INCOME TAXES

12 Months Ended

Jun. 02, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

9. INCOME TAXES

Income (loss) from continuing operations before income taxes included the following components (in thousands): 

	Fiscal Year Ended
	June 2,  2018			May 27,  2017			May 28,  2016
United States	$	(211	)	$	(8,150	)	$	(7,274	)
Foreign		4,071			2,034			1,054
Income (loss) before income taxes	$	3,860		$	(6,116	)	$	(6,220	)

 The provision for income taxes for fiscal 2018, 2017 and 2016 consisted of the following (in thousands): 

	Fiscal Year Ended
	June 2,  2018			May 27,  2017			May 28,  2016
Current:
Federal	$	—		$	(117	)	$	—
State		(12	)		3			17
Foreign		1,220			1,035			441
Total current	$	1,208		$	921		$	458
Deferred:
Federal	$	124		$	—		$	—
State		—			—			—
Foreign		202			(109	)		88
Total deferred	$	326		$	(109	)	$	88
Income tax provision	$	1,534		$	812		$	546

The differences between income taxes at the U.S. federal statutory income tax rate of 29.2% for fiscal 2018 and 34% for fiscal 2017 and 2016 and the reported income tax provision for fiscal 2018, 2017 and 2016 are summarized as follows:

	Fiscal Year Ended
	June 2,  2018			May 27, 2017			May 28,  2016
Federal statutory rate		29.2	%		34.0	%		34.0	%
Effect of:
State income taxes, net of federal tax benefit		0.3			4.8			4.2
Deemed repatriation tax		(50.0	)		—			—
Foreign income inclusion		—			(20.7	)		(0.4	)
Foreign taxes at other rates		(0.1	)		1.0			0.6
Permanent tax differences		6.7			(0.5	)		(0.8	)
Deferred remeasurement		45.1			—			—
Tax reserves		3.6			0.9			(6.0	)
Additional U.S. tax on undistributed foreign earnings		(12.5	)		15.8			(32.7	)
Change in valuation allowance for deferred tax assets		15.1			(46.6	)		(11.4	)
Return to provision adjustments		0.1			(2.0	)		3.9
Closure of foreign audits		2.2			—			—
Other		—			—			(0.2	)
Effective tax rate		39.7	%		(13.3	)%		(8.8	)%

                Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred tax assets and liabilities reflect continuing operations as of June 2, 2018 and May 27, 2017. Significant components were as follows (in thousands):

	Fiscal Year Ended
	June 2,			May 27,
	2018			2017
Deferred tax assets:
NOL carryforwards - foreign and domestic	$	7,883		$	7,870
Inventory valuations		978			1,141
Goodwill		294			325
Foreign tax credits		465			3,808
Severance reserve		119			227
Foreign capital loss		1,143			1,142
Other		1,632			2,048
Subtotal	$	12,514		$	16,561
Valuation allowance - foreign and domestic		(9,148	)		(8,557	)
Net deferred tax assets after valuation allowance	$	3,366		$	8,004
Deferred tax liabilities:
Accelerated depreciation	$	(2,474	)	$	(1,356	)
Tax on undistributed earnings		(274	)		(5,738	)
Other		28			35
Subtotal	$	(2,720	)	$	(7,059	)
Net deferred tax assets	$	646		$	945
Supplemental disclosure of deferred tax assets (liabilities) information:
Domestic	$	7,394		$	6,937
Foreign	$	2,401		$	2,565
Total	$	9,795		$	9,502

On December 22, 2017, the U.S. government enacted new tax legislation, Tax Cuts and Jobs Act (the “Act”). The primary provisions of the Act expected to impact the Company in fiscal 2018 are a reduction to the U.S. corporate income tax rate from 35% to 21% and a transition from a worldwide corporate tax system to a territorial tax system. The reduction in the corporate income tax rate requires the Company to remeasure its net deferred tax assets to the new corporate tax rate and the transition to a territorial tax system requires payment of a one-time tax on deemed repatriation of undistributed and previously untaxed non-U.S. earnings. Primarily as a result of those provisions of the Act, the Company recorded a deferred remeasurement impact of approximately $1.6 million, which was fully offset by the valuation allowance movement. Additionally, the estimated deemed earnings repatriation tax, net of available foreign tax credits brought back as part of the deemed repatriation, was $3.5 million. The Company does not anticipate any cash tax payments due to the foreign tax credit carryforwards available to fully offset the provisional deemed repatriation tax.

The 21% corporate income tax rate was effective January 1, 2018. Based on the Company’s June 2, 2018 fiscal year end, the U.S. statutory income tax rate for fiscal 2018 will be approximately 29.2%.

The tax impact recorded for the Act for fiscal 2018 is provisional as outlined below and may change. The Company completed a preliminary assessment of earnings that could be repatriated based on reinvestment needs of non-U.S. operations and earnings available for repatriation. The estimated withholding tax that would be incurred from the repatriation of those earnings was included in fiscal 2018 provisional income tax expense. The Company continues to analyze the provisions of the Act addressing the net deferred tax asset remeasurement and its calculations, the deemed earnings repatriation, including the determination of undistributed non-U.S. earnings, and evaluate potential Company actions. In addition, the Company continues to monitor potential legislative action and regulatory interpretations of the Act.

Based on the effective date of certain provisions, the Company will be subject to additional requirements of the Act beginning in fiscal 2019. Those provisions include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion and anti-avoidance tax (BEAT) related to certain payments between a U.S. corporation and foreign related entities, a limitation of certain executive compensation, a deduction for foreign derived intangible income (FDII) and interest expense limitations. The Company has not completed its analysis of those provisions and the estimated impact. The Company also has not determined its accounting policy to treat the taxes due on GILTI as a period cost or include in the determination of deferred taxes.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 that allows for a measurement period up to one year after the enactment date of the Act to complete the accounting requirements. The Company will complete the adjustments related to the Act within the allowed period.

As of June 2, 2018, we had approximately $3.4 million of net deferred tax assets related to federal net operating loss (“NOL”) carryforwards, compared to $4.2 million as of May 27, 2017. Net deferred tax assets related to domestic state NOL carryforwards amounted to approximately $3.9 million as of June 2, 2018, compared to $3.0 million as of May 27, 2017. Net deferred tax assets related to foreign NOL carryforwards as of June 2, 2018 totaled approximately $0.6 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was $0.7 million as of May 27, 2017. We also have a domestic net deferred tax asset of $0.5 million of foreign tax credit carryforwards as of June 2, 2018, compared to $3.8 million as of May 27, 2017. The changes in balances from prior year are generally due to the transition tax that was part of the Tax Cuts and Jobs Act for which the deemed inclusion on foreign earnings utilized most of the foreign tax credit carryforwards available. We do not have any alternative minimum tax credit carryforward as of June 2, 2018.

We have historically determined that undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. We repatriated $21.2 million of foreign cash to our U.S. parent company in fiscal 2018, $17.7 million from our Hong Kong entity and the remainder from our entities in Singapore, Italy and Taiwan. Due to the deemed repatriation tax, the untaxed outside basis difference for which the historic balance has primarily related has been reduced. The deferred tax liability on the outside basis difference is now primarily withholding tax on future dividend distributions. Accordingly, we have reduced the deferred tax liability from $5.7 million in fiscal 2017 to be $0.3 million in fiscal 2018 on foreign earnings of $28.6 million.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended June 2, 2018. Such objective evidence limits the ability to consider subjective evidence such as future income projections. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the repatriation of foreign earnings which we do not consider permanently reinvested in certain of our foreign subsidiaries. The weight of this positive evidence is not sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. jurisdiction.

As of June 2, 2018, a valuation allowance of $9.1 million has been established to record only the portion of the deferred tax asset that will more likely than not be realized. There has been an increase in the valuation allowance from May 27, 2017 in the amount of $0.6 million. The valuation allowance relates to deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred. We also recorded a valuation allowance for all domestic federal and state net deferred tax assets considering the significant cumulative losses in the U.S. jurisdiction, the reversal of the deferred tax liability for foreign earnings and no forecast of additional U.S. income. 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.

Income taxes paid, including foreign estimated tax payments, were $0.5 million, $0.4 million and $0.7 million, during fiscal 2018, 2017 and 2016, respectively.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2010 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination in Thailand (fiscal 2008 through 2011). We are also under examination in the state of Illinois for fiscal years 2014 and 2015. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2015 and the Netherlands beginning in fiscal 2012. 

The uncertain tax positions from continuing operations as of June 2, 2018 and May 27, 2017 were $0.1 million and $0.0 million, respectively. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the consolidated statements of comprehensive income (loss). Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. We have not recorded a liability for interest and penalties as of June 2, 2018 or May 27, 2017. It is not expected that there will be a change in the unrecognized tax benefits due to the expiration of various statutes of limitations within the next 12 months.

The following table summarizes the activity related to the unrecognized tax benefits (in thousands):

	Fiscal Year Ended
	June 2,  2018			May 27,  2017
Unrecognized tax benefits, beginning of period	$	1,883		$	2,000
Increase in positions taken in prior period		138			75
Decrease in positions due to settlements		(1,883	)		(75	)
Decrease related to the expiration of statute of limitations		—			(117	)
Unrecognized tax benefits, end of period	$	138		$	1,883

 Unrecognized tax benefits for continuing and discontinued operations were as follows (in thousands):

	Fiscal Year Ended
	June 2,  2018		May 27,  2017
Continuing operations	$	138	$	—
Discontinued operations(1)		—		1,883
	$	138	$	1,883

(1) Relates to an amended Illinois state income tax return related to the sale of RFPD.