Income Taxes

3 Months Ended

Jul. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $896,000, or (18.7%) of loss before income taxes, for the three-month period ending July 31, 2022, compared with income tax expense of $905,000, or 28.7% of income before income taxes, for the three-month period ending August 1, 2021.

Our effective income tax rates for the three-month periods ended July 31, 2022, and August 1, 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 rate for the three-month periods ended July 31, 2022, and August 1, 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 three-month periods ending July 31, 2022, and August 1, 2021:

	July 31,			August 1,
	2022			2021
U.S. federal income tax rate		21.0	%		21.0	%
U.S. valuation allowance		(35.4	)		(3.9	)
Withholding taxes associated with foreign jurisdictions		(5.0	)		4.7
Foreign income tax rate differential		2.7			2.8
Stock-based compensation		(2.1	)		0.2
Global Intangible Low Taxed Income Tax ("GILTI")		—			3.4
Other		0.1			0.5
	(18.7%)				28.7	%

Our consolidated effective income tax rate during the first quarter of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, in comparison with the first quarter of fiscal 2022. During the first quarter of fiscal 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 quarter 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, our U.S. operations earned a level of pre-tax income during the first quarter of fiscal 2022 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 July 31, 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 July 31, 2022, August 1, 2021, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:

(dollars in thousands)	July 31, 2022		August 1, 2021		May 1, 2022
U.S. federal and state net deferred income tax assets	$	11,006		9,221		9,527
U.S. capital loss carryforward		2,330		2,330		2,330
	$	13,336		11,551		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 July 31, 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 July 31, 2022, August 1, 2021, and May 1, 2022, we recorded a deferred income tax liability of $3.8 million, $3.2 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 July 31, 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 August 1, 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 July 31, 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 August 1, 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 July 31, 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:

			Three Months Ended
	July 31,			August 1,
(dollars in thousands)	2022			2021
China - Income Taxes	$	548		$	921
China - Withholding Taxes Associated With      Earnings and Profits Distributed to the U.S.		—			487
Canada - Income Taxes		82			280
	$	630		$	1,688