667	)	$	(36,980	)	$	(37,439	)

During fiscal 2022, UNIFI’s valuation allowance decreased by $5,313. The decrease was primarily driven by a decrease in the valuation allowance on foreign tax credits and capital loss carryforwards, offset by an increase in the valuation allowance on federal net operating loss and research credits carryforwards.

During fiscal 2021, UNIFI’s valuation allowance decreased by $459. The decrease was primarily driven by a decrease in the valuation allowance on investments in unconsolidated affiliates and foreign tax credits, offset by an increase in the valuation allowance on research credits and capital loss carryforwards.

During fiscal 2020, UNIFI’s valuation allowance increased by $11,419. The increase was primarily driven by an increase in the valuation allowance on a capital loss generated by the sale of UNIFI’s interest in PAL.  

Unrecognized Tax Benefits

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

	For the Fiscal Year Ended
	July 3, 2022			June 27, 2021			June 28, 2020
Balance at beginning of year	$	2,590		$	1,218		$	1,083
Gross increases (decreases) related to current period tax positions		408			(24	)		98
Gross (decreases) increases related to tax positions in prior periods		(89	)		1,396			37
Gross decreases related to settlements with tax authorities		—			—			—
Gross decreases related to lapse of applicable statute of limitations		—			—			—
Balance at end of year	$	2,909		$	2,590		$	1,218

Unrecognized tax benefits would generate a favorable impact of $4,746 on UNIFI’s effective tax rate when recognized. UNIFI does not expect material changes in uncertain tax positions within the next 12 months.  Expense for interest and penalties recognized by UNIFI within the provision for income taxes was $287, $141, and $69 for fiscal 2022, 2021, and 2020, respectively.  UNIFI had $559, and $273 accrued for interest and/or penalties related to uncertain tax positions as of July 3, 2022 and June 27, 2021, respectively.

Expiration of Net Operating Loss Carryforwards and Tax Credit Carryforwards

As of July 3, 2022, UNIFI had U.S. federal capital loss carryforwards of $71,105, U.S. federal NOL carryforwards of $16,731, U.S. state NOL carryforwards of $70,601 and foreign NOL carryforwards of $395. The NOL carryforwards begin expiring in varying amounts in fiscal 2023.  As of July 3, 2022, UNIFI had the following carryforward attributes held outside of the U.S. consolidated tax filing group: U.S. federal NOL carryforwards of $2,340 and U.S. state NOL carryforwards of $14,421. The NOL carryforwards held outside of the U.S. consolidated tax filing group begin expiring in fiscal 2023. As of July 3, 2022, UNIFI had U.S. federal foreign tax credit carryforwards of $3,075 and foreign tax credit carryforwards in foreign jurisdictions of $3,170. The foreign tax credit carryforwards begin expiring in varying amounts in fiscal 2023. As of July 3, 2022, UNIFI had U.S. federal research tax credit carryforwards of $5,284, which begin expiring in fiscal 2039.

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 2019, the Internal Revenue Service (“IRS”) initiated an audit of UNIFI’s domestic operations for fiscal years 2016 and 2017.  In fiscal 2020, the IRS expanded the audit to include fiscal 2018.  In fiscal 2021, the IRS expanded the audit to include fiscal 2019.  Fiscal years 2009 through 2014 remain open for certain foreign tax credit amendments and net operating loss and general business credit carrybacks.

Statutes related to material foreign jurisdictions are open from January 1, 2017 and material state jurisdictions from June 30, 2019.  Certain carryforward tax attributes generated in years prior remain subject to examination and could change in subsequent tax years.

Indefinite Reinvestment Assertion

UNIFI considers $26,253 of its unremitted foreign earnings to be permanently reinvested to fund working capital requirements and operations abroad and has therefore not recognized a deferred tax liability for the estimated future taxes that would be incurred upon repatriation. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, UNIFI could be subject to additional tax liabilities of approximately $6,046.