Note 9 - Income Taxes

9 Months Ended

Feb. 26, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

9. INCOME TAXES

In the third quarter of fiscal 2023 and 2022, we recognized income tax expense of $100.1 million and $109.9 million, respectively. In the first three quarters of fiscal 2023 and 2022, we recognized income tax expense of $237.0 and $263.8, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.6% and 33.4% for the third quarter of fiscal 2023 and 2022, respectively. The effective tax rate for the first three quarters of fiscal 2023 and 2022 was 26.8% and 26.5%, respectively.

The effective tax rate in the third quarter of fiscal 2023 reflected a tax benefit from statute lapses on state tax issues that were previously reserved and a benefit related to certain changes in estimates.

The effective tax rate in the first three quarters of fiscal 2023 reflected the above-cited items, as well as additional tax expense from disallowed deductions related to incentive compensation plans resulting from an increased level of estimated achievement on performance targets and stock price, a benefit from the adjustment of certain foreign taxes that were previously accrued, and the impact of an impairment of goodwill that was largely non-deductible for tax purposes. During the first three quarters of fiscal 2023, goodwill impairment charges totaling $141.7 million were recognized with an associated tax benefit of $2.7 million.

The effective tax rate in the third quarter of fiscal 2022 reflected additional tax expense of $25.0 million related to tax elections made in connection with filing our fiscal 2021 federal tax return. These elections are still under review with the Internal Revenue Service. These elections may result in increases to the tax basis in those assets and if successful would result in tax benefits being realized in future periods. The effective tax rate also reflected additional tax expense associated with non-deductible goodwill related to assets held for sale for which an impairment charge was recognized.

The effective tax rate in the first three quarters of fiscal 2022 reflected the above-cited items as well as a tax benefit resulting from state law changes, a benefit from statute lapses on state tax issues that were previously reserved, and a benefit of $3.6 million from the settlement of tax issues that were previously reserved.

The amount of gross unrecognized tax benefits for uncertain tax positions was $27.6 million as of February 26, 2023 and $62.9 million as of May 29, 2022. The gross unrecognized tax benefits excluded related liabilities for gross interest and penalties of $6.2 million and $6.7 million as of  February 26, 2023 and May 29, 2022, respectively.

The net amount of unrecognized tax benefits at February 26, 2023 and May 29, 2022 that, if recognized, would favorably impact the Company's effective tax rate was $24.4 million and $58.0 million, respectively.

We estimate that it is reasonably possible that the amount of gross unrecognized tax benefits will decrease by up to $2.3 million over the next twelve months due to various state audit settlements and the expiration of statutes of limitations.

In fiscal 2022, we made the assessment that the current earnings of certain foreign subsidiaries were not indefinitely reinvested or that we could not remit to the U.S. parent in a tax-neutral transaction. Accordingly, we have recorded a deferred tax liability of $6.1 million on approximately $122.0 million of earnings at February 26, 2023. The deferred tax liability relates to local withholding taxes that will be owed when this cash is distributed. The undistributed historic earnings in our foreign subsidiaries through May 30, 2021 are considered to be indefinitely reinvested or can be remitted in a tax-neutral transaction. Accordingly, we have not recorded a deferred tax liability related to these undistributed historic earnings.

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. We are in the process of evaluating the impact of the recently enacted law, including whether we are subject to the corporate alternative minimum tax. However, we do not expect the impact to be material to our Condensed Consolidated Financial Statements.