Income Taxes

6 Months Ended

Oct. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $2.0 million, or (12.9%) of loss before income taxes, for the six-month period ending October 30, 2022, compared with income tax expense of $1.3 million, or 30.3% of income before income taxes, for the six-month period ending October 31, 2021.

Our effective income tax rates for the six-month periods ended October 30, 2022, and October 31, 2021, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rates for the six-month periods ended October 30, 2022, and October 31, 2021, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, and Haiti versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the six-month periods ending October 30, 2022, and October 30, 2021:

	October 30,			October 31,
	2022			2021
U.S. federal income tax rate		21.0	%		21.0	%
U.S. valuation allowance		(36.7	)		(4.5	)
Withholding taxes associated with foreign jurisdictions		(3.3	)		6.1
Foreign income tax rate differential		3.2			3.9
Tax effects of local currency foreign exchange gains (losses)		4.7			(0.4	)
Stock-based compensation		(0.6	)		0.2
Global Intangible Low Taxed Income Tax ("GILTI")		—			3.3
Other		(1.2	)		0.7
		(12.9	)		30.3	%

Our consolidated effective income tax rate during the first half of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, as compared to the first half of fiscal 2022. During the first half of 2023, we incurred a significant pre-tax loss from our U.S. operations, and therefore, a significant income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets. In addition, all of our taxable income in the first half of fiscal 2023 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. In comparison, as of the end of the second quarter of fiscal 2022, our U.S. operations were projected to earn a level of pre-tax income that did not have a significant effect on our full valuation allowance or our consolidated effective income tax rate.

U.S. Valuation Allowance

We evaluate the realizability of our U.S. net deferred income tax assets to determine if a valuation allowance is required. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

As of October 30, 2022, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years from 2020 through 2022, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2023. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

Based on our assessments as of October 30, 2022, October 31, 2021, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)	October 30, 2022		October 31, 2021		May 1, 2022
U.S. federal and state net deferred income tax assets	$	13,958		9,155		9,527
U.S. capital loss carryforward		2,330		2,330		2,330
	$	16,288		11,485		11,857

Undistributed Earnings

We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company and whether we are required to record a deferred income tax liability for those undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of October 30, 2022, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would eventually be distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior reporting periods.

As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a deferred income tax liability will be required only for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company. As a result, as of October 30, 2022, October 31, 2021, and May 1, 2022, we recorded a deferred income tax liability of $4.0 million, $3.4 million, and $3.5 million, respectively.

Uncertain Income Tax Positions

An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, or negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.

As of October 30, 2022, and May 1, 2022, we had a $1.1 million total gross unrecognized income tax benefit, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of October 31, 2021, we had a $1.4 million total gross unrecognized income tax benefit, of which $1.1 million and $380,000 were recorded to income taxes payable – long-term and noncurrent deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets.

As of October 30, 2022, and May 1, 2022, we had a $1.1 million total gross unrecognized income tax benefit, of which the entire $1.1 million would favorably affect the income tax rate in future periods. As of October 31, 2021, we had a $1.4 million total gross unrecognized income tax benefit, of which $1.1 million would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of $1.1 million as of October 30, 2022, relates to income tax positions for which significant change is currently not expected within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.

Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:

	Six Months		Six Months
	Ended		Ended
	October 30,		October 31,
(dollars in thousands)	2022		2021
United States Transition Tax Payment	$	265	$	266
China Income Taxes		1,286		921
China - Withholding Taxes Associated With      Earnings and Profits Distributed to the U.S.		—		487
Canada - Income Taxes		161		427
	$	1,712	$	2,101