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Income Taxes
 3 Months Ended
Jul. 28, 2024
Income Tax Disclosure [Abstract]  
Income Taxes

14. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $240,000, or (3.4%) of loss before income taxes, for the three-month period ending July 28, 2024, compared with income tax expense of $701,000, or (26.5%) of loss before income taxes, for the three-month period ending July 30, 2023.

Our effective income tax rates for the three-month periods ended July 28, 2024, and July 30, 2023, 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 three-month periods ended July 28, 2024, and July 30, 2023, 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, Haiti, and Vietnam 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 three-month periods ending July 28, 2024, and July 30, 2023:

 

 

July 28,

 

 

July 30,

 

 

 

2024

 

 

2023

 

U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

U.S. valuation allowance

 

 

(23.5

)

 

 

(34.1

)

Withholding taxes associated with foreign jurisdictions

 

 

(1.0

)

 

 

(9.7

)

Foreign income tax rate differential

 

 

0.7

 

 

 

(6.0

)

Stock-based compensation

 

 

(0.9

)

 

 

—

 

Tax effects of local currency foreign exchange gains

 

 

(0.4

)

 

 

2.3

 

Uncertain income tax positions

 

 

1.2

 

 

 

(0.1

)

Other

 

 

(0.5

)

 

 

0.1

 

 

 

(3.4)%

 

 

(26.5)%

 

 

Our consolidated effective income tax rates during the first quarter of fiscal 2025 and the first quarter of fiscal 2024 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems mostly from our operations located in China, which has a higher income tax rate than the U.S. In addition, during the first quarters of fiscal 2025 and 2024, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets. The income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was higher during the first quarter of fiscal 2025 compared with the first quarter of fiscal 2024, as our $(7.0) million U.S. pre-tax loss incurred during the first quarter of fiscal 2025 was significantly greater than the $(3.3) million U.S. pre-tax loss incurred during the first quarter of fiscal 2024.

 

During the first quarter of fiscal 2025, we incurred a greater consolidated pre-tax loss totaling $(7.0) million, compared with $(2.6) million during the first quarter of fiscal 2024. 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 quarter of fiscal 2024, as compared with the first quarter of fiscal 2025.

 

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 July 28, 2024, 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. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years from 2022 through 2024, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2025. 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 July 28, 2024, July 30, 2023, and April 28, 2024, valuation allowances against our net deferred income tax assets pertain to the following:

 

(dollars in thousands)

 

July 28, 2024

 

 

July 30, 2023

 

 

April 28, 2024

 

U.S. federal and state net deferred income tax assets

 

$

21,326

 

 

$

17,246

 

 

$

19,674

 

U.S. capital loss carryforward

 

 

2,330

 

 

 

2,330

 

 

 

2,330

 

 

$

23,656

 

 

$

19,576

 

 

$

22,004

 

 

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 July 28, 2024, 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 July 28, 2024, July 30, 2023, and April 28, 2024, we recorded a deferred income tax liability of $4.9 million, $4.4 million, and $4.8 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, 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 July 28, 2024, July 30, 2023, and April 28, 2024 we had a $1.3 million, $1.2 million, and $1.3 million total of gross unrecognized income tax benefits, of which the entire amount was classified as income taxes payable – long-term in the accompanying Consolidated Balance Sheets. These unrecognized tax benefits would favorably affect income tax expense in future periods by $1.3 million, $1.2 million, and $1.3 million, as of July 28, 2024, July 30, 2023, and April 28, 2024, respectively.

Our gross unrecognized income tax benefit of $1.3 million as of July 28, 2024, 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:

 

 

 

Three Months

 

 

Three Months

 

 

 

Ended

 

 

Ended

 

 

 

July 28,

 

 

July 30,

 

(dollars in thousands)

 

2024

 

 

2023

 

China Income Taxes, Net of Refunds

 

 

561

 

 

 

915

 

Canada - Income Taxes, Net of Refunds

 

 

—

 

 

 

197

 

 

$

561

 

 

$

1,112