The entire amount of income tax expense of $3.1 million, $2.9 million, and $7.7 million during fiscal 2023, 2022, and 2021, respectively, was allocated to (loss) income from continuing operations.

Income tax expense consists of:


(dollars in thousands)	2023			2022			2021
current
federal	$	—			—			(17	)
state		1			2			3
foreign		3,053			2,156			4,151
uncertain income tax positions		78			37			(204	)
		3,132			2,195			3,933
deferred
federal		(1,591	)		1,121			(1,933	)
state		(66	)		47			(80	)
2017 Tax Cuts and Jobs Act		—			—			(3,674	)
undistributed earnings – foreign subsidiaries		628			76			112
U.S. federal & state carryforwards and credits		(5,162	)		(971	)		451
uncertain income tax positions		—			(380	)		380
foreign		(629	)		615			(22	)
valuation allowance		6,818			183			8,526
		(2	)		691			3,760
	$	3,130			2,886			7,693

(Loss) income before income taxes related to our foreign and U.S. operations consists of:


(dollars in thousands)	2023			2022			2021
Foreign
China	$	7,062			6,998			10,007
Canada		1,516			1,302			4,764
Haiti		(3,483	)		(980	)		817
Cayman Islands		—			—			(5	)
Total Foreign		5,095			7,320			15,583
United States		(33,485	)		(7,645	)		(4,703	)
	$	(28,390	)		(325	)		10,880

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:


	2023			2022			2021
U.S. federal income tax rate		21.0	%		21.0	%		21.0	%
valuation allowance		(24.0	)		(56.3	)		78.4
income tax effects of the 2017 Tax Cuts and Jobs Act		—			—			(33.8	)
global intangible low taxed income tax (GILTI)		—			(540.9	)		—
foreign tax rate differential		(4.0	)		(206.2	)		10.9
income tax effects of Chinese foreign exchange gains and losses		(0.9	)		(20.6	)		(8.4	)
withholding taxes associated with foreign tax jurisdictions		(2.4	)		(172.8	)		7.7
uncertain income tax positions		(0.3	)		105.4			1.6
U.S. state income taxes		0.6			21.5			0.3
stock-based compensation		(0.3	)		(3.3	)		0.3
gain on bargain purchase		—			—			(1.6	)
other (3)		(0.7	)		(35.8	)		(5.7	)
consolidated effective income tax rate (1) (2)		(11.0	)%		(888.0	)%		70.7	%

(1)

Our consolidated effective income tax rate during fiscal 2023 was much more negatively affected by the mix of earnings and losses between our U.S. operations and foreign subsidiaries, as compared with fiscal 2022 and 2021. During fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $(33.5) million, compared with $(7.6) million and $(4.7) million for fiscal 2022 and 2021, respectively. As a result, a significantly higher income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets during fiscal 2023, as compared with

fiscal 2022 and 2021. In addition, almost all of our taxable income for each of fiscal 2023, 2022, and 2021 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.

(2)

During fiscal 2023, we incurred a significantly higher consolidated pre-tax loss totaling $(28.4) million, compared with a much lower consolidated pre-tax loss totaling $(325,000) during fiscal 2022 and pre-tax income totaling $10.9 million during fiscal 2021. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced for fiscal 2022 and 2021, compared with fiscal 2023.

(3)

“Other” for all periods presented represents miscellaneous adjustments that pertain to U.S. permanent differences such as meals and entertainment and income tax provision to return adjustments.

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)	2023			2022
deferred tax assets:
accounts receivable	$	297			227
inventories		3,277			2,020
compensation		2,676			2,437
liabilities and other		5			28
intangible assets and goodwill		395			536
property, plant, and equipment (1)		179			199
operating lease liability		781			1,297
foreign income tax credits - U.S.		783			783
loss carryforwards – U.S.		13,564			8,373
valuation allowance - U.S.		(18,675	)		(11,857	)
total deferred tax assets		3,282			4,043


deferred tax liabilities:
undistributed earnings on foreign subsidiaries		(4,213	)	(3,586	)
property, plant and equipment (2)		(3,450	)	(4,292	)
right of use assets		(964	)	(1,520	)
other		(129	)	(121	)
total deferred tax liabilities		(8,756	)	(9,519	)
Net deferred liabilities	$	(5,474	)	(5,476	)

(1)

Pertains to the company’s operations located in China.

(2)

Pertains to the company’s operations located in the U.S. and Canada.

As of April 30, 2023, our U.S. federal net operating loss carryforwards totaled $48.2 million, with related future income tax benefits of $10.1 million. In accordance with the 2017 Tax Cuts and Jobs Act (“TCJA”), U.S. federal net operating loss carryforwards generated in fiscal 2019 and after do not expire. As of April 30, 2023, all our unused U.S. federal net operating loss carryforwards were generated during fiscal 2019 and after, and therefore, do not expire in accordance with the TCJA. As of April 30, 2023, our U.S. state net operating loss carryforwards totaled $27.2 million, with related future income tax benefits of $1.0 million. Our U.S. state net operating loss carryforwards totaling $27.2 million have expiration dates ranging from fiscal years 2024 through 2044. Our U.S. foreign income tax credits of $783,000 have expiration dates ranging from fiscal years 2026 through 2028, which represent 10 years from when the associated earnings and profits from our foreign subsidiaries were repatriated to the U.S.

Effective July 20, 2020, the U.S. Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the TCJA. With the enactment of these final regulations, we became eligible for an exclusion from GILTI if we meet the provisions for the GILTI High-Tax exception included in these final regulations on a jurisdiction-by-jurisdiction basis. To meet the provisions of the GILTI High-Tax exception, the tested foreign entity’s effective income tax rate related to current year’s earnings must

be higher than 90% of the U.S. federal income tax rate of 21% (i.e.,18.9%). In addition, the enactment of the new regulations and the provisions for the GILTI High-Tax exception were retroactive to the original enactment of the GILTI tax provision, which included our 2019 and 2020 fiscal years.

Since we met the requirements for the GILTI High-Tax exception for our 2019 and 2020 fiscal years, we recorded a non-cash income tax benefit of $3.6 million resulting from the re-establishment of certain U.S. federal net operating loss carryforwards. The $3.6 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.

We did not meet the GILTI High-Tax exception for the 2021 tax year regarding our foreign operations located in China. This was due primarily to significant income tax deductible foreign exchange losses that significantly lowered income tax expense associated with the current year’s earnings. As a result, the current effective income tax rate was lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception. Consequently, we incurred a non-cash income tax charge of $1.8 million, which charge was fully offset by a $1.8 million non-cash income tax benefit due to a corresponding reversal of our full valuation allowance associated with our U.S. net deferred income tax assets.

We did not meet the GILTI High-Tax exception for the 2022 tax year regarding our operations located in Canada and Haiti. With regards to Canada, we placed several significant capital projects into service during fiscal 2022, and therefore, were eligible for a significant amount of deductible accelerated depreciation. As a result, our current year's income tax expense was much lower than prior fiscal years, and therefore, our current effective income tax rate was lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception. For our operations located in Haiti, taxable income or losses are not subject to income tax, as we are located in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have nine years remaining. Since our operations located in Haiti are not subject to income tax, our current effective tax rate was 0%, which is lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception. Although our operations located in Canada and Haiti did not meet the GILTI High-Tax exception, we incurred a nominal amount of GILTI tax for the 2022 tax year, as the losses subject to GILTI tax from our Haitian operations mostly offset the income subject to GILTI tax from our Canadian operation.

We do not expect to pay GILTI tax for the 2023 tax year, as we expect to meet the GILTI High-Tax exception regarding our operations located in China and Canada, and we incurred taxable losses associated with our operations located in Haiti.

We evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. We 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, considering the effects of local tax law.

As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income assets as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.S. pre-tax losses during such years, and which offset was reversed because of the retroactivity of the new GILTI regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. pre-tax losses during the last two fiscal years, and we expected at the time of this assessment that our history of U.S. pre-tax losses would continue into fiscal 2021. As a result of the significant weight of this negative evidence, we believed it was more-likely-than-not that our U.S. deferred income tax assets would not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $7.0 million to provide for a full valuation allowance against our U.S. net deferred income tax assets. This $7.0 million income tax charge was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.

As of April 30, 2023, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was still required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years. In addition, we are currently expecting U.S. pre-tax losses to continue into fiscal 2024. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.

A summary of the change in the valuation allowances against our U.S. net deferred income tax assets follows:


(dollars in thousands)	2023			2022			2021
beginning balance	$	11,857			11,674			3,148
change in judgement of beginning of year U.S. valuation allowance (1)		—			—			6,964
change in valuation allowance associated with current year earnings		7,252			1,640			1,004
change in estimate during current year (2)		(434	)		(1,457	)		558
ending balance	$	18,675			11,857			11,674

(1)

Refer to the above "Assessment" subsection within the section titled Deferred Income Taxes – Valuation Allowance for further details regarding our assessment and conclusions reached for providing a full valuation allowance against our U.S net deferred income tax assets during the first quarter of fiscal 2021.

(2)

Amounts represent changes in our U.S. net deferred income tax asset balances during the current year that pertain to (i) income tax provision to return adjustments, (ii) changes in estimates of our U.S. effective income tax rate that pertain to U.S. state income tax rates and apportionment percentages, (iii) recognition of an uncertain income tax position due to the expiration of statute of limitations, (iv) expiration of certain U.S. state loss carryforwards, and (v) other immaterial items.

We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company and whether we are required to record a deferred income tax liability for those undistributed earnings from our foreign subsidiaries that will not be reinvested indefinitely. As of April 30, 2023, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would be eventually distributed to our U.S. parent company. The conclusion reached from this assessment has been consistent with prior years.

As a result of the TCJA, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation.Therefore, a deferred income tax liability will be required only for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company. As a result, we recorded a deferred income tax liability of $4.2 million and $3.6 million as of April 30, 2023, and May 1, 2022, respectively.

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 end of the reporting period, or is effectively settled through examination, negotiation, or litigation, or if 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.

The following table sets forth the change in the company’s unrecognized income tax benefit:


(dollars in thousands)	2023			2022			2021
beginning balance	$	1,101			1,444			1,269
increases from prior period tax positions		175			114			249
decreases from prior period tax positions		(97	)		(77	)		(74	)
lapse of applicable statute of limitations		—			(380	)		—
ending balance	$	1,179			1,101			1,444

As of April 30, 2023, we had $1.2 million of total gross unrecognized tax benefits, of which the entire amount was classified as income taxes payable - long-term in the accompanying Consolidated Balance Sheets. As of May 1, 2022, we had $1.1 million of total gross

unrecognized tax benefits, of which the entire amount was classified as income taxes payable - long-term in the accompanying Consolidated Balance Sheets. These unrecognized income tax benefits would favorably affect income tax expense in future periods by $1.2 million and $1.1 million as of April 30, 2023, and May 1, 2022, respectively.

We elected to classify interest and penalties as part of income tax expense. As of April 30, 2023, and May 1, 2022, the gross amount of interest and penalties due to unrecognized tax benefits was $239,000 and $185,000, respectively.

Our gross unrecognized income tax benefit of $1.2 million as of April 30, 2023, 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. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent. Canadian federal income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2018 and subsequent.

The following table sets forth income taxes paid (refunded) by jurisdiction:


(dollars in thousands)	2023		2022		2021
United States federal - Alternative Minimum Tax (AMT) credit refunds (1)	$	—	$	—	$	(1,510	)
United States federal - Transition Tax		265		266		226
China - Income Taxes		1,831		2,036		2,076
China - Withholding Taxes Associated with Earnings and Profits Distribution to U.S. Parent		—		487		798
Canada - Income Taxes		228		311		1,408
	$	2,324	$	3,100	$	2,998

(1)

In accordance with the provisions of the TCJA, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable. We received refunds totaling $1.5 million in two separate installments totaling $746,000 and $764,000 during the first and second quarters of fiscal 2021, respectively.