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Income Taxes
 12 Months Ended
Jul. 02, 2023
Income Tax Disclosure [Abstract]  
Income Taxes

14. Income Taxes

Components of (Loss) Income Before Income Taxes

The components of (loss) income before income taxes consist of the following:

 

 

Fiscal 2023

 

 

Fiscal 2022

 

 

Fiscal 2021

 

U.S.

 

$

(63,773

)

 

$

(18,364

)

 

$

(12,463

)

Foreign

 

 

18,330

 

 

 

45,192

 

 

 

58,810

 

(Loss) income before income taxes

 

$

(45,443

)

 

$

26,828

 

 

$

46,347

 

 

Components of Provision for Income Taxes

Provision for income taxes consists of the following:

 

 

Fiscal 2023

 

 

Fiscal 2022

 

 

Fiscal 2021

 

Current:

 

 

 

 

 

 

 

 

 

Federal

 

$

309

 

 

$

(1,163

)

 

$

(577

)

State

 

 

(7

)

 

 

2

 

 

 

25

 

Foreign

 

 

3,385

 

 

 

15,935

 

 

 

12,739

 

Total current tax expense

 

 

3,687

 

 

 

14,774

 

 

 

12,187

 

Deferred:

 

 

 

 

 

 

 

 

 

Federal

 

 

41

 

 

 

(630

)

 

 

(1,564

)

State

 

 

71

 

 

 

33

 

 

 

131

 

Foreign

 

 

(2,898

)

 

 

(2,520

)

 

 

6,520

 

Total deferred tax expense

 

 

(2,786

)

 

 

(3,117

)

 

 

5,087

 

Provision for income taxes

 

$

901

 

 

$

11,657

 

 

$

17,274

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation H.R. 1, formerly known as the Tax Cuts and Jobs Act. The Global Intangible Low-Taxed Income (“GILTI”) provisions included in H.R. 1 require that certain income earned by foreign subsidiaries must be currently included in the gross income of the U.S. shareholder. UNIFI has elected to recognize GILTI as a current-period expense. Under this policy, UNIFI has not provided deferred taxes related to temporary differences that, upon their reversal, will affect the amount of income subject to GILTI in the period.

On July 20, 2020, the U.S. Treasury issued and enacted final regulations related to GILTI that allow certain U.S. taxpayers to elect to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. The GILTI high-tax exclusion is an annual election and is retroactively available for tax years beginning after December 31, 2017. Fiscal 2021 includes a tax benefit of $4,816 related to the retroactive election.

Utilization of Net Operating Loss Carryforwards

Domestic deferred tax expense includes the utilization of federal net operating loss (“NOL”) carryforwards of $200, $110, and $5,312 for fiscal 2023, 2022, and 2021, respectively. Foreign deferred tax expense includes the utilization of NOL carryforwards of $166, $32, and $441 for fiscal 2023, 2022, and 2021, respectively. State deferred tax expense includes the utilization of NOL carryforwards of $109, $25, and $167 for fiscal 2023, 2022, and 2021, respectively.

Effective Tax Rate

Reconciliation from the federal statutory tax rate to the effective tax rate is as follows:

 

 

Fiscal 2023

 

 

Fiscal 2022

 

 

Fiscal 2021

 

Federal statutory tax rate

 

 

21.0

%

 

 

21.0

%

 

 

21.0

%

Change in valuation allowance

 

 

(30.8

)

 

 

12.6

 

 

 

5.0

 

Repatriation of foreign earnings and withholding taxes

 

 

(7.4

)

 

 

3.9

 

 

 

1.8

 

Change in uncertain tax positions

 

 

(4.1

)

 

 

2.4

 

 

 

0.5

 

Foreign income taxed at different rates

 

 

(1.9

)

 

 

10.7

 

 

 

9.0

 

U.S. tax on GILTI

 

 

(1.5

)

 

 

0.2

 

 

 

3.9

 

Nondeductible compensation

 

 

(0.8

)

 

 

2.1

 

 

 

1.4

 

Recovery of income taxes in Brazil

 

 

9.2

 

 

 

—

 

 

 

—

 

Research and other business credits

 

 

3.6

 

 

 

(4.0

)

 

 

(3.7

)

State income taxes, net of federal tax benefit

 

 

3.2

 

 

 

(1.3

)

 

 

(0.2

)

Tax expense on unremitted foreign earnings

 

 

3.0

 

 

 

5.5

 

 

 

7.0

 

Nontaxable income

 

 

2.5

 

 

 

(10.2

)

 

 

(2.4

)

Foreign tax credits

 

 

2.3

 

 

 

(0.5

)

 

 

(5.4

)

Deemed repatriation of foreign earnings under Subpart F

 

 

—

 

 

 

—

 

 

 

1.5

 

Domestic production activities deduction

 

 

—

 

 

 

—

 

 

 

0.6

 

Rate benefit of U.S. federal NOL carryback

 

 

—

 

 

 

—

 

 

 

(2.8

)

Nondeductible expenses and other

 

 

(0.3

)

 

 

1.1

 

 

 

0.1

 

Effective tax rate

 

 

(2.0

)%

 

 

43.5

%

 

 

37.3

%

Deferred Income Taxes

The significant components of UNIFI’s deferred tax assets and liabilities consist of the following:

 

 

July 2, 2023

 

 

July 3, 2022

 

Deferred tax assets:

 

 

 

 

 

 

Capital loss carryforwards

 

$

16,390

 

 

$

16,318

 

NOL carryforwards

 

 

16,235

 

 

 

6,603

 

Tax credits

 

 

11,634

 

 

 

12,079

 

Research and development costs

 

 

9,137

 

 

 

7,409

 

Accrued compensation

 

 

1,396

 

 

 

2,106

 

Other items

 

 

5,614

 

 

 

4,877

 

Total gross deferred tax assets

 

 

60,406

 

 

 

49,392

 

Valuation allowance

 

 

(43,910

)

 

 

(31,667

)

Total deferred tax assets

 

 

16,496

 

 

 

17,725

 

Deferred tax liabilities:

 

 

 

 

 

 

PP&E

 

 

(11,901

)

 

 

(14,952

)

Unremitted earnings

 

 

(3,872

)

 

 

(5,253

)

Recovery of non-income taxes

 

 

—

 

 

 

132

 

Other

 

 

(148

)

 

 

(138

)

Total deferred tax liabilities

 

 

(15,921

)

 

 

(20,211

)

Net deferred tax assets (liabilities)

 

$

575

 

 

$

(2,486

)

Deferred Income Taxes – Valuation Allowance

In assessing its ability to realize deferred tax assets, UNIFI considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. UNIFI considers the scheduled reversal of taxable temporary differences, taxable income in carryback years, cumulative losses in recent years, projected future taxable income, and tax planning strategies in making this assessment. Since UNIFI operates in multiple jurisdictions, the assessment is made on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of its deferred income tax asset balances to warrant the application of a full valuation allowance against the deferred tax assets of its U.S. consolidated group and certain foreign subsidiaries as of July 2, 2023.

Components of UNIFI’s deferred tax valuation allowance are as follows:

 

 

Fiscal 2023

 

 

Fiscal 2022

 

 

Fiscal 2021

 

Capital loss carryforwards

 

$

(16,390

)

 

$

(16,318

)

 

$

(17,429

)

NOL carryforwards

 

 

(16,235

)

 

 

(4,570

)

 

 

(2,336

)

Tax credits

 

 

(10,800

)

 

 

(10,779

)

 

 

(17,215

)

Other deferred tax assets

 

 

(485

)

 

 

—

 

 

 

—

 

Total deferred tax valuation allowance

 

$

(43,910

)

 

$

(31,667

)

 

$

(36,980

)

 

 

During fiscal 2023, UNIFI’s valuation allowance increased by $12,243. The increase was primarily driven by a by an increase in the valuation allowance on federal net operating loss and research credits carryforwards. The increase was partially offset by a decrease in the valuation allowance on foreign tax credits.

During fiscal 2022, UNIFI’s valuation allowance decreased by $5,313. The decrease was primarily driven by a decrease in the valuation allowance on foreign tax credits and capital loss carryforwards, offset by an increase in the valuation allowance on federal net operating loss and research credits carryforwards.

During fiscal 2021, UNIFI’s valuation allowance decreased by $459. The decrease was primarily driven by a decrease in the valuation allowance on investments in unconsolidated affiliates and foreign tax credits, offset by an increase in the valuation allowance on research credits and capital loss carryforwards.

Unrecognized Tax Benefits

A reconciliation of beginning and ending gross amounts of unrecognized tax benefits is as follows:

 

 

Fiscal 2023

 

 

Fiscal 2022

 

 

Fiscal 2021

 

Balance at beginning of year

 

$

2,909

 

 

$

2,590

 

 

$

1,218

 

Gross increases (decreases) related to tax positions in prior periods

 

 

1,436

 

 

 

(89

)

 

 

1,396

 

Gross increases (decreases) related to current period tax positions

 

 

8

 

 

 

408

 

 

 

(24

)

Gross decreases related to settlements with tax authorities

 

 

—

 

 

 

—

 

 

 

—

 

Gross decreases related to lapse of applicable statute of limitations

 

 

—

 

 

 

—

 

 

 

—

 

Balance at end of year

 

$

4,353

 

 

$

2,909

 

 

$

2,590

 

Unrecognized tax benefits would generate a favorable impact of $4,368 on UNIFI’s effective tax rate if recognized. Expense for interest and penalties recognized by UNIFI within the provision for income taxes was $400, $287, and $141 for fiscal 2023, 2022, and 2021, respectively. UNIFI had $959, $559, and $273 accrued for interest and/or penalties related to uncertain tax positions as of July 2, 2023, July 3, 2022 and June 27, 2021, respectively.

It is reasonably possible that the balance of unrecognized tax benefits could change within the next twelve months due to settlements with tax authorities or expiration of statute of limitations on returns filed. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty. Therefore, UNIFI is unable to estimate the range of possible adjustments to the balance of unrecognized tax benefits.

Expiration of Net Operating Loss Carryforwards and Tax Credit Carryforwards

As of July 2, 2023, UNIFI had U.S. federal capital loss carryforwards of $16,390, U.S. federal NOL carryforwards of $9,271, U.S. state NOL carryforwards of $3,162 and foreign NOL carryforwards of $2,253. The NOL carryforwards begin expiring in varying amounts in fiscal 2024. As of July 2, 2023, UNIFI had the following carryforward attributes held outside of the U.S. consolidated tax filing group: U.S. federal NOL carryforwards of $292 and U.S. state NOL carryforwards of $513. The NOL carryforwards held outside of the U.S. consolidated tax filing group begin expiring in fiscal 2024. As of July 2, 2023, UNIFI had U.S. federal foreign tax credit carryforwards of $855 and foreign tax credit carryforwards in foreign jurisdictions of $3,404. The foreign tax credit carryforwards begin expiring in varying amounts in fiscal 2028. As of July 2, 2023, UNIFI had U.S. federal and state research and other business tax credit carryforwards of $7,375, which begin expiring in fiscal 2024. As of July 2, 2023, UNIFI had U.S. federal disallowed interest deduction carryforwards of $1,692.

Tax Years Subject to Examination

Unifi, Inc. and its domestic subsidiaries file a consolidated federal income tax return, as well as income tax returns in multiple state and foreign jurisdictions. The tax years subject to examination vary by jurisdiction. UNIFI regularly assesses the outcomes of both completed and ongoing examinations to ensure that UNIFI’s provision for income taxes is sufficient.

In fiscal 2019, the Internal Revenue Service (the “IRS”) initiated an audit of UNIFI’s domestic operations for fiscal years 2016 and 2017. In fiscal 2020, the IRS expanded the audit to include fiscal 2018. In fiscal 2021, the IRS expanded the audit to include fiscal 2019. Fiscal years 2009 through 2014 remain open for certain foreign tax credit amendments and net operating loss and general business credit carrybacks.

Statutes related to material foreign jurisdictions are open from filing dates of their 2018 tax year and material US state jurisdictions from filing dates of state tax returns ended on June 30, 2019. Certain carryforward tax attributes generated in years prior remain subject to examination and could change in subsequent tax years.

Indefinite Reinvestment Assertion

UNIFI considers $43,664 of its unremitted foreign earnings to be permanently reinvested to fund working capital requirements and operations abroad and has therefore not recognized a deferred tax liability for the estimated future taxes that would be incurred upon repatriation. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, UNIFI could be subject to additional tax liabilities of approximately $11,592.