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INCOME TAXES | 12 Months Ended
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May 01, 2016
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) |  | 2016 |  |  | 2015 |  |  | 2014 |
income from operations |  | $ | 10,963 |  |  |  | 7,885 |  |  |  | 1,596 |
shareholders’ equity, related to the tax benefit arising from stock based compensation |  |  | (841 | ) |  |  | (109 | ) |  |  | (143 | )
|  | $ | 10,122 |  |  |  | 7,776 |  |  |  | 1,453 |
Income tax expense attributable to income from operations consists of:
(dollars in thousands) |  | 2016 |  |  | 2015 |  |  | 2014 |
current |  |  |  |  |  |  |  |  |
federal |  | $ | - |  |  |  | - |  |  |  | - |
state |  |  | 6 |  |  |  | (7 | ) |  |  | - |
foreign |  |  | 6,765 |  |  |  | 4,713 |  |  |  | 3,323 |
|  |  | 6,771 |  |  |  | 4,706 |  |  |  | 3,323 |
deferred |  |  |  |  |  |  |  |  |  |  |  |
federal |  |  | (1,205 | ) |  |  | (849 | ) |  |  | 1,065 |
state |  |  | 305 |  |  |  | (52 | ) |  |  | 416 |
undistributed earnings – foreign subsidiaries |  |  | (1,129 | ) |  |  | (260 | ) |  |  | (5,018 | )
U.S. operating loss carryforwards |  |  | 5,467 |  |  |  | 4,487 |  |  |  | 1,838 |
foreign |  |  | 1,086 |  |  |  | (92 | ) |  |  | (42 | )
valuation allowance |  |  | (332 | ) |  |  | (55 | ) |  |  | 14 |
|  |  | 4,192 |  |  |  | 3,179 |  |  |  | (1,727 | )
|  | $ | 10,963 |  |  |  | 7,885 |  |  |  | 1,596 |
Income (loss) before income taxes related to the company’s foreign and U.S. operations consists of:
(dollars in thousands) |  | 2016 |  |  | 2015 |  |  | 2014 |
Foreign |  |  |  |  |  |  |  |  |  |  |  |
China |  | $ | 14,130 |  |  |  | 12,531 |  |  |  | 11,512 |
Canada |  |  | 3,647 |  |  |  | 2,695 |  |  |  | 2,149 |
Poland |  |  | (62 | ) |  |  | (260 | ) |  |  | (370 | )
Total Foreign |  |  | 17,715 |  |  |  | 14,966 |  |  |  | 13,291 |
United States |  |  | 10,183 |  |  |  | 7,990 |  |  |  | 5,752 |
|  | $ | 27,898 |  |  |  | 22,956 |  |  |  | 19,043 |
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:
|  | 2016 |  |  | 2015 |  |  | 2014 |
federal income tax rate |  |  | 34.0 | % |  |  | 34.0 | % |  |  | 34.0 | %
tax effects of Chinese foreign exchange gains |  |  | 4.4 |  |  |  | 0.3 |  |  |  | (1.3 | )
change in valuation allowance |  |  | (1.2 | ) |  |  | (0.2 | ) |  |  | 0.1 |
change in North Carolina income tax rates |  |  | 0.7 |  |  |  | - |  |  |  | 1.8 |
undistributed earnings from foreign subsidiaries |  |  | - |  |  |  | - |  |  |  | (26.3 | )
other |  |  | 1.4 |  |  |  | 0.2 |  |  |  | 0.1 |
|  |  | 39.3 | % |  |  | 34.3 | % |  |  | 8.4 | %
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) |  | 2016 |  |  | 2015 |
deferred tax assets: |  |  |  |  |  |  |  |
accounts receivable |  | $ | 545 |  |  |  | 444 |
inventories |  |  | 2,660 |  |  |  | 2,251 |
compensation |  |  | 5,311 |  |  |  | 4,497 |
liabilities and other |  |  | 1,173 |  |  |  | 1,155 |
foreign income tax credits - U.S. |  |  | 1,436 |  |  |  | - |
alternative minimum tax credit - U.S. |  |  | 1,320 |  |  |  | 1,320 |
property, plant and equipment (1) |  |  | 326 |  |  |  | 447 |
loss carryforwards – U.S. |  |  | 6,888 |  |  |  | 12,133 |
loss carryforwards – foreign |  |  | 147 |  |  |  | 361 |
unrecognized tax benefits – U.S. |  |  | (6,888 | ) |  |  | (10,349 | )
valuation allowances |  |  | (590 | ) |  |  | (922 | )
total deferred tax assets |  |  | 12,328 |  |  |  | 11,337 |
deferred tax liabilities: |  |  |  |  |  |  |  |
undistributed earnings on foreign subsidiaries |  |  | (604 | ) |  |  | (1,733 | )
unrecognized tax benefits – U.S. |  |  | (4,168 | ) |  |  | - |
property, plant and equipment (2) |  |  | (5,210 | ) |  |  | (4,022 | )
goodwill |  |  | (1,325 | ) |  |  | (1,197 | )
other |  |  | (185 | ) |  |  | (198 | )
total deferred tax liabilities |  |  | (11,492 | ) |  |  | (7,150 | )
Net deferred tax asset |  | $ | 836 |  |  |  | 4,187 |
(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 approximately $18.0 million with related future tax benefits of $6.9 million at May 1, 2016. These carryforwards principally expire in 10-19 years, fiscal 2026 through fiscal 2035. Our U.S. foreign income tax credits of $1.4 million expire in 10 years, fiscal 2026. Our alternative minimum tax credit carryforward of approximately $1.3 million for federal income tax purposes does not expire. At May 1, 2016, our non-current deferred income tax asset of $2.3 million represents $1.7 million and $572,000 from our operations located in the U.S. and China, respectively. At May 3, 2015, our non-current deferred income tax asset of $5.2 million represents $4.3 million and $868,000 from our operations located in the U.S. and China, respectively. Our non-current deferred income tax liability balances of $1.5 million and $982,000 at May 1, 2016 and May 3, 2015, respectively, pertain 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 1, 2016, we recorded a partial valuation allowance of $590,000, of which $518,000 pertained to certain U.S. state net operating loss carryforwards and credits and $72,000 pertained to loss carryforwards associated with our Culp Europe operation located in Poland. 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. No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at May 1, 2016 and May 3, 2015, respectively. United States Our partial valuation allowance against our U.S. net deferred assets totaled $518,000, $561,000, and $666,000 at May 1, 2016, May 3, 2015, and April 27, 2014, respectively. These valuation allowances pertain 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. We recorded income tax benefits of $43,000, $105,000, and $56,000 that reduced our valuation allowance against our U.S. net deferred tax assets in fiscal years 2016, 2015, and 2014, respectively. These income tax benefits pertain to a change in estimate of the recoverability of our U.S. state net loss operating carryforwards at the end of the respective prior fiscal year. 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 five years imposed by the Polish government, we recorded an income tax charge of $241,000 during fiscal 2013 to establish a full valuation allowance against Culp Europe’s net deferred tax assets. Our partial valuation allowance against our loss carryforwards associated with our Culp Europe operation located in Poland totaled $72,000 at May 1, 2016. Our full valuation allowance against our loss carryforwards associated with our Culp Europe operation located in Poland totaled $361,000 and $311,000 at May 3, 2015 and April 27, 2014, respectively. These valuation allowances pertain to net operating loss carryforwards in which it is “more likely than not” that these net operating loss carryforwards would not be realized prior to their respective expiration dates. During fiscal 20 16, we recorded an income tax benefit of $289,000 for a change in estimate of the recoverability of our net loss operating carryforwards at the end of the respective prior fiscal year. During fiscal 2015 and 2014, we recorded an income tax charge of $50,000 and $70,000, respectively, for an increase in the full valuation allowance against our net deferred tax assets associated with our Culp Europe operations. 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. At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling $38.5 million, offset by U.S. foreign income tax credits of $37.9 million. 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. Fiscal 2014 - Discrete Event 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. Uncertainty in Income Taxes The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) |  | 2016 |  |  | 2015 |  |  | 2014 |
beginning balance |  | $ | 14,141 |  |  |  | 13,740 |  |  |  | 13,166 |
increases from prior period tax positions |  |  | 454 |  |  |  | 588 |  |  |  | 756 |
decreases from prior period tax positions |  |  | (77 | ) |  |  | (187 | ) |  |  | (182 | )
increases from current period tax positions |  |  | 379 |  |  |  | - |  |  |  | - |
ending balance |  | $ | 14,897 |  |  |  | 14,141 |  |  |  | 13,740 |
At May 1, 2016, we had $14.9 million of total gross unrecognized tax benefits, of which $3.8 million would favorably affect the income tax rate in future periods. 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. As of May 1, 2016, we had $14.9 million of total gross unrecognized tax benefits, of which $11.1 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 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. We elected to classify interest and penalties as part of income tax expense. At May 1, 2016 and May 3, 2015, the gross amount of interest and penalties due to unrecognized tax benefits was $978,000 and $844,000, respectively. The liability for uncertain tax positions at May 1, 2016, includes $14.9 million related to tax positions for which significant change is reasonably possible in fiscal 2017. 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 2009 and subsequent. Canadian provincial (Quebec) returns remain subject to examination for tax years 2012 and subsequent. Income tax returns for the company’s China subsidiaries are subject to examination for tax years 2011 and subsequent. Income Taxes Paid Income tax payments, net of income tax refunds, were $6.7 million in fiscal 2016, $4.8 million in 2015, and $3.0 million in 2014.

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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 + Details
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