Income Taxes

3 Months Ended

Jul. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

14. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $701,000, or (26.5%) of loss before income taxes, for the three-month period ending July 30, 2023, compared with income tax expense of $896,000, or (18.7%) of loss before income taxes, for the three-month period ending July 31, 2022.

Our effective income tax rates for the three-month periods ended July 30, 2023, and July 31, 2022, 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 three-month periods ended July 30, 2023, and July 31, 2022, 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 three-month periods ending July 30, 2023, and July 31, 2022:

	July 30,			July 31,
	2023			2022
U.S. federal income tax rate		21.0	%		21.0	%
U.S. valuation allowance		(34.1	)		(35.4	)
Withholding taxes associated with foreign jurisdictions		(9.7	)		(5.0	)
Foreign income tax rate differential		(6.0	)		2.7
Stock-based compensation		—			(2.1	)
Tax effects of local currency foreign exchange gains (losses)		2.3			1.4
Other		—			(1.3	)
	(26.5%)			(18.7%)

Our consolidated effective income tax rates during the first quarter of fiscal 2024 and the first quarter of fiscal 2023 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S. In addition, during the first quarters of fiscal 2024 and 2023, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets. However, the income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was lower during the first quarter of fiscal 2024 compared with the first quarter of fiscal 2023, as our $(3.3) million U.S. pre-tax loss incurred during the first quarter of fiscal 2024 was much lower than the $(7.2) million U.S. pre-tax loss incurred during the first quarter of fiscal 2023.

During the first quarter of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(2.6) million, compared with $(4.8) million during the first quarter of fiscal 2023. As a result, 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 were more pronounced during the first quarter of fiscal 2024, as compared with the first quarter of fiscal 2023.

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 July 30, 2023, 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. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years from 2021 through 2023, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2024. 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 July 30, 2023, July 31, 2022, and April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)	July 30, 2023		July 31, 2022		April 30, 2023
U.S. federal and state net deferred income tax assets	$	17,246		11,006		16,345
U.S. capital loss carryforward		2,330		2,330		2,330
	$	19,576		13,336		18,675

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 July 30, 2023, 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 July 30, 2023, July 31, 2022, and April 30, 2023, we recorded a deferred income tax liability of $4.4 million, $3.8 million, and $4.2 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, 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 July 30, 2023, we had a $1.2 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 July 31, 2022, we had a $1.1 million total gross unrecognized income tax benefit, of which the entire amount was recorded to income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of April 30, 2023, we had a $1.2 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. These unrecognized income tax benefits would favorably affect income tax expense in future periods by $1.2 million, $1.1 million, and $1.2 million, as of July 30, 2023, July 31, 2022, and April 30, 2023, respectively.

Our gross unrecognized income tax benefit of $1.2 million as of July 30, 2023, relates to income tax positions for which significant change is currently not expected within the next year.

Income Taxes Paid

The following table sets forth taxes paid by jurisdiction:

	July 30,		July 31,
(dollars in thousands)	2023		2022
China Income Taxes, Net of Refunds	$	915	$	548
Canada Income Taxes, Net of Refunds		197		82
	$	1,112	$	630