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INCOME TAXES | 12 Months Ended
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May. 03, 2015
Income Tax Disclosure [Abstract] |
INCOME TAXES |
9. | INCOME TAXES
Income Tax Expense and Effective Income Tax Rate Total income tax expense was allocated as follows:
(dollars in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
income from operations |  | $ | 7,885 |  |  |  | 1,596 |  |  |  | 1,972 |
shareholders’ equity, related to the tax benefit arising from stock based compensation |  |  | (109 | ) |  |  | (143 | ) |  |  | (76 | )
|  | $ | 7,776 |  |  |  | 1,453 |  |  |  | 1,896 |
Income tax expense attributable to income from operations consists of:
(dollars in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
current |  |  |  |  |  |  |  |  |
federal |  | $ | - |  |  |  | - |  |  |  | - |
state |  |  | (7 | ) |  |  | - |  |  |  | 19 |
foreign |  |  | 4,713 |  |  |  | 3,323 |  |  |  | 2,297 |
|  |  | 4,706 |  |  |  | 3,323 |  |  |  | 2,316 |
deferred |  |  |  |  |  |  |  |  |  |  |  |
federal |  |  | (849 | ) |  |  | 1,065 |  |  |  | 192 |
state |  |  | (52 | ) |  |  | 416 |  |  |  | 14 |
undistributed earnings – foreign subsidiaries |  |  | (260 | ) |  |  | (5,018 | ) |  |  | 7,011 |
U.S. operating loss carryforwards |  |  | 4,487 |  |  |  | 1,838 |  |  |  | 3,665 |
foreign |  |  | (92 | ) |  |  | (42 | ) |  |  | 608 |
valuation allowance |  |  | (55 | ) |  |  | 14 |  |  |  | (11,834 | )
|  |  | 3,179 |  |  |  | (1,727 | ) |  |  | (344 | )
|  | $ | 7,885 |  |  |  | 1,596 |  |  |  | 1,972 |
Income (loss) before income taxes related to the company’s foreign and U.S. operations consists of:
(dollars in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
Foreign |  |  |  |  |  |  |  |  |  |  |  |
China |  | $ | 12,531 |  |  |  | 11,512 |  |  |  | 10,593 |
Canada |  |  | 2,695 |  |  |  | 2,149 |  |  |  | 2,075 |
Poland |  |  | (260 | ) |  |  | (370 | ) |  |  | (630 | )
Total Foreign |  |  | 14,966 |  |  |  | 13,291 |  |  |  | 12,038 |
United States |  |  | 7,990 |  |  |  | 5,752 |  |  |  | 8,251 |
|  | $ | 22,956 |  |  |  | 19,043 |  |  |  | 20,289 |
The following schedule summarizes the principal differences between the income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
|  | 2015 |  |  | 2014 |  |  | 2013 |
federal income tax rate |  |  | 34.0 | % |  |  | 34.0 | % |  |  | 34.0 | %
foreign tax rate differential |  |  | (6.7 | ) |  |  | (7.2 | ) |  |  | (6.7 | )
increase in the liability for uncertain tax positions |  |  | 3.7 |  |  |  | 4.3 |  |  |  | 4.0 |
undistributed earnings from foreign subsidiaries |  |  | 3.0 |  |  |  | (26.3 | ) |  |  | 34.6 |
change in valuation allowance |  |  | (0.2 | ) |  |  | 0.1 |  |  |  | (58.3 | )
other |  |  | 0.5 |  |  |  | 3.5 |  |  |  | 2.1 |
|  |  | 34.3 | % |  |  | 8.4 | % |  |  | 9.7 | %
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) |  | 2015 |  |  | 2014 |
deferred tax assets: |  |  |  |  |  |  |  |
accounts receivable |  | $ | 444 |  |  |  | 274 |
inventories |  |  | 2,251 |  |  |  | 1,801 |
compensation |  |  | 4,497 |  |  |  | 3,200 |
liabilities and other |  |  | 1,155 |  |  |  | 1,109 |
alternative minimum tax credit |  |  | 1,320 |  |  |  | 1,320 |
property, plant and equipment (1) |  |  | 447 |  |  |  | 572 |
loss carryforwards – U.S. |  |  | 12,133 |  |  |  | 17,161 |
loss carryforwards – foreign |  |  | 361 |  |  |  | 311 |
unrecognized tax benefits – U.S. |  |  | (10,349 | ) |  |  | (9,778 | )
valuation allowances |  |  | (922 | ) |  |  | (977 | )
total deferred tax assets |  |  | 11,337 |  |  |  | 14,993 |
deferred tax liabilities: |  |  |  |  |  |  |  |
undistributed earnings on foreign subsidiaries |  |  | (1,733 | ) |  |  | (1,993 | )
property, plant and equipment (2) |  |  | (4,022 | ) |  |  | (4,581 | )
goodwill |  |  | (1,197 | ) |  |  | (1,028 | )
other |  |  | (198 | ) |  |  | (134 | )
total deferred tax liabilities |  |  | (7,150 | ) |  |  | (7,736 | )
Net deferred tax asset |  | $ | 4,187 |  |  |  | 7,257 |
(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 $32.2 million with related future tax benefits of $12.1 million at May 3, 2015. These carryforwards principally expire in 11-19 years, fiscal 2026 through fiscal 2034. 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 May 3, 2015, the current deferred tax asset of $4.8 million represents $4.4 million and $421,000 from our operations located in the U.S. and China, respectively. At May 3, 2015, the non-current deferred tax asset of $447,000 pertained to our operations located in China. At May 3, 2015, the non-current deferred tax liability of $1.1 million represents $896,000 and $154,000 from our operations located in Canada and U.S., respectively. At April 27, 2014, the current deferred tax asset of $6.2 million represents $5.8 million and $372,000 from our operations located in the U.S. and China, respectively. At April 27, 2014, the non-current deferred tax asset of $2.0 million represents $1.4 million and $572,000 from our operations located in the U.S. and China, respectively. At April 27, 2014, the non-current deferred tax liability of $1.0 million pertained 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 May 3, 2015, we recorded a partial valuation allowance of $922,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $361,000 pertained to loss carryforwards associated with our Culp Europe operation located in Poland. Based on our assessment at April 27, 2014, we recorded a partial valuation allowance of $977,000, of which $666,000 pertained to certain U.S. state net operating loss carryforwards and credits and $311,000 pertained to loss carryforwards 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 May 3, 2015 and April 27, 2014, respectively. United States Our net deferred tax asset regarding our U.S. operations includes U.S. loss carryforwards totaling $32.2 million, $45.7 million, and $50.7 million at May 3, 2015, April 27, 2014, and April 28, 2013, respectively. Fiscal 2013 Due to the favorable results of our multi-year restructuring process in our upholstery fabric operations and key acquisitions and capital investments made in our mattress fabric operations, our U.S operations' financial results started to improve in fiscal 2011 and this improvement 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, were attributed to the 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 stabilization of raw material prices. 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 (see separate section below), 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 that we concluded were more likely than not to be realized. 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 had a remaining valuation allowance against our U.S. net deferred tax assets totaling $722,000 as of April 28, 2013. This valuation allowance pertained 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 would not be realized prior to their respective expiration dates. Fiscal 2014 At April 27, 2014, we had a remaining valuation allowance against our U.S net deferred tax assets totaling $666,000. This valuation allowance pertained to 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 would not be realized prior to their respective expiration dates. In fiscal 2014, we recorded an income tax benefit of $56,000 that reduced our valuation allowance against our U.S. net deferred tax assets. This income tax benefit pertained to a change in estimate of the recoverability of our U.S. state net loss operating carryforwards at the end of fiscal 2014. Fiscal 2015 At May 3, 2015, we had a remaining valuation allowance against our U.S net deferred tax assets totaling $561,000. This valuation allowance pertained to 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 would not be realized prior to their respective expiration dates. In fiscal 2015, we recorded an income tax benefit of $105,000 that reduced our valuation allowance against our U.S. net deferred tax assets. This income tax benefit pertained to a change in estimate of the recoverability of our U.S. state net loss operating carryforwards at the end of fiscal 2015. 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 a history of cumulative pre-tax losses. Based on the negative evidence, as supported by our cumulative pre-tax 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 commencing in the second quarter of fiscal 2013. As of May 3, 2015, we recorded a full valuation allowance against Culp Europe’s net deferred tax assets totaling $361,000. Change in Valuation Allowance In fiscal 2015, we recorded an income tax benefit of $55,000 for a reduction of our valuation allowance. This $55,000 reduction represents an income tax benefit of $105,000 for a change in estimate of the recoverability of our U.S. state net loss operating carryforwards, partially offset by an income tax charge of $50,000 for an increase in the full valuation allowance against our net deferred tax assets associated with our Culp Europe operations located in Poland. In fiscal 2014, we recorded an income tax charge of $14,000 for an increase of our valuation allowance. The $14,000 increase represents an income tax charge of $70,000 for an increase in the full valuation allowance against our net deferred tax assets associated with our Culp Europe operations located in Poland, partially offset by an income tax benefit of $56,000 for a change in estimate of the recoverability of our U.S. state net loss operating carryforwards at the end of fiscal 2014. 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, partially 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. Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries 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. Also, 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 our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time. Fiscal 2013 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 would not be reinvested indefinitely and would be eventually distributed to our U.S. parent company. The financial requirements of the U.S. parent company 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 was 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 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. Fiscal 2014 During the third quarter of fiscal 2014, our operations in China achieved positive accumulated earnings and profits for both U.S. income tax and financial reporting purposes for the first time since we determined our undistributed earnings from foreign subsidiaries would not be reinvested indefinitely in the second quarter of fiscal 2013. As a result, we recorded an income tax benefit of $5.4 million to recognize U.S. foreign income tax credits of $9.9 million offset by the U.S. income tax effects of the undistributed earnings from our China operations and foreign withholding taxes totaling $4.5 million. This $5.4 million income tax benefit was treated as a discrete event in which the full income tax benefits of this adjustment were recorded in the third quarter and full fiscal year 2014, as it pertained to a change in judgment on prior periods’ accumulated earnings and profits associated with our subsidiaries located in China. In addition, an income tax charge of $352,000 was recorded during fiscal 2014 for the U.S. income tax effects of the undistributed earnings and foreign withholding taxes incurred in fiscal 2014 from our Canadian operations and the fourth quarter of fiscal 2014 from our China operations. At April 27, 2014, we had accumulated earnings and profits from our foreign subsidiaries totaling $72.8 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.0 million, which included U.S. income and foreign withholding taxes totaling $28.1 million, offset by U.S. foreign income tax credits of $26.1 million. Fiscal 2015 An income tax charge of $695,000 was recorded during fiscal 2015 for the U.S. income tax effects of the undistributed earnings and foreign withholding taxes incurred in fiscal 2015 from our Canadian and China operations. At May 3, 2015, we had accumulated earnings and profits from our foreign subsidiaries totaling $85.2 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $1.7 million, which included U.S. income and foreign withholding taxes totaling $32.4 million, offset by U.S. foreign income tax credits of $30.7 million. Uncertainty in Income Taxes The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) |  | 2015 |  |  | 2014 |  |  | 2013 |
beginning balance |  | $ | 13,740 |  |  |  | 13,166 |  |  |  | 12,462 |
increases from prior period tax positions |  |  | 588 |  |  |  | 756 |  |  |  | 812 |
decreases from prior period tax positions |  |  | (187 | ) |  |  | (182 | ) |  |  | (108 | )
increases from current period tax positions |  |  | - |  |  |  | - |  |  |  | - |
ending balance |  | $ | 14,141 |  |  |  | 13,740 |  |  |  | 13,166 |
At May 3, 2015, we had $14.1 million of total gross unrecognized tax benefits, of which $3.8 million would favorably affect the income tax rate in future periods. At April 27, 2014, we had $13.7 million of total gross unrecognized tax benefits, of which $4.0 million would favorably affect the income tax rate in future periods. As of May 3, 2015, we had $14.1 million of total gross unrecognized tax benefits, of which $10.3 million and $3.8 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 27, 2014, we had $13.7 million of total gross unrecognized tax benefits, of which $9.7 million and $4.0 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 May 3, 2015 and April 27, 2014, the gross amount of interest and penalties due to unrecognized tax benefits was $844,000 and $755,000, respectively. The liability for uncertain tax positions at May 3, 2015, includes $14.1 million related to tax positions for which significant change is reasonably possible in fiscal 2016. 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 2005 and subsequent due to loss carryforwards. Canadian federal returns remain subject to examination for tax years 2008 and subsequent. Canadian provincial (Quebec) returns remain subject to examination for tax years 2011 and subsequent. Income tax returns for the company’s China subsidiaries are subject to examination for tax years 2010 and subsequent. Income Taxes Paid Income tax payments, net of income tax refunds, were $4.8 million in fiscal 2015, $3.0 million in 2014, and $2.8 million in 2013.

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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 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 2: 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 Reference 3: 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 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 SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 + Details
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