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Income Taxes | 9 Months Ended
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Jan. 29, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | 13. Income Taxes Effective Income Tax Rate We recorded income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023, compared with income tax expense of $2.6 million, or 48.4% of income before income taxes, for the nine-month period ending January 30, 2022. Our effective income tax rates for the nine-month periods ended January 29, 2023, and January 30, 2022, 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. When calculating the annual estimated effective income tax rates for the nine-month periods ended January 29, 2023, and January 30, 2022, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. 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, Canada, and Haiti versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar. The following schedule summarizes 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 for the nine-month periods ending January 29, 2023, and January 30, 2022:
|  | January 29, |  |  | January 30, |
|  | 2023 |  |  | 2022 |
U.S. federal income tax rate |  |  | 21.0 | % |  |  | 21.0 | %
U.S. valuation allowance |  |  | (29.3 | ) |  |  | (26.9 | )
Withholding taxes associated with foreign jurisdictions |  |  | (2.0 | ) |  |  | 9.8 |
Capital expenditure deduction - Quebec, Canada |  |  | (1.6 | ) |  |  | — |
Foreign income tax rate differential |  |  | 1.4 |  |  |  | 7.9 |
Tax effects of local currency foreign exchange gains (losses) |  |  | 1.3 |  |  |  | (1.0 | )
Global Intangible Low Taxed Income Tax ("GILTI") |  |  | — |  |  |  | 37.4 |
Other |  |  | (0.3 | ) |  |  | 0.2 |
|  | (9.5)% |  |  |  | 48.4 | %
Our consolidated effective income tax rate during the first nine months of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, as compared to the first nine months of fiscal 2022. During the first nine months of fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $(28.8) million, compared with $(2.3) million during the first nine months of fiscal 2022. 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 the first nine months of fiscal 2023, as compared with the first nine months of fiscal 2022. In addition, almost all of our taxable income in the first nine months of fiscal 2023 and fiscal 2022 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. During the first nine months of fiscal 2023, we incurred a significantly higher consolidated pre-tax loss totaling $(24.5) million, compared with a much lower pre-tax income totaling $5.4 million, during the first nine months of fiscal 2022. 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 during the first nine months of fiscal 2022, compared with the first nine months of fiscal 2023. U.S. Valuation Allowance We evaluate the realizability of our U.S. net deferred income tax assets 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 of January 29, 2023, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years from 2020 through 2022, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2023. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. 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. Based on our assessments as of January 29, 2023, January 30, 2022, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:
(dollars in thousands) |  | January 29, 2023 |  |  | January 30, 2022 |  |  | May 1, 2022 |
U.S. federal and state net deferred income tax assets |  | $ | 15,741 |  |  |  | 7,802 |  |  |  | 9,527 |
U.S. capital loss carryforward |  |  | 2,330 |  |  |  | 2,330 |  |  |  | 2,330 |
|  | $ | 18,071 |  |  |  | 10,132 |  |  |  | 11,857 |
Undistributed Earnings 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 foreign subsidiaries that will not be reinvested indefinitely. As of January 29, 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 eventually be distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior reporting periods. As a result of the 2017 Tax Cuts and Jobs Act, 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, as of January 29, 2023, January 30, 2022, and May 1, 2022, we recorded a deferred income tax liability of $4.1 million, $3.6 million, and $3.5 million, respectively. Uncertain Income Tax Positions 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, or 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. As of January 29, 2023, we had a $1.2 million total gross unrecognized income tax benefit, 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 a $1.1 million total gross unrecognized income tax benefit, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. As of January 30, 2022, we had a $1.4 million total gross unrecognized income tax benefit, of which $1.1 million and $380,000 were recorded to income taxes payable – long-term and noncurrent deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. These unrecognized income tax benefits would favorably affect the income tax rate in future periods by $1.2 million, $1.1 million, and $1.1 million, as of January 29, 2023, May 1, 2022, and January 30, 2022, respectively. Our gross unrecognized income tax benefit of $1.2 million as of January 29, 2023, relates to income tax positions for which significant change is currently not expected within the next year. Income Taxes Paid The following table sets forth taxes paid by jurisdiction:
|  | Nine Months |  |  | Nine Months |
|  | Ended |  |  | Ended |
|  | January 29, |  |  | January 30, |
(dollars in thousands) |  | 2023 |  |  | 2022 |
United States Transition Tax Payment |  | $ | 265 |  |  | $ | 266 |
China Income Taxes, Net of Refunds |  |  | 1,680 |  |  |  | 2,036 |
China - Withholding Taxes Associated With Earnings and Profits Distributed to the U.S. |  |  | — |  |  |  | 487 |
Canada - Income Taxes, Net of Refunds |  |  | (9 | ) |  |  | 256 |
|  | $ | 1,936 |  |  | $ | 3,045 |

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI https://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI https://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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