Income Taxes

3 Months Ended

Sep. 02, 2023

Income Tax Disclosure [Abstract]

Income Taxes

7. INCOME TAXES

We recorded an income tax provision of $0.4 million and $2.1 million for the first three months of fiscal 2024 and the first three months of fiscal 2023, respectively. The effective income tax rate during the first three months of fiscal 2024 was 23.7% as compared to an effective income tax rate of 25.0% during the first three months of fiscal 2023. The difference in rate during the first three months of fiscal 2024 as compared to the first three months of fiscal 2023 reflects changes in our geographical distribution of income (loss), which is primarily driven by a decrease in U.S. earnings for fiscal 2024 and the state income tax provision, as well as the utilization of U.S. research and development credits. The 23.7% effective income tax rate differs from the federal statutory rate of 21% as a result of our geographical distribution of income (loss), state income tax provision, and the research and development tax credit.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2018 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2019 and the Netherlands beginning in fiscal 2021.

We have historically determined that certain undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. The deferred tax liability on the outside basis difference is now primarily withholding tax on future dividend distributions. The deferred tax liability related to undistributed earnings of our foreign subsidiaries was less than $0.1 million as of September 2, 2023 and May 27, 2023.

The Company did not have any uncertain tax positions as of September 2, 2023 and May 27, 2023. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the consolidated statements of comprehensive income when applicable. The reserve for the German audits was reversed in fiscal 2023.

The Company maintains a valuation allowance representing the portion of the deferred tax asset that management does not believe is more likely than not to be realized. The valuation allowance was $1.4 million as of September 2, 2023 and $3.5 million as of August 27, 2022. The current valuation allowance relates to deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($1.2 million) and state NOLs ($0.2 million). The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.