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INCOME TAXES | 12 Months Ended
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Apr. 30, 2017
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) |  |  | 2017 |  |  | 2016 |  |  | 2015 |
income from operations |  | $ | 7,339 |  |  |  | 10,963 |  |  |  | 7,885 |
shareholders’ equity, related to the tax benefit arising from stock based compensation |  |  | (657 | ) |  |  | (841 | ) |  |  | (109 | )
|  | $ | 6,682 |  |  |  | 10,122 |  |  |  | 7,776 |
Income tax expense attributable to income from operations consists of:
(dollars in thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
current |  |  |  |  |  |  |  |  |
federal |  | $ | 109 |  |  |  | - |  |  |  | - |
state |  |  | 13 |  |  |  | 6 |  |  |  | (7 | )
foreign |  |  | 5,981 |  |  |  | 6,765 |  |  |  | 4,713 |
foreign – reversal of uncertain tax position |  |  | (3,431 | ) |  |  | - |  |  |  | - |
|  |  | 2,672 |  |  |  | 6,771 |  |  |  | 4,706 |
deferred |  |  |  |  |  |  |  |  |  |  |  |
federal |  |  | 404 |  |  |  | (1,205 | ) |  |  | (849 | )
state |  |  | 54 |  |  |  | 305 |  |  |  | (52 | )
undistributed earnings – foreign subsidiaries |  |  | (101 | ) |  |  | (1,129 | ) |  |  | (260 | )
U.S. operating loss carryforwards |  |  | 3,630 |  |  |  | 5,467 |  |  |  | 4,487 |
foreign |  |  | 734 |  |  |  | 1,086 |  |  |  | (92 | )
valuation allowance |  |  | (54 | ) |  |  | (332 | ) |  |  | (55 | )
|  |  | 4,667 |  |  |  | 4,192 |  |  |  | 3,179 |
|  | $ | 7,339 |  |  |  | 10,963 |  |  |  | 7,885 |
Income (loss) before income taxes related to our foreign and U.S. operations consists of:
(dollars in thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
Foreign: |  |  |  |  |  |  |  |  |  |  |  |
China |  | $ | 13,650 |  |  |  | 14,130 |  |  |  | 12,531 |
Canada |  |  | 4,918 |  |  |  | 3,647 |  |  |  | 2,695 |
Poland |  |  | (19 | ) |  |  | (62 | ) |  |  | (260 | )
Cayman Islands |  |  | 154 |  |  |  | - |  |  |  | - |
Total Foreign |  |  | 18,703 |  |  |  | 17,715 |  |  |  | 14,966 |
United States |  |  | 10,993 |  |  |  | 10,183 |  |  |  | 7,990 |
|  | $ | 29,696 |  |  |  | 27,898 |  |  |  | 22,956 |
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:
|  | 2017 |  |  | 2016 |  |  | 2015 |
federal income tax rate |  |  | 34.0 | % |  |  | 34.0 | % |  |  | 34.0 | %
tax effects of Chinese foreign exchange gains |  |  | 1.6 |  |  |  | 4.4 |  |  |  | 0.3 |
change in valuation allowance |  |  | (0.2 | ) |  |  | (1.2 | ) |  |  | (0.2 | )
change in North Carolina income tax rates |  |  | - |  |  |  | 0.7 |  |  |  | - |
reversal of foreign uncertain income tax position |  |  | (11.6 | ) |  |  | - |  |  |  | - |
other |  |  | 0.9 |  |  |  | 1.4 |  |  |  | 0.2 |
|  |  | 24.7 | % |  |  | 39.3 | % |  |  | 34.3 | %
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) |  | 2017 |  |  | 2016 |
deferred tax assets: |  |  |  |  |  |
accounts receivable |  | $ | 447 |  |  |  | 545 |
inventories |  |  | 2,196 |  |  |  | 2,660 |
compensation |  |  | 6,222 |  |  |  | 5,311 |
liabilities and other |  |  | 890 |  |  |  | 1,173 |
foreign income tax credits - U.S. |  |  | 1,436 |  |  |  | 1,436 |
alternative minimum tax credit - U.S. |  |  | 1,428 |  |  |  | 1,320 |
property, plant and equipment (1) |  |  | 245 |  |  |  | 326 |
loss carryforwards – U.S. |  |  | 3,842 |  |  |  | 6,888 |
loss carryforwards – foreign |  |  | 73 |  |  |  | 147 |
unrecognized tax benefits – U.S. |  |  | (3,842 | ) |  |  | (6,888 | )
valuation allowances |  |  | (536 | ) |  |  | (590 | )
total deferred tax assets |  |  | 12,401 |  |  |  | 12,328 |
deferred tax liabilities: |  |  |  |  |  |  |  |
undistributed earnings on foreign subsidiaries |  |  | (497 | ) |  |  | (604 | )
unrecognized tax benefits – U.S. |  |  | (7,936 | ) |  |  | (4,168 | )
property, plant and equipment (2) |  |  | (5,546 | ) |  |  | (5,210 | )
goodwill |  |  | (1,478 | ) |  |  | (1,325 | )
other |  |  | (118 | ) |  |  | (185 | )
total deferred tax liabilities |  |  | (15,575 | ) |  |  | (11,492 | )
Net deferred tax (liability) asset |  | $ | (3,174 | ) |  |  | 836 |
(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 $9.0 million with related future tax benefits of $3.8 million at April 30, 2017. These carryforwards principally expire in 9-18 years, fiscal 2027 through fiscal 2035. Our U.S. foreign income tax credits of $1.4 million expire in 9 years, fiscal 2026. Our alternative minimum tax credit carryforward of approximately $1.4 million for federal income tax purposes does not expire. At April 30, 2017, our non-current deferred income tax asset of $419,000 pertained to our operations located in China. 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 April 30, 2017, our non-current deferred income tax liability of $3.6 million represents $2.1 million and $1.5 million from our operations located in Canada and the U.S., respectively. At May 1, 2016, our non-current deferred income tax liability of $1.5 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 April 30, 2017, we recorded a partial valuation allowance of $536,000, of which $464,000 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 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. No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at April 30, 2017 and May 1, 2016, respectively. United States Our partial valuation allowance against our U.S. net deferred assets totaled $464,000 and $518,000 at April 30, 2017, and May 1, 2016, 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 $54,000, $43,000, and $105,000 that reduced our valuation allowance against our U.S. net deferred tax assets in fiscal years 2017, 2016, and 2015, 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 Our partial valuation allowance against our loss carryforwards associated with our Culp Europe operation located in Poland totaled $72,000 at April 30, 2017 and May 1, 2016. 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 2016, 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 we recorded 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 operation. 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 April 30, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $146.9 million. At the same date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $497,000, which included U.S. income and foreign withholding taxes totaling $44.0 million, offset by U.S. foreign income tax credits of $43.5 million. 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. Uncertainty in Income Taxes The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) |  | 2017 |  |  | 2016 |  |  | 2015 |
beginning balance |  | $ | 14,897 |  |  |  | 14,141 |  |  |  | 13,740 |
increases from prior period tax positions |  |  | 854 |  |  |  | 454 |  |  |  | 588 |
decreases from prior period tax positions |  |  | (3,506 | )** |  |  | (77 | ) |  |  | (187 | )
increases from current period tax positions |  |  | - |  |  |  | 379 |  |  |  | - |
ending balance |  | $ | 12,245 |  |  |  | 14,897 |  |  |  | 14,141 |
** Amount includes a reduction to unrecognized tax benefits of $3,431 resulting from a lapse of the applicable statute of limitations. At April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $467,000 would favorably affect the income tax rate in future periods. 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 April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $11.8 million and $467,000 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, 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. We elected to classify interest and penalties as part of income tax expense. At April 30, 2017 and May 1, 2016, the gross amount of interest and penalties due to unrecognized tax benefits was $50,000 and $978,000, respectively. Our gross unrecognized income tax benefit of $12.2 million at April 30, 2017, relates to tax positions for which significant change is reasonably possible within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal and provincial (Quebec) returns filed by us remain subject to examination for income tax years 2013 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2012 and subsequent. Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years 2014 through 2016, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018. During the third quarter of fiscal 2017, Revenue Quebec commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013 through 2015, and no adjustments have been proposed at this time. We currently expect this examination to be completed during fiscal 2018. In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time. During the fiscal 2017, we recognized an income tax benefit of $3.4 million for the reversal of an uncertain income tax position associated with certain foreign jurisdictions in which the statute of limitations expired. Accordingly, of this $3.4 million income tax benefit, $2.1 million and $1.3 million were treated as discrete events in which the full income tax effects of these adjustments were recorded in the third and fourth quarters, respectively. Income Taxes Paid Income tax payments, net of income tax refunds, were $5.5 million in fiscal 2017, $6.7 million in 2016, and $4.8 million in 2015.

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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=65882285&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=65882285&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=65882285&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=65882285&loc=d3e32537-109319 + Details
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