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INCOME TAXES | 12 Months Ended
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Apr. 29, 2012
INCOME TAXES |
10. | INCOME TAXES
Income Tax Expense and Effective Income Tax Rate Total income tax expense (benefit) was allocated as follows:
(dollars in thousands) |  | 2012 |  |  | 2011 |  |  | 2010 |
income from operations |  | $ | 902 |  |  |  | (1,102 | ) |  |  | 1,128 |
shareholders’ equity, related to |  |  |  |  |  |  |  |  |  |  |  |
the tax benefit arising from the |  |  |  |  |  |  |  |  |  |  |  |
exercise of stock options |  |  | (64 | ) |  |  | (339 | ) |  |  | (429 | )
|  | $ | 838 |  |  |  | (1,441 | ) |  |  | 699 |
Income tax expense (benefit) attributable to income from operations consists of:
(dollars in thousands) |  | 2012 |  |  | 2011 |  |  | 2010 |
current |  |  |  |  |  |  |  |  |
federal |  | $ | 79 |  |  |  | (79 | ) |  |  | (83 | )
state |  |  | - |  |  |  | - |  |  |  | - |
foreign |  |  | 2,505 |  |  |  | 2,367 |  |  |  | 1,359 |
|  |  | 2,584 |  |  |  | 2,288 |  |  |  | 1,276 |
deferred |  |  |  |  |  |  |  |  |  |  |  |
federal |  |  | 727 |  |  |  | 1,805 |  |  |  | 1,625 |
state |  |  | 55 |  |  |  | 142 |  |  |  | 129 |
U.S. operating loss carryforwards |  |  | 1,102 |  |  |  | 1,241 |  |  |  | 2,722 |
foreign |  |  | 143 |  |  |  | 89 |  |  |  | 138 |
USD election for Canadian returns |  |  | - |  |  |  | (315 | ) |  |  | - |
valuation allowance |  |  | (3,709 | ) |  |  | (6,352 | ) |  |  | (4,762 | )
|  |  | (1,682 | ) |  |  | (3,390 | ) |  |  | (148 | )
|  | $ | 902 |  |  |  | (1,102 | ) |  |  | 1,128 |
Income before income taxes related to the company’s foreign operations for the years ended April 29, 2012, May 1, 2011, and May 2, 2010 was $10.5 million, $9.9 million, and $11.3 million, respectively. Income before income taxes related to the company’s domestic operations for the years ended April 29, 2012, May 1, 2011, and May 2, 2010 was $3.7 million, $5.2 million, and $3.0 million, respectively. The following schedule summarizes the principal differences between the income tax expense (benefit) at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
|  | 2012 |  |  | 2011 |  |  | 2010 |
federal income tax rate |  |  | 34.0 | % |  |  | 34.0 | % |  |  | 34.0 | %
foreign tax rate differential |  |  | (8.8 | ) |  |  | (6.5 | ) |  |  | (6.4 | )
increase in tax reserves |  |  | 6.1 |  |  |  | 8.8 |  |  |  | 9.7 |
tax effects of Canadian fx gain (loss) |  |  | - |  |  |  | - |  |  |  | (11.6 | )
undistributed earnings from foreign subsidiaries |  |  | - |  |  |  | - |  |  |  | 12.3 |
non-deductible stock option expense |  |  | - |  |  |  | 1.0 |  |  |  | 0.9 |
USD election for Canadian returns |  |  | - |  |  |  | (2.1 | ) |  |  | - |
change in valuation allowance |  |  | (26.1 | ) |  |  | (42.2 | ) |  |  | (33.3 | )
other |  |  | 1.2 |  |  |  | (0.3 | ) |  |  | 2.3 |
|  |  | 6.4 | % |  |  | (7.3 | )% |  |  | 7.9 | %
Deferred Income Taxes The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities consist of the following:
(dollars in thousands) |  | 2012 |  |  | 2011 |
deferred tax assets: |  |  |  |  |  |
accounts receivable |  | $ | 301 |  |  |  | 425 |
inventories |  |  | 1,738 |  |  |  | 1,753 |
compensation |  |  | 2,107 |  |  |  | 1,594 |
liabilities and other |  |  | 523 |  |  |  | 509 |
alternative minimum tax credit |  |  | 1,320 |  |  |  | 1,241 |
property, plant and equipment (1) |  |  | 1,001 |  |  |  | 1,262 |
loss carryforwards – U.S. |  |  | 23,472 |  |  |  | 23,303 |
loss carryforwards – foreign |  |  | 115 |  |  |  | 28 |
unrecognized tax benefits – U.S. |  |  | (8,298 | ) |  |  | (7,572 | )
valuation allowances |  |  | (12,797 | ) |  |  | (16,438 | )
total deferred tax assets |  |  | 9,482 |  |  |  | 6,105 |
deferred tax liabilities: |  |  |  |  |  |  |  |
property, plant and equipment (2) |  |  | (3,715 | ) |  |  | (2,225 | )
other |  |  | (800 | ) |  |  | (659 | )
total deferred tax liabilities |  |  | (4,515 | ) |  |  | (2,884 | )
Net deferred tax asset |  | $ | 4,967 |  |  |  | 3,221 |
(1) | Pertains to the company’s operations located in China.
(2) | Pertains to the company’s operations located in the U.S. and Canada.
Federal and state net operating loss carryforwards were $59.9 million with related future tax benefits of $23.5 million at April 29, 2012. These carryforwards principally expire in 14-17 years, fiscal 2025 through fiscal 2028. The company also has an alternative minimum tax credit carryforward of approximately $1.3 million for federal income tax purposes that does not expire. At April 29, 2012, the current deferred tax asset of $2.5 million represents $2.1 million and $405,000 from our operations located in the U.S. and China, respectively. At April 29, 2012, the non-current deferred tax asset of $3.2 million represents $2.1 million, $1.0 million, and $115,000 from our operations located in the U.S., China, and Poland, respectively. At April 29, 2012, the non-current deferred tax liability of $705,000 pertains to our operations located in Canada. At May 1, 2011, the current deferred tax asset of $293,000 pertains to our operations located in China. At May 1, 2011, the current deferred tax liability of $82,000 pertains to our operations located in Canada. At May 1, 2011, the non-current deferred tax asset of $3.6 million represents $2.3 million and $1.3 million from our operations located in the U.S. and China, respectively. At May 1, 2011, the non-current deferred tax liability of $596,000 pertains to our operations located in Canada. Deferred Income Taxes – Valuation Allowance Summary In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies 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, taking into account the effects of local tax law. Based on this assessment, we recorded a partial valuation allowance of $12.8 million and $16.4 million against our net deferred tax assets associated with our U.S. operations at April 29, 2012 and May 1, 2011, respectively. At April 29, 2012 and May 1, 2011, no valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Poland. United States Our net deferred tax asset regarding our U.S. operations primarily pertain to incurring significant U.S. pre-tax losses over the last several years, with U.S. loss carryforwards totaling $59.9 million and $60.0 million at April 29, 2012 and May 1, 2011, respectively. Fiscal 2011 Due to the favorable results of our multi-year restructuring process in our upholstery fabric operations and key acquisitions and capital investments made for our mattress fabric segment, on a cumulative three-year basis ending May 1, 2011, our U.S. operations earned a pre-tax income of $4.2 million. In addition, our U.S. operations reported a pre-tax income over fiscal years 2011 and 2010 totaling $8.2 million. We believed that fiscal years 2011 and 2010 were a more indicative measure of future pre-tax income as these fiscal years reflect operating performance after the cost savings of the profit-improvement and restructuring plans were realized and the full operational effects of the acquisitions associated with the company’s mattress fabric operations located in the U.S. Although the financial results of our U.S. operations improved, the significant uncertainty in the overall economic climate made it very difficult to forecast medium and long-term financial results associated with our U.S. operations. Based on these economic conditions, we believed it was too uncertain to project pre-tax income associated with our U.S. operations after fiscal 2012. Based on this significant positive and negative evidence, we recorded a partial valuation allowance of $16.4 million against our net deferred tax assets associated with our U.S. operations that was expected to reverse beyond fiscal 2012 and we recognized an income tax benefit of $2.3 million in the fourth quarter of fiscal 2011 for the reduction in this valuation allowance for projected U.S. taxable income in fiscal 2012 that was expected to reduce our U.S. loss carryforwards. Fiscal 2012 This improvement in the U.S. operations' financial results continued through fiscal 2012. Our U.S. operations earned a cumulative pretax income through the second quarter of fiscal 2012 and fiscal years 2011 and 2010 totaling $10.0 million. This continued earnings improvement from our U.S. operations was driven by our mattress fabrics operations (which primarily resides in the U.S.). During the second quarter of fiscal 2012, our mattress fabrics operations had net sales totaling $35.2 million compared with $28.3 million in the second quarter of fiscal 2011. In addition, our mattress fabrics operations had operating income totaling $3.8 million in the second quarter of fiscal 2012 compared with $3.3 million in the second quarter of fiscal 2011. These improved results in the second quarter of fiscal 2012, which were better than expected, can be attributed to increased sales from our sales and marketing initiatives and new programs with customers who are leading suppliers in the bedding industry. Collectively these developments increased our confidence in forecasting U.S. taxable income through fiscal 2014 in the second quarter of fiscal 2012. Although our U.S. operations' financial results continued to improve through the second quarter of fiscal 2012, the significant uncertainty in the overall economic climate also continued. As a result, to forecast medium and long-term financial results associated with our U.S. operations remained difficult. Since it will take a significant period of time for our U.S. operations to realize its U.S. net deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believe it was too uncertain to project U.S. pre-tax income levels associated with our U.S. operations after fiscal 2014 that support a "more likely than not" assertion at the end of our second quarter of fiscal 2012. These trends continued through the fourth quarter of fiscal 2012 and, as a result, we maintain our position that we can forecast U.S. taxable income through fiscal 2014. Our mattress fabric operations had net sales totaling $145.5 million in fiscal 2012 compared with $122.4 million in fiscal 2011. In addition our mattress fabric operations reported operating income of $15.8 million in fiscal 2012 compared with $15.4 million in fiscal 2011. Based on this positive and negative evidence noted above, we recorded a partial valuation allowance of $12.8 million at April 29, 2012, against the net deferred tax assets associated with our U.S. operations that are expected to reverse beyond fiscal 2014. Accordingly, we recognized an income tax benefit of $4.4 million in the second quarter of fiscal 2012 for the reduction in this valuation allowance for estimated U.S. taxable income in fiscal years 2013 and 2014 that is expected reduce our U.S. loss carryfowards. In the fourth quarter of fiscal 2012, we booked an income tax charge of $211,000 due to a change in our estimate of U.S. taxable income in fiscal years 2013 and 2014 that was made in the second quarter of fiscal 2012. China Our net deferred tax asset regarding our China operations primarily pertains to the book versus tax basis difference associated with our China operation’s fixed assets. This book versus tax basis difference resulted from our impairment losses and fixed asset write-downs associated with our September 2008 upholstery fabrics restructuring plan. In order for this net deferred tax asset to have been realized, our China operations must have had sufficient pre-tax income levels to utilize its tax over book depreciation expense. During fiscal 2011, management assessed both positive and negative evidence and concluded that there was sufficient positive evidence that our net deferred tax assets regarding our China operations will more likely than not be realized. Due to the favorable results from our restructuring activities and profit improvement plan initiated in the second quarter of fiscal 2009, our China operations became profitable, reporting pre-tax income of $7.9 million in fiscal 2011 and fiscal 2010. In addition, our China operations earned pre-tax income of $10.2 million over a cumulative three-year period ending May 1, 2011. As a result of the improvement of our China operations’ pre-tax income levels that have been demonstrated over a cumulative period of three years, there was sufficient positive evidence that our China operations can provide sufficient pre-tax income levels to utilize its tax over book depreciation expense. Based on this significant positive evidence, we do not have a valuation allowance against our China net deferred tax assets at April 29, 2012 and May 1, 2011, respectively. During fiscal 2011 we recognized an income tax benefit of $1.3 million to reduce the valuation allowance of $1.3 million recorded at May 2, 2010 (the beginning of fiscal 2011). Change in Valuation Allowance In fiscal 2010, we recorded an income tax benefit of $4.8 million for the reduction of our valuation allowance. This $4.8 million decrease results from the realization of U.S. loss carryforwards associated with fiscal 2010 pre-tax income from our U.S. operations and the realization and projected realization of tax versus book depreciation associated with our China operations, as discussed above. In fiscal 2011, we recorded an income tax benefit of $6.4 million for the reduction of our valuation allowance. This $6.4 million decrease represents a $2.8 million realization of U.S. loss carryforwards associated with fiscal 2011 pre-tax income, a $2.3 million adjustment pertaining to a change in judgment about the future realization of our U.S. net deferred tax assets, and a $1.3 million adjustment pertaining to a change in judgment about the future realization of our China net deferred tax assets. In fiscal 2012, we recorded an income tax benefit of $3.7 million for the reduction of our valuation allowance. This $3.7 million decrease represents a $4.2 million income tax benefit pertaining to a change in judgment about the future realization of our U.S. net deferred tax assets, offset by an income tax charge of $447,000 associated with the realization of our U.S. loss carryforwards from fiscal 2012 pre-tax income. Overall The recorded valuation allowance of $12.8 million has no effect on our operations, compensation, loan covenant compliance, or the possible realization of the U.S. income tax loss carryforwards in the future. If it is determined that it is more-likely-than-not that we will realize any of these U.S. income tax loss carryforwards, an income tax benefit would be recognized at that time. Uncertainty in Income Taxes The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) |  | 2012 |  |  | 2011 |  |  | 2010 |
beginning balance |  | $ | 11,739 |  |  |  | 10,135 |  |  |  | 8,254 |
increases from prior period tax positions |  |  | 852 |  |  |  | 1,799 |  |  |  | 1,940 |
decreases from prior period tax positions |  |  | (129 | ) |  |  | (195 | ) |  |  | (59 | )
increases from current period tax positions |  |  | - |  |  |  | - |  |  |  | - |
ending balance |  | $ | 12,462 |  |  |  | 11,739 |  |  |  | 10,135 |
At April 29, 2012, we had $12.5 million of total gross unrecognized tax benefits, of which $4.2 million would favorably affect the income tax rate in future periods. At May 1, 2011, we had $11.7 million of total gross unrecognized tax benefits, of which $4.2 million would favorably affect the income tax rate in future periods. As of April 29, 2012, we had $12.5 million of total gross unrecognized tax benefits, of which $8.3 million and $4.2 million were classified as net non-current deferred income taxes and income taxes payable-long-term, respectively, in the accompanying consolidated balance sheets. As of May 1, 2011, we had $11.7 million of total gross unrecognized tax benefits, of which $7.5 million and $4.2 million were classified as net non-current deferred income taxes and income taxes payable- long-term, respectively, in the accompanying consolidated balance sheets. We elected to classify interest and penalties as part of income tax expense. At April 29, 2012 and May 1, 2011, the gross amount of interest and penalties due to unrecognized tax benefits was $485,000 and $498,000, respectively. The liability for uncertain tax positions at April 29, 2012, includes $12.5 million related to tax positions for which significant change is reasonably possible in fiscal 2013. This amount relates to double taxation under applicable tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by the company remain subject to examination for tax years 2002 and subsequent due to loss carryforwards. Canadian federal returns remain subject to examination for tax years 2005 and subsequent. Canadian provincial (Quebec) returns remain subject to examination for tax years 2009 and subsequent. Income tax returns for the company’s China subsidiaries are subject to examination for tax years 2007 and subsequent. Income Taxes Paid Income tax payments, net of income tax refunds, were $2.4 million in fiscal 2012, $1.2 million in 2011, and $1.3 million in 2010.

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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 Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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=6881521&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 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: 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 7: 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 8: 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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