| INCOME TAXES | 9.
INCOME TAXES Income Tax Expense and Effective Income Tax
Rate
Total
income tax expense was allocated as follows:
(dollars in thousands)
2015
2014
2013
income
from operations
$
7,885
1,596
1,972
shareholders’
equity, related to the
tax benefit arising from stock based
compensation (109 ) (143 ) (76 )
$ 7,776 1,453 1,896 Income
tax expense attributable to income from operations consists
of:
(dollars in thousands)
2015
2014
2013
current
federal
$
-
-
-
state
(7 )
-
19
foreign 4,713 3,323 2,297
4,706 3,323 2,316
deferred
federal
(849 )
1,065
192
state
(52 )
416
14
undistributed
earnings – foreign subsidiaries
(260 )
(5,018 )
7,011
U.S.
operating loss carryforwards
4,487
1,838
3,665
foreign
(92 )
(42 )
608
valuation
allowance (55 ) 14 (11,834 )
3,179 (1,727 ) (344 )
$ 7,885 1,596 1,972
Income
(loss) before income taxes related to the company’s foreign
and U.S. operations consists of:
(dollars in thousands)
2015
2014
2013
Foreign
China
$
12,531
11,512
10,593
Canada
2,695
2,149
2,075
Poland (260 ) (370 ) (630 )
Total
Foreign 14,966 13,291 12,038
United
States 7,990 5,752 8,251
$ 22,956 19,043 20,289
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:
2015
2014
2013
federal
income tax rate
34.0 %
34.0 %
34.0 %
foreign
tax rate differential
(6.7 )
(7.2 )
(6.7 )
increase
in the liability for uncertain tax positions
3.7
4.3
4.0
undistributed
earnings from foreign subsidiaries
3.0
(26.3 )
34.6
change
in valuation allowance
(0.2 )
0.1
(58.3 )
other 0.5 3.5 2.1
34.3 % 8.4 % 9.7 %
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)
2015
2014
deferred
tax assets:
accounts
receivable
$
444
274
inventories
2,251
1,801
compensation
4,497
3,200
liabilities
and other
1,155
1,109
alternative
minimum tax credit
1,320
1,320
property,
plant and equipment (1)
447
572
loss
carryforwards – U.S.
12,133
17,161
loss
carryforwards – foreign
361
311
unrecognized
tax benefits – U.S.
(10,349 )
(9,778 )
valuation
allowances (922 ) (977 )
total
deferred tax assets 11,337 14,993
deferred
tax liabilities:
undistributed
earnings on foreign subsidiaries
(1,733 )
(1,993 )
property,
plant and equipment (2)
(4,022 )
(4,581 )
goodwill
(1,197 )
(1,028 )
other (198 ) (134 )
total
deferred tax liabilities (7,150 ) (7,736 )
Net
deferred tax asset $ 4,187 7,257
(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 $32.2 million with
related future tax benefits of $12.1
million at May 3, 2015. These carryforwards principally expire in
11-19 years, fiscal 2026 through fiscal 2034. The company also has
an alternative minimum tax credit carryforward of approximately
$1.3 million for federal income tax purposes that does not
expire.
At
May 3, 2015, the current deferred tax asset of $4.8 million
represents $4.4 million and $421,000 from our operations located in
the U.S. and China, respectively. At May 3, 2015, the non-current
deferred tax asset of $447,000 pertained to our operations located
in China. At May 3, 2015, the non-current deferred tax liability of
$1.1 million represents $896,000 and $154,000 from our operations
located in Canada and U.S., respectively.
At
April 27, 2014, the current deferred tax asset of $6.2 million
represents $5.8 million and $372,000 from our operations located in
the U.S. and China, respectively. At April 27, 2014, the
non-current deferred tax asset of $2.0 million represents $1.4
million and $572,000 from our operations located in the U.S.
and China, respectively. At April 27, 2014, the non-current
deferred tax liability of $1.0 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 May 3, 2015, we recorded a partial valuation
allowance of $922,000, of which $561,000 pertained to certain U.S.
state net operating loss carryforwards and credits and $361,000
pertained to loss carryforwards associated with our Culp Europe
operation located in Poland. Based on our assessment at April 27,
2014, we recorded a partial valuation allowance of $977,000, of
which $666,000 pertained to certain U.S. state net operating loss
carryforwards and credits and $311,000 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 May 3, 2015 and April 27, 2014, respectively.
United States
Our
net deferred tax asset regarding our U.S. operations includes U.S.
loss carryforwards totaling $32.2 million, $45.7 million, and $50.7
million at May 3, 2015, April 27, 2014, and April 28, 2013,
respectively.
Fiscal 2013
Due
to the favorable results of our multi-year restructuring process in
our upholstery fabric operations and key acquisitions and capital
investments made in our mattress fabric operations, our U.S
operations' financial results started to improve in fiscal 2011 and
this improvement continued through the second quarter of fiscal
2013. Our U.S. operations earned a pre-tax income on a cumulative
three-year basis as of April 29, 2012 (the end of our fiscal 2012)
of $11.9 million and an additional $3.4 million through the second
quarter of fiscal 2013.
This
continued earnings improvement from our U.S. operations was
primarily due to the operating performance of our mattress fabric
operations. Through the second quarter of fiscal 2013, our mattress
fabric operations had net sales that totaled $77.7 million, an
increase of 15% compared with $67.4 million through the second
quarter of fiscal 2012. In addition, our mattress fabric operations
reported operating income of $10.3 million through the second
quarter of fiscal 2013, an increase of 49% compared
with $7.0
million through the second quarter of fiscal 2012. These improved
results through the second quarter of fiscal 2013, which were
better than expected, were attributed to the evolution of the
bedding industry into a more decorative business with growing
consumer demand for better bedding and a higher quality mattress
fabric, and the stabilization of raw material prices.
Based
on the positive evidence at the end of our second quarter of fiscal
2013, as supported by our cumulative earnings history, current and
expected earnings improvement driven by our U.S. mattress fabric
operations, and the significant source of U.S. taxable income from
the undistributed earnings of our foreign subsidiaries (see
separate section below), we recorded an income tax benefit of $12.2
million to reverse substantially all of the valuation allowance
against our U.S. net deferred tax assets that we concluded were
more likely than not to be realized. In the third quarter of fiscal
2013, we recorded an income tax charge of $103,000, due to a change
in our second quarter estimate of the recoverability of
our U.S.
state net loss operating carryforwards.
After
this valuation allowance reversal of $12.1 million, we had a
remaining valuation allowance against our U.S. net deferred tax
assets totaling $722,000 as of April 28, 2013. This valuation
allowance pertained to certain 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.
Fiscal 2014
At
April 27, 2014, we had a remaining valuation allowance against our
U.S net deferred tax assets totaling $666,000. This valuation
allowance pertained 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. In fiscal
2014, we recorded an income tax benefit of $56,000 that reduced our
valuation allowance against our U.S. net deferred tax assets. This
income tax benefit pertained to a change in estimate of the
recoverability of our U.S. state net loss operating carryforwards
at the end of fiscal 2014.
Fiscal 2015
At
May 3, 2015, we had a remaining valuation allowance against our U.S
net deferred tax assets totaling $561,000.
This valuation allowance pertained 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. In fiscal 2015, we recorded an income tax benefit
of $105,000 that reduced our valuation allowance against our U.S.
net deferred tax assets. This income tax benefit pertained to a
change in estimate of the recoverability of our U.S. state net loss
operating carryforwards at the end of fiscal 2015.
Poland
During
the third quarter of fiscal 2011, we established Culp Europe, a
wholly-owned subsidiary located in Poland. Due to the initial start
up costs of setting up this operation and the current state of the
European economy, this operation had a history of cumulative
pre-tax losses.
Based
on the negative evidence, as supported by our cumulative pre-tax
loss history and the short carryforward period of 5 years imposed
by the Polish government, we recorded a full valuation allowance
against Culp Europe’s net deferred tax assets commencing in
the second quarter of fiscal 2013. As of May 3, 2015, we recorded a
full valuation allowance against Culp Europe’s net deferred
tax assets totaling $361,000.
Change in Valuation Allowance
In
fiscal 2015, we recorded an income tax benefit of $55,000 for a
reduction of our valuation allowance. This $55,000 reduction
represents an income tax benefit of $105,000 for a change in
estimate of the recoverability of our U.S. state net loss operating
carryforwards, partially offset by 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 operations
located in Poland.
In
fiscal 2014, we recorded an income tax charge of $14,000 for an
increase of our valuation allowance. The $14,000 increase
represents an income tax charge of $70,000 for an increase in the
full valuation allowance against our net deferred tax assets
associated with our Culp Europe operations located in Poland,
partially offset by an income tax benefit of $56,000 for a change
in estimate of the recoverability of our U.S. state net loss
operating carryforwards at the end of fiscal 2014.
In
fiscal 2013, we recorded an income tax benefit of $11.8 million for
the reduction of our valuation allowance. This $11.8 million
decrease represents a $12.1 million income tax benefit pertaining
to a change in judgment about the future realization of our U.S.
net deferred tax assets, partially offset by an income tax charge
of $241,000 for the establishment of a full valuation allowance
against our net deferred tax assets associated with our Culp Europe
operations located in Poland.
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.
Fiscal 2013
Prior
to the second quarter of fiscal 2013, it was management’s
intention to indefinitely reinvest all of our undistributed foreign
earnings. Accordingly, no deferred tax liability had been recorded
in connection with the future repatriation of these
earnings.
During
the second quarter of fiscal 2013, we assessed the financial
requirements of our U.S. parent company and foreign subsidiaries
and determined that our undistributed earnings from our foreign
subsidiaries totaling $55.6 million would not be reinvested
indefinitely and would be eventually distributed to our U.S. parent
company. The financial requirements of the U.S. parent company
changed due to a decision to return cash to its shareholders
through dividend payments and common stock repurchases. Also, in
order to keep up with the recent growth in consumer demand for
better bedding and a higher quality mattress fabric, it was our
intention to continue our investment in our domestic mattress
fabric operations. As a result of this assessment, we recorded a
deferred tax liability and corresponding income tax charge of $6.6
million during the second quarter of fiscal 2013 and an additional
$400,000 in the last half of fiscal 2013.
At
April 28, 2013, we had accumulated earnings and profits from our
foreign subsidiaries totaling $56.7 million. At the same date, the
deferred tax liability associated with our undistributed earnings
from our foreign subsidiaries totaled $7.0 million, which included
U.S. income and foreign withholding taxes totaling $22.0 million,
offset by U.S. foreign income tax credits of $15.0
million.
Fiscal 2014
During
the third quarter of fiscal 2014, our operations in China achieved
positive accumulated earnings and profits for both U.S. income tax
and financial reporting purposes for the first time since we
determined our undistributed earnings from foreign subsidiaries
would not be reinvested indefinitely in the second quarter of
fiscal 2013. As a result, we recorded an income tax benefit of $5.4
million to recognize U.S. foreign income tax credits of $9.9
million offset by the U.S. income tax effects of the undistributed
earnings from our China operations and foreign withholding taxes
totaling $4.5 million. This $5.4 million income tax benefit was
treated as a discrete event in which the full income tax benefits
of this adjustment were recorded in the third quarter and full
fiscal year 2014, as it pertained to a change in judgment on prior
periods’ accumulated earnings and profits associated with our
subsidiaries located in China.
In
addition, an income tax charge of $352,000 was recorded during
fiscal 2014 for the U.S. income tax effects of the undistributed
earnings and foreign withholding taxes incurred in fiscal 2014 from
our Canadian operations and the fourth quarter of fiscal 2014 from
our China operations.
At
April 27, 2014, we had accumulated earnings and profits from our
foreign subsidiaries totaling $72.8 million. At the same date, the
deferred tax liability associated with our undistributed earnings
from our foreign subsidiaries totaled $2.0 million, which included
U.S. income and foreign withholding taxes totaling $28.1 million,
offset by U.S. foreign income tax credits of $26.1
million.
Fiscal 2015
An
income tax charge of $695,000 was recorded during fiscal 2015 for
the U.S. income tax effects of the undistributed earnings and
foreign withholding taxes incurred in fiscal 2015 from our Canadian
and China operations.
At
May 3, 2015, we had accumulated earnings and profits from our
foreign subsidiaries totaling $85.2 million. At the same date, the
deferred tax liability associated with our undistributed earnings
from our foreign subsidiaries totaled $1.7 million, which included
U.S. income and foreign withholding taxes totaling $32.4 million,
offset by U.S. foreign income tax credits of $30.7
million.
Uncertainty in Income Taxes
The
following table sets forth the change in the company’s
unrecognized tax benefit:
(dollars in thousands)
2015
2014
2013
beginning
balance
$
13,740
13,166
12,462
increases
from prior period tax positions
588
756
812
decreases
from prior period tax positions
(187 )
(182 )
(108 )
increases
from current period tax positions - - -
ending
balance $ 14,141 13,740 13,166
At
May 3, 2015, we had $14.1 million of total gross unrecognized tax
benefits, of which $3.8 million would favorably affect the income
tax rate in future periods. At April 27, 2014, we had $13.7 million
of total gross unrecognized tax benefits, of which $4.0 million
would favorably affect the income tax rate in future
periods.
As
of May 3, 2015, we had $14.1 million of total gross unrecognized
tax benefits, of which $10.3 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. As of April 27, 2014, we had $13.7
million of total gross unrecognized tax benefits, of which $9.7
million and $4.0 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 May 3, 2015 and April 27, 2014, the gross amount of
interest and penalties due to unrecognized tax benefits was
$844,000 and $755,000,
respectively.
The
liability for uncertain tax positions at May 3, 2015, includes
$14.1 million related to tax positions for which significant change
is reasonably possible in fiscal 2016. This amount relates to
double taxation under applicable tax treaties with foreign tax
jurisdictions. United States federal and state income tax returns
filed by the company remain subject to examination for tax years
2005 and subsequent due to loss carryforwards. Canadian federal
returns remain subject to examination for tax years 2008 and
subsequent. Canadian provincial (Quebec) returns remain subject to
examination for tax years 2011 and subsequent. Income tax returns
for the company’s China subsidiaries are subject to
examination for tax years 2010 and subsequent.
Income Taxes Paid
Income
tax payments, net of income tax refunds, were $4.8 million in
fiscal 2015, $3.0 million in 2014, and $2.8 million in
2013. |
