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INCOME TAXES | 12 Months Ended
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Jun. 01, 2013
INCOME TAXES |
9. | INCOME TAXES
The components of income (loss) before income taxes are (in thousands):
|  | Fiscal Year Ended |
|  | June 1, 2013 |  |  | June 2, 2012 |  |  | May 28, 2011 |
United States |  | $ | (2,716 | ) |  | $ | 982 |  |  | $ | (947 | )
Foreign |  |  | 3,358 |  |  |  | 6,674 |  |  |  | 3,397 |
Income before income taxes |  | $ | 642 |  |  | $ | 7,656 |  |  | $ | 2,450 |
The provision for income taxes differs from income taxes computed at the federal statutory tax rate of 34% during fiscal 2013 and 2012 and 35% during fiscal 2011 as a result of the following items:
|  | Fiscal Year Ended |
|  | June 1, 2013 |  |  | June 2, 2012 |  |  | May 28, 2011 |
Federal statutory rate |  |  | 34.0 | % |  |  | 34.0 | % |  |  | 35.0 | %
Effect of: |  |  |  |  |  |  |  |  |  |  |  |
State income taxes, net of federal tax benefit |  |  | (14.5 | ) |  |  | 0.4 |  |  |  | (1.4 | )
Foreign income inclusion |  |  | 24.7 |  |  |  | 5.1 |  |  |  | 16.9 |
Foreign taxes at other rates |  |  | (44.6 | ) |  |  | (17.5 | ) |  |  | (13.0 | )
Other permanent tax differences |  |  | 3.2 |  |  |  | 1.2 |  |  |  | (3.9 | )
Tax reserves |  |  | (23.5 | ) |  |  | (1.6 | ) |  |  | (14.5 | )
Additional U.S. tax on undistributed foreign earnings |  |  | 33.8 |  |  |  | (25.4 | ) |  |  | — |
Net increase in valuation allowance for deferred tax assets |  |  | 18.1 |  |  |  | — |  |  |  | — |
Additional benefit for carryback of current year federal loss |  |  | (6.1 | ) |  |  | — |  |  |  | — |
Other |  |  | (0.2 | ) |  |  | (0.3 | ) |  |  | — |
Effective tax rate |  |  | 24.9 | % |  |  | (4.4 | )% |  |  | 19.1 | %
The effective tax rate differs from the U.S. federal statutory rate of 34% during fiscal 2013 due to our geographical distribution of taxable income or losses, the release of income tax reserves for uncertain tax positions, changes in the amount of foreign earnings considered to be permanently reinvested, and changes in valuation allowance. There were no changes in judgment during the fiscal year end regarding the beginning-of-year valuation allowance. The provision (benefit) for income taxes consists of the following (in thousands):
|  | Fiscal Year Ended |
|  | June 1, 2013 |  |  | June 2, 2012 |  |  | May 28, 2011 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (974 | ) |  | $ | 950 |  |  | $ | (282 | )
State |  |  | 56 |  |  |  | 2 |  |  |  | (39 | )
Foreign |  |  | 970 |  |  |  | 1,156 |  |  |  | 789 |
Total current |  | $ | 52 |  |  | $ | 2,108 |  |  | $ | 468 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (213 | ) |  | $ | (2,392 | ) |  | $ | — |
State |  |  | 151 |  |  |  | — |  |  |  | — |
Foreign |  |  | 170 |  |  |  | (50 | ) |  |  | — |
Total deferred |  | $ | 108 |  |  | $ | (2,442 | ) |  | $ | — |
Income tax provision (benefit) |  | $ | 160 |  |  | $ | (334 | ) |  | $ | 468 |
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 1, 2013 and June 2, 2012. Significant components are as follows (in thousands):
|  | Fiscal Year Ended |
|  | June 1, 2013 |  |  | June 2, 2012 |
Deferred tax assets: |  |  |  |  |  |  |  |
NOL carryforwards - foreign and domestic |  | $ | 3,086 |  |  | $ | 2,827 |
Inventory valuations |  |  | 935 |  |  |  | 1,031 |
Goodwill |  |  | 1,050 |  |  |  | 1,442 |
Severance reserve |  |  | 200 |  |  |  | 151 |
Foreign capital loss |  |  | 1,093 |  |  |  | 1,093 |
Other |  |  | 2,638 |  |  |  | 2,656 |
Subtotal |  | $ | 9,002 |  |  | $ | 9,200 |
Valuation allowance - foreign and domestic |  |  | (4,201 | ) |  |  | (3,787 | )
Net deferred tax assets after valuation allowance |  | $ | 4,801 |  |  | $ | 5,413 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Accelerated depreciation |  | $ | (309 | ) |  | $ | (312 | )
Tax on undistributed earnings |  |  | (6,820 | ) |  |  | (7,622 | )
Other |  |  | (1,065 | ) |  |  | (799 | )
Subtotal |  | $ | (8,194 | ) |  | $ | (8,733 | )
Net Deferred tax assets (liabilities) |  | $ | (3,393 | ) |  | $ | (3,320 | )
Supplemental disclosure of deferred tax assets (liabilities) information: |  |  |  |  |  |  |  |
Domestic |  | $ | (2,108 | ) |  | $ | (2,458 | )
Foreign |  | $ | 2,916 |  |  | $ | 2,925 |
As of June 1, 2013, we had no domestic federal net operating loss (“NOL”) carryforwards. Domestic state NOL carryforwards amounted to approximately $2.3 million. Foreign NOL carryforwards totaled approximately $0.8 million with various or indefinite expiration dates. We also had no alternative minimum tax credit carryforward or foreign tax credit carryforwards as of June 1, 2013. The domestic federal NOL and foreign tax credit generated in fiscal 2013 are expected to be carried back to prior tax years. 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 1, 2013. On the basis of this evaluation, as of June 1, 2013, a valuation allowance of $7.5 million has been established to record only the portion of the deferred tax asset that more likely than not will be realized. The valuation allowance relates to deferred tax assets in jurisdictions where cumulative losses have been incurred, and domestic state NOL carryforwards related to states where the utilization of NOLs have been suspended. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or 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. Our future U.S. federal statutory tax rate is expected to be closer to 34%, our state effective tax rate is expected to be approximately 3.8%, and our foreign effective tax rate is expected to be approximately 26%. Income taxes paid, including foreign estimated tax payments, were $1.7 million, $40.1 million, and $3.4 million during fiscal 2013, 2012, and 2011, respectively. We have historically determined that certain undistributed earnings of our foreign subsidiaries to the extent of cash available will be repatriated to the U.S., and accordingly, we have provided a deferred tax liability totaling $6.8 million and $7.6 million as of June 1, 2013 and June 2, 2012, respectively, on foreign earnings of $42.6 million. In addition, as of June 1, 2013, $36.9 million of cumulative positive earnings of some of our foreign subsidiaries are still considered permanently reinvested pursuant to ASC 740-30, Income Taxes - Other Considerations or Special Areas (“ASC 740-30”). Due to various tax attributes that are continuously changing, it is not practical to determine what, if any, tax liability might exist if such earnings were to be repatriated. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2005 are closed for examination under the statute of limitation for U.S. federal, state or local, or non-U.S. tax jurisdictions. During fiscal 2013, we completed federal audits in the U.S. for fiscal 2009, 2010, and 2011. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany and the Netherlands beginning in fiscal 2007. The uncertain tax positions as of June 1, 2013 and June 2, 2012, totaled $0.03 million and $1.8 million, respectively. No unrecognized tax benefits would affect our effective tax rate if recognized. The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
|  | Fiscal Year Ended |
|  | June 1, 2013 |  |  | June 2, 2012 |
Unrecognized tax benefits, beginning of period |  | $ | 1,750 |  |  | $ | 2,034 |
Increase (decrease) due to currency translation |  |  | 2 |  |  |  | (36 | )
Increase in positions taken in prior period |  |  | — |  |  |  | — |
Decrease in positions taken in prior period |  |  | — |  |  |  | — |
Increase in positions taken in current period |  |  | 99 |  |  |  | — |
Decrease in positions due to settlements |  |  | (1,779 | ) |  |  | — |
Decrease related to the expiration of statute of limitations |  |  | (40 | ) |  |  | (248 | )
Unrecognized tax benefits, end of period |  | $ | 32 |  |  | $ | 1,750 |
Unrecognized tax benefits for continuing and discontinued operations are as follows (in thousands):
|  | Fiscal Year Ended |
|  | June 1, 2013 |  |  | June 2, 2012 |
Continuing operations |  | $ | 17 |  |  | $ | 358 |
Discontinuing operations |  |  | 15 |  |  |  | 1,392 |
|  | $ | 32 |  |  | $ | 1,750 |
We record penalties and interest relating to uncertain tax positions in the income tax expense line item within the consolidated statements of operations and comprehensive income (loss). Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. As of June 1, 2013 and June 2, 2012, we recorded a liability for interest and penalties of $0.04 million and $0.1 million, respectively. Given that unrecognized tax benefits are less than $0.1 million, 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.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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