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Income Taxes | 12 Months Ended
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May 28, 2022
Income Tax Disclosure [Abstract] |
Income Taxes |
7. | INCOME TAXES
Income (loss) before income taxes included the following components (in thousands):
|  | Fiscal Year Ended |
|  | May 28, 2022 |  |  | May 29, 2021 |  |  | May 30, 2020 |
United States |  | $ | 12,299 |  |  | $ | 1,077 |  |  | $ | (3,716 | )
Foreign |  |  | 3,460 |  |  |  | 1,231 |  |  |  | 2,502 |
Income (loss) before income taxes |  | $ | 15,759 |  |  | $ | 2,308 |  |  | $ | (1,214 | )
The provision for income taxes for fiscal 2022, fiscal 2021 and fiscal 2020 consisted of the following (in thousands):
|  | Fiscal Year Ended |
|  | May 28, 2022 |  |  | May 29, 2021 |  |  | May 30, 2020 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | (4,213 | ) |  | $ | 108 |  |  | $ | — |
State |  |  | 950 |  |  |  | — |  |  |  | — |
Foreign |  |  | 1,038 |  |  |  | 665 |  |  |  | 616 |
Total current |  |  | (2,225 | ) |  |  | 773 |  |  |  | 616 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | — |  |  |  | — |  |  |  | (88 | )
Foreign |  |  | 57 |  |  |  | (120 | ) |  |  | 96 |
Total deferred |  |  | 57 |  |  |  | (120 | ) |  |  | 8 |
Income tax (benefit) provision |  | $ | (2,168 | ) |  | $ | 653 |  |  | $ | 624 |
The differences between income taxes at the U.S. federal statutory income tax rate of 21.0% for fiscal 2022, fiscal 2021 and fiscal 2020 and the reported income tax provision for fiscal 2022, fiscal 2021 and fiscal 2020, are summarized as follows:
|  | Fiscal Year Ended |
|  | May 28, 2022 |  |  | May 29, 2021 |  |  | May 30, 2020 |
Federal statutory rate |  |  | 21.0 | % |  |  | 21.0 | % |  |  | 21.0 | %
Effect of: |  |  |  |  |  |  |  |  |  |  |  |
State income taxes, net of federal tax benefit |  |  | 5.5 |  |  |  | 21.6 |  |  |  | 6.6 |
Foreign taxes at other rates |  |  | 4.5 |  |  |  | 10.5 |  |  |  | (15.3 | )
Permanent tax differences |  |  | (2.0 | ) |  |  | 18.3 |  |  |  | (41.1 | )
Change in valuation allowance for deferred tax assets |  |  | (43.1 | ) |  |  | (49.7 | ) |  |  | (29.8 | )
Return to provision adjustments |  |  | 0.2 |  |  |  | 2.2 |  |  |  | 1.4 |
Other |  |  | 0.2 |  |  |  | 4.4 |  |  |  | 5.8 |
Effective tax rate |  |  | (13.7 | )% |  |  | 28.3 | % |  |  | (51.4 | )%
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 operations as of May 28, 2022 and May 29, 2021. Significant components were as follows (in thousands):
|  | Fiscal Year Ended |
|  | May 28, 2022 |  |  | May 29, 2021 |
Deferred tax assets: |  |  |  |  |  |  |  |
NOL carryforwards - foreign and domestic |  | $ | 2,796 |  |  | $ | 7,362 |
Inventory valuations |  |  | 1,571 |  |  |  | 1,501 |
Goodwill |  |  | 1,182 |  |  |  | 1,286 |
Foreign tax credits |  |  | 1,782 |  |  |  | 1,782 |
Severance reserve |  |  | 183 |  |  |  | 185 |
Foreign capital loss |  |  | 1,224 |  |  |  | 1,261 |
Other |  |  | 1,480 |  |  |  | 1,469 |
Subtotal |  |  | 10,218 |  |  |  | 14,846 |
Valuation allowance - foreign and domestic |  |  | (3,474 | ) |  |  | (12,225 | )
Net deferred tax assets after valuation allowance |  |  | 6,744 |  |  |  | 2,621 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Accelerated depreciation |  |  | (2,406 | ) |  |  | (2,279 | )
Tax on undistributed earnings |  |  | (24 | ) |  |  | (24 | )
Other |  |  | (1 | ) |  | 18 |
Subtotal |  |  | (2,431 | ) |  |  | (2,285 | )
Net deferred tax assets |  | $ | 4,313 |  |  | $ | 336 |
Supplemental disclosure of net deferred tax assets, excluding valuation allowance: |  |  |  |  |  |  |  |
Domestic |  | $ | 6,017 |  |  | $ | 10,653 |
Foreign |  |  | 1,770 |  |  |  | 1,913 |
Total |  | $ | 7,787 |  |  | $ | 12,566 |
On December 22, 2017, the U.S. government enacted new tax legislation, Tax Cuts and Jobs Act (the “Act”). The Company was subject to requirements of the Act beginning in fiscal 2019. Provisions include an income inclusion for global intangible low-taxed income (“GILTI”), a tax determined by base erosion and anti-avoidance tax (“BEAT”) related to certain payments between a U.S. corporation and foreign related entities, a limitation of certain executive compensation and a deduction for foreign derived intangible income. The Company has determined its accounting policy to treat the taxes due on GILTI as a period cost. The Company is not subject to the BEAT provision due to the revenue thresholds. As of May 28, 2022, we have utilized all net deferred tax assets related to federal net operating loss (“NOL”) carryforwards, compared to $3.0 million as of May 29, 2021. Net deferred tax assets related to domestic state NOL carryforwards at May 28, 2022 amounted to approximately $2.4 million, compared to $3.9 million at May 29, 2021. Net deferred tax assets related to foreign NOL carryforwards as of May 28, 2022 totaled approximately $0.4 million with various or indefinite expiration dates. The amount of net deferred tax assets related to foreign NOL carryforwards was $0.4 million as of May 29, 2021. We also had a domestic net deferred tax asset of $1.8 million of foreign tax credit carryforwards as of both May 28, 2022 and May 29, 2021. We have historically determined that undistributed earnings of our foreign subsidiaries, to the extent of cash available, will be repatriated to the U.S. The deferred tax liability on the outside basis difference is now primarily withholding tax on future dividend distributions. The deferred tax liability related to undistributed earnings of our foreign subsidiaries was less than $0.1 million in both fiscal 2022 and fiscal 2021. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to support a more likely than not assertion that its deferred tax assets will be realized. A significant component of objective evidence evaluated was the cumulative income or loss incurred in each jurisdiction over the three-year period ended May 28, 2022. We considered other positive evidence in determining the need for a valuation allowance in the U.S. including the subpart F and GILTI inclusions of our foreign earnings, the changes in our business performance in recent years, and the utilization of federal NOLs. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance in the U.S. federal jurisdiction. As a result of the positive evidence outweighing the negative evidence for the year ended May 28, 2022, we have released the full valuation allowance on the U.S. federal and state deferred tax items. In addition, we partially released the valuation allowance on the state NOL deferred tax item, based on the amount of the NOLs that management believes it is more likely than not to realize. We have maintained a full valuation allowance against the foreign tax credit deferred tax asset based on negative evidence relating to the Company’s ability to utilize the foreign tax credit carryforward in the future. As of May 28, 2022, a valuation allowance of $3.5 million was recorded, representing the portion of the deferred tax asset that management does not believe is more likely than not to be realized. The valuation allowance as of May 29, 2021 was $12.2 million. The remaining valuation allowance relates to foreign tax credits ($1.8 million), state NOLs ($0.2 million) and deferred tax assets in foreign jurisdictions where historical taxable losses have been incurred ($1.5 million). The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are 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. Income taxes paid, including foreign estimated tax payments, were $1.5 million, $0.1 million and $1.0 million, during fiscal 2022, fiscal 2021 and fiscal 2020, respectively. In the normal course of business, we are subject to examination by taxing authorities throughout the world. Generally, years prior to fiscal 2016 are closed for examination under the statute of limitation for U.S. federal, U.S. state and local or non-U.S. tax jurisdictions. We are currently under examination in Germany for fiscal 2015 through fiscal 2018. This audit is expected to be closed in the first quarter of fiscal 2023. Our primary foreign tax jurisdictions are Germany and the Netherlands. We have tax years open in Germany beginning in fiscal 2019 and the Netherlands beginning in fiscal 2018. The uncertain tax positions as of both May 28, 2022 and May 29, 2021 were $0.1 million. We record penalties and interest related to uncertain tax positions in the income tax expense line item within the Consolidated Statements of Comprehensive Income (Loss). Accrued interest and penalties were included within the related tax liability line in the Consolidated Balance Sheets. We have not recorded a liability for interest and penalties as of May 28, 2022 or May 29, 2021. The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
|  | Fiscal Year Ended |
|  | May 28, 2022 |  |  | May 29, 2021 |
Unrecognized tax benefits, beginning of period |  | $ | 142 |  |  | $ | 129 |
Currency translation adjustment |  |  | (17 | ) |  |  | 13 |
Unrecognized tax benefits, end of period |  | $ | 125 |  |  | $ | 142 |

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