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Income Taxes | 6 Months Ended
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Oct. 27, 2013
Income Taxes | 14. Income Taxes Effective Income Tax Rate We recorded income tax expense of $4.0 million, or 38.9% of income before income tax expense, for the six month period ended October 27, 2013, compared to an income tax benefit of $1.9 million, or 19.1% of income before income tax expense, for the six month period ended October 28, 2012. Our effective income tax rates for the six month periods ended October 27, 2013 and October 28, 2012 were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the U.S. dollar. The income tax expense for the six month period ended October 27, 2013 is different from the amount obtained by applying our statutory rate of 34% to income before income taxes for the following reasons:
| · | The income tax rate increased 3% for adjustments primarily made to our state of North Carolina loss carryforwards for the decrease in future North Carolina corporate income tax rates commencing in fiscal 2015 and beyond. These adjustments totaled $273,000 and represented a discrete event in which the full tax effects were recorded in the six month period ending October 27, 2013.
| · | The income tax rate decreased by 6% for taxable income subject to lower statutory income tax rates in foreign jurisdictions (Canada and China) compared with the statutory income tax rate of 34% for the United States.
| · | The income tax rate increased by 4% for an increase in unrecognized tax benefits.
| · | The income tax rate increased by 3.9% for stock-based compensation and other miscellaneous items.
The income tax expense for the six month period ended October 28, 2012 is different from the amount obtained by applying our statutory rate of 34% to income before income taxes for the following reasons:
| · | The income tax rate was reduced by 123% for a reduction in our valuation allowance associated with our U.S. net deferred tax assets. This 123% reduction in our income tax rate is due to a change in judgment about the realization of our U.S. net deferred income tax assets in future years. Since the realization of our U.S. net deferred income tax assets is a result of a change in judgment about future years we recorded an income tax benefit of $12.2 million that represents a discrete event in which the full tax effects were recorded for the three and six month periods ending October 28, 2012.
| · | The income tax rate was increased by 67% for the establishment of a deferred tax liability for U.S. income taxes that will be paid upon repatriation of undistributed earnings from our foreign subsidiaries located in Canada and China. This 67% increase in our income tax rate is due to a change in judgment in which our prior years’ accumulated earnings and profits associated with our subsidiaries located in Canada and China are no longer considered indefinitely reinvested. Since the establishment of our deferred tax liability is a result of a change in judgment about prior years’ accumulated earnings and profits we recorded an income tax charge of $6.6 million that represents a discrete event in which the full tax effects were recorded for the three and six month periods ending October 28, 2012.
| · | The income tax rate increased 4% for an increase in unrecognized tax benefits.
| · | The income tax rate was reduced by 5% for taxable income subject to lower statutory income tax rates in foreign jurisdictions (Canada and China) compared with the statutory income tax rate of 34% for the United States.
| · | The income tax rate was increased by 2% for the establishment of a valuation allowance against our net deferred tax assets associated with our Culp Europe operation located in Poland.
| · | The income tax rate was increased by 1.9% for stock-based compensation and other miscellaneous items.
Deferred Income Taxes Valuation Allowance 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 October 27, 2013, we recorded a partial valuation allowance of $1.0 million, of which $722,000 pertained to certain U.S. state net operating loss carryforwards and credits and $315,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at October 28, 2012, we recorded a partial valuation allowance of $825,000, of which $616,000 pertained to certain U.S. state net operating loss carryforwards and credits and $209,000 pertained to loss carryforwards associated with our Culp Europe operation located in Poland. 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 carryfowards associated with our Culp Europe operation located in Poland. No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at October 27, 2013, October 28, 2012, and April 28, 2013, respectively. The recorded valuation allowance of $1.0 million at October 27, 2013, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time. Undistributed Earnings 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. Based on our assessment of the financial requirements of our U.S. parent company and foreign subsidiaries, we determined that our undistributed earnings from our foreign subsidiaries 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 changed over the past year 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 growth in consumer demand for our mattress fabric products, it is our intention to continue our investment in our domestic mattress fabric operations. We had accumulated earnings from our foreign subsidiaries totaling $57.7 million, $55.6 million, and $56.7 million at October 27, 2013, October 28, 2012, and April 28, 2013, respectively. At October 27, 2013, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $7.1 million, which included U.S. income and foreign withholding taxes totaling $22.4 million, offset by U.S. foreign income tax credits of $15.3 million. At October 28, 2012, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $6.6 million, which included U.S. income and foreign withholding taxes totaling $21.6 million offset by U.S. foreign income tax credits of $15.0 million. At April 28, 2013, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $7.0 million, which included U.S. income and foreign withholding taxes totaling $22.0 million, offset by U.S. foreign income tax credits of $15.0 million. In accordance with ASC Topic 740, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not that our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time. Overall At October 27, 2013, the current deferred tax asset of $7.8 million represents $7.4 million and $386,000 from our operations located in the U.S. and China, respectively. At October 27, 2013, the non-current deferred tax asset of $661,000 pertains to our operations located in China. At October 27, 2013, the non-current deferred tax liability of $5.0 million represents $4.1 million and $945,000 from our operations located in the U.S. and Canada, respectively. At October 28, 2012, the current deferred tax asset of $4.5 million represents $4.1 million and $369,000 from our operations located in the U.S. and China, respectively. At October 28, 2012, the non-current deferred tax asset of $4.7 million represents $3.9 million and $866,000 from our operations located in the U.S. and China, respectively. At October 28, 2012, the non-current deferred tax liability of $856,000 pertains to our operation located in Canada. 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. Uncertainty In Income Taxes At October 27, 2013, we had $13.5 million of total gross unrecognized tax benefits, of which $4.1 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. At October 28, 2012, we had $12.8 million of total gross unrecognized tax benefits, of which $4.2 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. 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. As of October 27, 2013, we had $13.5 million in gross unrecognized tax benefits, of which $9.4 million were classified as net non-current deferred income tax liability and $4.1 million were classified as income taxes payable –long-term in the accompanying consolidated balance sheets. As of October 28, 2012, we had $12.8 million in gross unrecognized tax benefits, of which $8.6 million were classified as net non-current deferred income tax assets and $4.2 million were classified as income taxes payable long-term in the accompanying consolidated balance sheets. As of April 28, 2013, we had $13.1 million in gross unrecognized tax benefits, of which $8.9 million were classified as net non-current deferred income tax liability and $4.2 million were classified as income taxes payable – long-term in the accompanying consolidated balance sheets. We estimate that the amount of gross unrecognized tax benefits will increase by approximately $848,000 for fiscal 2014. This increase primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.

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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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