19. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $3.4 million, or 32.5% of income before income taxes, for the nine- month period ended January 27, 2019, compared to income tax expense of $12.0 million or 58.6% of income before income taxes, for the nine-month period ended January 28, 2018. Our effective income tax rates for these nine-month periods, 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 subsidiaries located in China and Canada versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the factors that contributed to the difference between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the nine months of each fiscal year:


	2019			2018
Federal income tax rate		21.0	%		30.4	%
Tax effects of the 2017 Tax Cuts and Jobs Act		(5.7	)		28.4
Foreign income tax rate differential		10.1			3.9
Global Intangible Low Taxed Income Tax (GILTI)		2.6			—
Tax effects of Chinese foreign exchange gains (losses)		1.4			(2.9	)
Excess income tax deficiency (benefits) related to stock-based compensation		0.7			(2.3	)
Other		2.4			1.1

		32.5	%		58.6	%

2017 Tax Cuts and Jobs Act

On December 22, 2017 (the Enactment Date), the Tax Cuts and Jobs Act (H.R.1) (the Tax Act) was signed into law. The key effects of the Tax Act on our financial statements during fiscal 2019 will include the reduction of our U.S federal statutory income tax rate to 21% compared with the blended statutory income tax rate of 30.4% during fiscal 2018 and the creation of the Global Intangible Low Taxed Income Tax (GILTI).

In order to calculate GILTI on an interim basis, estimates were required based on (i) projections and estimates associated with U.S. and foreign pre-tax earnings and income tax expense for fiscal 2019, (ii) projections and estimates regarding certain assets that will be held in our domestic operations or foreign subsidiaries, and (iii) projections and estimates associated with our net sales with foreign jurisdictions. Our estimates may change based on actual versus projected results. Our policy to account for GILTI will be to expense this tax in the period incurred.

During our third quarter of fiscal 2019, we completed our assessment of the effects of the Tax Act in connection with our fiscal 2018 U.S. Federal income tax return filing. In accordance with SEC Staff Accounting Bulletin No. 118, we recorded our final provisional adjustments within the one-year time period from the Enactment Date. Our final provisional adjustments recorded during the third quarter of fiscal 2019 totaled to an income tax benefit of $593,000, and represented a discrete event for which the full income tax effects were recorded in the three-month and nine-month periods ending January 27, 2019. The $593,000 final provisional adjustment represents $310,000 for the re-measurement of our U.S. deferred income taxes and $283,000 for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.

During the third quarter of fiscal 2018, we recorded a provisional income tax charge of $5.9 million, which represented a discrete event for which the full income tax effects were recorded during the three-month and nine-month periods ending January 28, 2018. The $5.9 million provisional income tax charge represents $1.1 million for the re-measurement of our U.S. deferred income tax taxes and $4.8 million for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.

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 assessments at January 27, 2019, January 28, 2018, and April 29, 2018, valuation allowances against our deferred income taxes pertain to the following jurisdictions:


(dollars in thousands)	January 27, 2019		January 28, 2018		April 29, 2018
U.S. foreign income tax credits	$	4,550		2,277		4,550
U.S. state loss carryforwards and credits		903		495		578
Polish loss carryforwards		—		73		76

	$	5,453		2,845		5,204

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 as of January 27, 2019, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. 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.

For fiscal 2019 and beyond, the Tax Act allows a U.S. corporation a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a deferred tax liability will be required for withholding taxes that are incurred by our foreign subsidiaries at the time earnings and profits are distributed. As a result, at January 27, 2019, January 28, 2018, and April 29, 2018, we recorded a deferred income tax liability of $3.4 million, $3.1 million, and $4.3 million for withholding taxes on undistributed earnings and profits from our foreign subsidiaries.

Uncertainty In Income Taxes

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 benefits will be recorded at that time.

At January 27, 2019, we had a $880,000 total gross unrecognized income tax benefit, of which $500,000 and $380,000 were classified as income taxes payable- long-term and non-current deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. At January 28, 2018, we had a $12.4 million total gross unrecognized income tax benefit, of which $9.9 million and $2.5 million were classified as income taxes payable—long term and non-current deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. At April 29, 2018, we had a $844,000 total gross unrecognized income tax benefit, of which $464,000 and $380,000 were classified as income taxes payable – long-term and non-current deferred income taxes respectively, in the accompanying Consolidated Balance Sheets.

At January 27, 2019, our $880,000 total gross unrecognized income tax benefit included $500,000 that, if recognized, would favorably affect the income tax rate in future periods. At January 28, 2018, our $12.4 million total gross unrecognized income tax benefit, included $9.9 million that, if recognized, would favorably affect the income tax rate in future periods. At April 29, 2018, our $844,000 total gross unrecognized income tax benefit included $464,000 that, if recognized, would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of $880,000, relates to income tax positions for which significant change is currently not expected within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.