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INCOME TAXES | 12 Months Ended
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Apr. 28, 2013
INCOME TAXES |
8. | INCOME TAXES
| Income Tax Expense and Effective Income Tax Rate
| Total income tax expense (benefit) was allocated as follows:
(dollars in thousands) |  | 2013 |  |  | 2012 |  |  | 2011 |
income from operations |  | $ | 1,972 |  |  |  | 902 |  |  |  | (1,102 | )
shareholders’ equity, related to |  |  |  |  |  |  |  |  |  |  |  |
the tax benefit arising from the |  |  |  |  |  |  |  |  |  |  |  |
exercise of stock options |  |  | (76 | ) |  |  | (64 | ) |  |  | (339 | )
|  | $ | 1,896 |  |  |  | 838 |  |  |  | (1,441 | )
Income tax expense (benefit) attributable to income from operations consists of:
(dollars in thousands) |  | 2013 |  |  | 2012 |  |  | 2011 |
current |  |  |  |  |  |  |  |  |
federal |  | $ | - |  |  |  | 79 |  |  |  | (79 | )
state |  |  | 19 |  |  |  | - |  |  |  | - |
foreign |  |  | 2,297 |  |  |  | 2,505 |  |  |  | 2,367 |
|  |  | 2,316 |  |  |  | 2,584 |  |  |  | 2,288 |
deferred |  |  |  |  |  |  |  |  |  |  |  |
federal |  |  | 192 |  |  |  | 727 |  |  |  | 1,805 |
state |  |  | 14 |  |  |  | 55 |  |  |  | 142 |
undistributed earnings – foreign subsidiaries |  |  | 7,011 |  |  |  | - |  |  |  | - |
U.S. operating loss carryforwards |  |  | 3,665 |  |  |  | 1,102 |  |  |  | 1,241 |
foreign |  |  | 608 |  |  |  | 143 |  |  |  | 89 |
USD election for Canadian returns |  |  | - |  |  |  | - |  |  |  | (315 | )
valuation allowance |  |  | (11,834 | ) |  |  | (3,709 | ) |  |  | (6,352 | )
|  |  | (344 | ) |  |  | (1,682 | ) |  |  | (3,390 | )
|  | $ | 1,972 |  |  |  | 902 |  |  |  | (1,102 | )
Income before income taxes related to the company’s foreign operations for the years ended April 28, 2013, April 29, 2012, and May 1, 2011 was $12.0 million, $10.5 million, and $9.9 million, respectively. Income before income taxes related to the company’s domestic operations for the years ended April 28, 2013, April 29, 2012, and May 1, 2011 was $8.2 million, $3.7 million, and $5.2 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:
|  | 2013 |  |  | 2012 |  |  | 2011 |
federal income tax rate |  |  | 34.0 | % |  |  | 34.0 | % |  |  | 34.0 | %
foreign tax rate differential |  |  | (6.7 | ) |  |  | (8.8 | ) |  |  | (6.5 | )
increase in tax reserves |  |  | 4.0 |  |  |  | 6.1 |  |  |  | 8.8 |
undistributed earnings from foreign subsidiaries |  |  | 34.6 |  |  |  | - |  |  |  | - |
non-deductible stock option expense |  |  | - |  |  |  | - |  |  |  | 1.0 |
USD election for Canadian returns |  |  | - |  |  |  | - |  |  |  | (2.1 | )
change in valuation allowance |  |  | (58.3 | ) |  |  | (26.1 | ) |  |  | (42.2 | )
other |  |  | 2.1 |  |  |  | 1.2 |  |  |  | (0.3 | )
|  |  | 9.7 | % |  |  | 6.4 | % |  |  | (7.3 | )%
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) |  | 2013 |  |  | 2012 |
deferred tax assets: |  |  |  |  |  |
accounts receivable |  | $ | 376 |  |  |  | 301 |
inventories |  |  | 1,689 |  |  |  | 1,738 |
compensation |  |  | 3,049 |  |  |  | 2,107 |
liabilities and other |  |  | 700 |  |  |  | 523 |
alternative minimum tax credit |  |  | 1,320 |  |  |  | 1,320 |
property, plant and equipment (1) |  |  | 758 |  |  |  | 1,001 |
loss carryforwards – U.S. |  |  | 19,842 |  |  |  | 23,472 |
loss carryforwards – foreign |  |  | 241 |  |  |  | 115 |
unrecognized tax benefits – U.S. |  |  | (8,976 | ) |  |  | (8,298 | )
valuation allowances |  |  | (963 | ) |  |  | (12,797 | )
total deferred tax assets |  |  | 18,036 |  |  |  | 9,482 |
deferred tax liabilities: |  |  |  |  |  |  |  |
undistributed earnings on foreign subsidiaries |  |  | (7,011 | ) |  |  | - |
property, plant and equipment (2) |  |  | (4,653 | ) |  |  | (3,715 | )
other |  |  | (985 | ) |  |  | (800 | )
total deferred tax liabilities |  |  | (12,649 | ) |  |  | (4,515 | )
Net deferred tax asset |  | $ | 5,387 |  |  |  | 4,967 |
| (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 $50.7 million with related future tax benefits of $19.8 million at April 28, 2013. These carryforwards principally expire in 13-16 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 28, 2013, the current deferred tax asset of $7.7 million represents $7.4 million and $325,000 from our operations located in the U.S. and China, respectively. At April 28, 2013, the non-current deferred tax asset of $753,000 pertains to our operations located in China. At April 28, 2013, the non-current deferred tax liability of $3.1 million represents $2.0 million and $1.1 million from our operations located in the U.S. and Canada, respectively. 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. 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 our assessment at April 28, 2013, we recorded a partial valuation allowance of $963,000, of which $722,000 pertained to certain U.S. state net operating loss carryforwards and credits and $241,000 pertained to loss carryforwards associated with our Culp Europe operation located in Poland. Based on our assessment at April 29, 2012, we recorded a partial valuation allowance of $12.8 million against our net deferred tax assets associated with our U.S. operations. No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at April 28, 2013 and April 29, 2012, respectively. United States Our net deferred tax asset regarding our U.S. operations primarily pertains to incurring significant U.S. pre-tax losses over the last several years, with U.S. loss carryforwards totaling $50.7 million, $59.9 million, and $60.0 million at April 28, 2013, 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 reflected 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 had 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 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 increase in cumulative pre-tax income 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 was difficult. Since it would have taken a significant period of time for our U.S. operations to realize their U.S. net deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believed 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 as of end of our second quarter of fiscal 2012. These trends continued through the fourth quarter of fiscal 2012 and, as a result, we maintained our position that we could only forecast U.S. taxable income through fiscal 2014. Our mattress fabric operations had net sales that totaled $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 the 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 were 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. Fiscal 2013 The improvement in our U.S. operations’ financial results continued through the second quarter of fiscal 2013. Our U.S. operations earned a pre-tax income on a cumulative three-year basis as of April 29, 2012 (the end of our fiscal 2012) of $11.9 million and an additional $3.4 million through the second quarter of fiscal 2013. This continued earnings improvement from our U.S. operations was primarily due to the operating performance of our mattress fabric operations. Through the second quarter of fiscal 2013, our mattress fabric operations had net sales that totaled $77.7 million, an increase of 15% compared with $67.4 million through the second quarter of fiscal 2012. In addition, our mattress fabric operations reported operating income of $10.3 million through the second quarter of fiscal 2013, an increase of 49% compared with $7.0 million through the second quarter of fiscal 2012. These improved results through the second quarter of fiscal 2013, which were better than expected, can be attributed to the recent evolution of the bedding industry into a more decorative business with growing consumer demand for better bedding and a higher quality mattress fabric, and the recent stabilization of raw material prices. In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Prior to the second quarter of fiscal 2013, it was management’s intention to indefinitely reinvest all of our undistributed foreign earnings. Accordingly, no deferred tax liability had been recorded in connection with the future repatriation of these earnings. During the second quarter of fiscal 2013, we assessed the financial requirements of our U.S. parent company and foreign subsidiaries and determined that our undistributed earnings from our foreign subsidiaries totaling $55.6 million will not be reinvested indefinitely and will be eventually distributed to our U.S. parent company. The financial requirements of the U.S. parent company have recently changed due to a decision to return cash to its shareholders through dividend payments and common stock repurchases. Also, in order to keep up with the recent growth in consumer demand for better bedding and a higher quality mattress fabric, it is our intention to continue our investment in our domestic mattress fabric operations. As a result of this assessment, we recorded a deferred tax liability and corresponding income tax charge of $6.6 million during the second quarter of fiscal 2013 and an additional $400,000 in the last half of fiscal 2013. At April 28, 2013, we had accumulated earnings and profits from our foreign subsidiaries totaling $56.7 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries included U.S. income and foreign withholding taxes totaling $22.0 million, offset by U.S. foreign income tax credits of $15.0 million. Based on the positive evidence at the end of our second quarter of fiscal 2013, as supported by our cumulative earnings history, current and expected earnings improvement driven by our U.S. mattress fabric operations, and the significant source of U.S. taxable income from the undistributed earnings of our foreign subsidiaries, we recorded an income tax benefit of $12.2 million to reverse substantially all of the valuation allowance against our U.S. net deferred tax assets. In the third quarter of fiscal 2013, we recorded an income tax charge of $103,000, due to a change in our second quarter estimate of the recoverability of our U.S. state net loss operating carryforwards. After this valuation allowance reversal of $12.1 million, we have a remaining valuation allowance against our U.S. net deferred tax assets totaling $722,000 as of April 28, 2013. This valuation allowance pertains to certain U.S. state net operating loss carryforwards and credits in which it is “more likely than not” that these U.S. state net operating loss carryforwards and credits will not be realized prior to their respective expiration dates. Poland During the third quarter of fiscal 2011, we established Culp Europe, a wholly-owned subsidiary located in Poland. Due to the initial start up costs of setting up this operation and the current state of the European economy, this operation had recorded cumulative pre-tax losses totaling $1.1 million through the second quarter of fiscal 2013. Based on the negative evidence, as supported by our cumulative loss history and the short carryforward period of 5 years imposed by the Polish government, we recorded a full valuation allowance against Culp Europe’s net deferred tax assets as of the end of the second quarter of fiscal 2013. As of April 28, 2013, we recorded an income tax charge and a full valuation allowance against Culp Europe’s net deferred tax assets totaling $241,000. 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 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 2013, we recorded an income tax benefit of $11.8 million for the reduction of our valuation allowance. This $11.8 million decrease represents a $12.1 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 $241,000 for the establishment of a full valuation allowance against our net deferred tax assets associated with our Culp Europe operations located in Poland. 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. 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. Uncertainty in Income Taxes The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) |  | 2013 |  |  | 2012 |  |  | 2011 |
beginning balance |  | $ | 12,462 |  |  |  | 11,739 |  |  |  | 10,135 |
increases from prior period tax positions |  |  | 812 |  |  |  | 852 |  |  |  | 1,799 |
decreases from prior period tax positions |  |  | (108 | ) |  |  | (129 | ) |  |  | (195 | )
increases from current period tax positions |  |  | - |  |  |  | - |  |  |  | - |
ending balance |  | $ | 13,166 |  |  |  | 12,462 |  |  |  | 11,739 |
At April 28, 2013, we had $13.1 million of total gross unrecognized tax benefits, of which $4.2 million would favorably affect the income tax rate in future periods. 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. As of April 28, 2013, we had $13.1 million of total gross unrecognized tax benefits, of which $8.9 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 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. We elected to classify interest and penalties as part of income tax expense. At April 28, 2013 and April 29, 2012, the gross amount of interest and penalties due to unrecognized tax benefits was $640,000 and $485,000, respectively. The liability for uncertain tax positions at April 28, 2013, includes $13.1 million related to tax positions for which significant change is reasonably possible in fiscal 2014. 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 2006 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 2008 and subsequent. Income Taxes Paid Income tax payments, net of income tax refunds, were $2.8 million in fiscal 2013, $2.4 million in 2012, and $1.2 million in 2011.

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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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