Note 11 - Income Taxes

9 Months Ended

Feb. 25, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

11. INCOME TAXES

In the third quarter of fiscal 2024 and 2023, we recognized income tax expense of $95.9 million and $100.1 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.7% and 22.6% for the third quarter of fiscal 2024 and 2023, respectively. In the first three quarters of fiscal 2024 and 2023, we recognized income tax expense of $297.1 million and $237.0 million, respectively. The effective tax rate was 24.5% and 26.8% for the first three quarters of fiscal 2024 and 2023, respectively. 

The effective tax rate in the third quarter of fiscal 2024 reflected a tax benefit related to certain changes in estimates upon completing our fiscal 2023 federal tax return.

The effective tax rate in the first three quarters of fiscal 2024 reflected the above cited item, as well as the impact of an impairment of goodwill that is non-deductible for tax purposes, and tax expense associated with no longer asserting permanent reinvestment of a foreign subsidiary when we reclassified certain assets and liabilities to held for sale. During the first three quarters of fiscal 2024, goodwill impairment charges totaling $20.7 million were recognized with no associated tax benefit.

The effective tax rate in the third quarter of fiscal 2023 reflected a tax benefit from statute lapses on state tax issues that were previously reserved and a benefit related to certain changes in estimates.

The effective tax rate in the first three quarters of fiscal 2023 reflected the above-cited items, as well as additional tax expense from disallowed deductions related to incentive compensation plans resulting from an increased level of estimated achievement on performance targets and stock price, a benefit from the adjustment of certain foreign taxes that were previously accrued, and the impact of an impairment of goodwill that was largely non-deductible for tax purposes. During the first three quarters of fiscal 2023, goodwill impairment charges totaling $141.7 million were recognized with an associated tax benefit of $2.7 million.

The amount of gross unrecognized tax benefits for uncertain tax positions was $25.4 million as of February 25, 2024 and $23.7 million as of May 28, 2023. These amounts include the issue of certain elections made in connection with our fiscal 2021 federal tax return which remains under review with the U.S. Internal Revenue Service. The gross unrecognized tax benefits excluded related liabilities for gross interest and penalties of $6.4 million and $5.6 million as of  February 25, 2024 and May 28, 2023, respectively.

The net amount of unrecognized tax benefits at February 25, 2024 and May 28, 2023 that, if recognized, would favorably impact the Company's effective tax rate was $22.7 million and $21.3 million, respectively.

We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $13.4 million over the next twelve months due to various audit settlements and the expiration of statutes of limitations.

We have previously made the assessment that the current earnings of certain foreign subsidiaries were not indefinitely reinvested or that we could not remit to the U.S. parent in a tax-neutral transaction. Accordingly, we had recorded a deferred tax liability of $16.2 million on approximately $324.6 million of cumulative earnings at February 25, 2024. The deferred tax liability relates to local withholding taxes that will be owed when this cash is distributed. The undistributed historic earnings in our foreign subsidiaries through May 30, 2021 are considered to be indefinitely reinvested or can be remitted in a tax-neutral transaction. Accordingly, we have not recorded a deferred tax liability related to these undistributed historic earnings.

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. We have determined that we are not subject to the corporate alternative minimum tax at this time.