Note 17: Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1, 2018. Because we are a fiscal year U.S. taxpayer, the majority of the provisions, such as elimination of the domestic manufacturing deduction, new taxes on certain foreign-sourced income, and new limitations on certain business deductions, will begin applying to us for our fiscal 2019. For fiscal 2018, the most significant impacts include a lower U.S. federal corporate income tax rate applied to our fiscal 2018 U.S. tax activity, a revaluing of net U.S. deferred taxes, and a new transition tax on the deemed repatriation of certain foreign earnings. As the Company is a fiscal year taxpayer, the lower corporate income tax rate is phased in, resulting in a blended federal rate of 30.4% for fiscal 2018, compared with the previous 35% rate. The federal tax rate will be reduced to 21% in subsequent fiscal years.

Income before income taxes consists of the following (for the fiscal years ended):

(Amounts in thousands)	(52 weeks) 4/28/2018		(52 weeks) 4/29/2017		(53 weeks) 4/30/2016
United States	$	111,516	$	122,196	$	115,750
Foreign	17,374		8,544		9,293

Total	$	128,890	$	130,740	$	125,043

Income tax expense (benefit) consists of the following components (for the fiscal years ended):

(Amounts in thousands)	(52 weeks) 4/28/2018			(52 weeks) 4/29/2017			(53 weeks) 4/30/2016
Federal:
– current	$	21,206		$	35,606		$	32,403
– deferred	16,401			2,349			3,559
State:
– current	4,886			5,194			4,750
– deferred	1,075			(1,703		)	859
Foreign:
– current	3,820			2,388			2,345
– deferred	(93		)	(78		)	164

Total income tax expense	$	47,295		$	43,756		$	44,080

Our effective tax rate differs from the U.S. federal income tax rate for the following reasons:

	Fiscal Year Ended
(% of income before income taxes)	4/28/2018		4/29/2017		4/30/2016
Statutory tax rate	30.4	%	35.0	%	35.0	%
Increase (reduction) in income taxes resulting from:
Re-measurement of deferred taxes for changes in statutory U.S. tax rate	7.8		—		—
State income taxes, net of federal benefit	3.3		2.7		3.4
U.S. manufacturing benefit	(1.5	)	(2.4	)	(2.5	)
Change in valuation allowance	(0.3	)	(1.0	)	(0.3	)
U.S. research tax credits	(1.9	)	—		—
Miscellaneous items	(1.1	)	(0.8	)	(0.3	)

Effective tax rate	36.7	%	33.5	%	35.3	%

In December of 2017, the Securities and Exchange Commission staff issued guidance which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include a provisional amount based on their reasonable estimate in their financial statements. The guidance also allows companies to adjust the provisional amounts during a one year measurement period which is similar to the measurement period used when accounting for business combinations. As of April 28, 2018, we have not completed our accounting for all of the tax effects associated with the enactment of the Tax Act. However, we made reasonable estimates, based on our current interpretation of the Tax Act, to record provisional adjustments during fiscal 2018. We may alter our estimates as we continue to accumulate and process data to finalize the underlying calculations and review further guidance that we expect regulators to issue. We are also analyzing other provisions of the Tax Act to determine if they will impact our effective tax rate in the future. We will continue to refine our adjustments through the permissible measurement period, which is not to extend beyond one year of the enactment date.

While our accounting for the Tax Act is not complete, we have made reasonable estimates for certain provisions and we have recorded a net tax expense of $10.2 million related to its enactment. This net charge includes a deferred tax charge of $10.0 million primarily from revaluing our net U.S. deferred tax assets to reflect the new U.S. corporate tax rate. We believe this calculation is complete except for changes in estimates that can result from finalizing the filing of our 2018 fiscal year U.S. income tax return, which are not anticipated to be material, and changes that may be a direct impact of other provisional amounts recorded due to the enactment of the Tax Act. The net charge also includes a provisional tax charge of $0.2 million related to the one-time transition tax. In general, the one-time transition tax imposed by the Tax Act results in the taxation of our accumulated foreign earnings and profits (“E&P”) at a 15.5% rate on liquid assets and 8% on the remaining unremitted foreign E&P, both net of foreign tax credits. At this time, we have not yet gathered, prepared and analyzed the necessary information with respect to the 2018 fiscal year in sufficient detail to complete the complex calculations necessary to finalize the amount of our transition tax. We also anticipate that further guidance may become available in this and other areas. We believe that our preliminary calculations provide a reasonable estimate of the transition tax and related foreign tax credit and, as such, have included those amounts in our year-end income tax provision. As the analysis of accumulated foreign E&P and related foreign taxes paid are completed on an entity by entity basis and we finalize the amount held in cash or other specified assets, we will update our provisional estimate of the transition tax and related foreign tax credit.

For our foreign operating units, we permanently reinvest the earnings and consequently do not record a deferred tax liability relative to the undistributed earnings. We have reinvested approximately $45.1 million of the earnings. After enactment of the Tax Act, the potential deferred tax attributable to these earnings would be approximately $2.6 million, primarily related to foreign withholding taxes and state income taxes.

The primary components of our deferred tax assets and (liabilities) were as follows:

(Amounts in thousands)	4/28/2018			4/29/2017
Assets
Deferred and other compensation	$	18,326		$	26,689
State income tax — net operating losses, credits and other	5,050			4,927
Warranty	5,348			8,261
Rent	2,971			4,768
Workers’ compensation	2,714			3,707
Employee benefits	2,343			3,752
Pension	—			1,299
Other	—			3,364
Valuation allowance	(1,224		)	(1,786		)

Total deferred tax assets	35,528			54,981
Liabilities
Property, plant and equipment	(7,684		)	(8,453		)
Inventory	(1,531		)	(3,052		)
Goodwill and other intangibles	(3,575		)	(3,345		)
Pension	(1,230		)	—
Other	(243		)	—

Net deferred tax assets	$	21,265		$	40,131

The deferred tax assets associated with loss carry forwards and the related expiration dates are as follows:

(Amounts in thousands)	Amount		Expiration
Various U.S. state net operating losses (excluding federal tax effect)	$	4,804	Fiscal 2019 – 2036
Foreign capital losses	17		Indefinite

We evaluate our deferred taxes to determine if a valuation allowance is required. Accounting standards require that 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.

The evaluation of the amount of net deferred tax assets expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. We have forecasted future results using estimates management believes to be reasonable. We based these estimates on objective evidence such as expected trends resulting from certain leading economic indicators. Based upon our net deferred tax asset position at April 28, 2018, we estimate that about $72 million of future taxable income would need to be generated to fully recover our net deferred tax assets. The realization of deferred income tax assets is dependent on future events. Actual results inevitably will vary from management’s forecasts. Such variances could result in adjustments to the valuation allowance on deferred tax assets in future periods, and such adjustments could be material to the financial statements.

During fiscal 2018, we recorded a $0.6 million decrease in our valuation allowance for deferred tax assets that are now considered more likely than not to be realized. This determination was primarily the result of our assessment of our cumulative pre-tax income in certain jurisdictions. A summary of the valuation allowance by jurisdiction is as follows:

Jurisdiction (Amounts in thousands)	4/29/2017 Valuation Allowance		Change			4/28/2018 Valuation Allowance
U.S. state	$	1,769	$	(562	)	$	1,207
Foreign	17		—			17

Total	$	1,786	$	(562	)	$	1,224

The remaining valuation allowance of $1.2 million primarily related to certain U.S. state and foreign deferred tax assets. The U.S. state deferred taxes are primarily related to state net operating losses.

As of April 28, 2018, we had a gross unrecognized tax benefit of $1.0 million related to uncertain tax positions in various jurisdictions. A reconciliation of the beginning and ending balance of these unrecognized tax benefits is as follows:

(Amounts in thousands)	(52 weeks) 4/28/2018			(52 weeks) 4/29/2017			(53 weeks) 4/30/2016
Balance at the beginning of the period	$	620		$	1,821		$	2,226
Additions:
Positions taken during the current year	464			148			87
Positions taken during the prior year	25			—			—
Reductions:
Positions taken during the prior year	—			(4		)	(321		)
Decreases related to settlements with taxing authorities	—			(27		)	—
Reductions resulting from the lapse of the statute of limitations	(95		)	(1,318		)	(171		)

Balance at the end of the period	$	1,014		$	620		$	1,821

We recognize interest and penalties associated with uncertain tax positions in income tax expense. We had approximately $0.3 and $0.2 million accrued for interest and penalties as of April 28, 2018, and April 29, 2017, respectively.

If recognized, $0.9 million of the total $1.0 million of unrecognized tax benefits would decrease our effective tax rate. We do not expect that the net liability for uncertain income tax positions will significantly change within the next 12 months. The remaining balance will be settled or released as tax audits are effectively settled, statutes of limitation expire or other new information becomes available.

Our U.S. federal income tax returns for fiscal years 2015 and subsequent are still subject to audit. Our U.S. federal income tax return for fiscal year 2016 is currently under audit. In addition, we conduct business in various states. The major states in which we conduct business are subject to audit for fiscal years 2014 and subsequent. Our foreign operations are subject to audit for fiscal years 2008 and subsequent.

Cash paid for taxes (net of refunds received) during the fiscal years ended April 28, 2018, April 29, 2017, and April 30, 2016, were $37.1 million, $33.7 million, and $34.5 million, respectively.