Note 18: Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1, 2018. Because we are a fiscal year U.S. taxpayer, the majority of the provisions, such as elimination of the domestic manufacturing deduction, new taxes on certain foreign-sourced income, and new limitations on certain business deductions, began applying to us in fiscal 2019. Additionally, as a Company fiscal year taxpayer, the lower corporate income tax rate of 21% was phased in, resulting in a blended federal rate of 30.4% for fiscal 2018. The federal tax rate is 21% for fiscal 2019.

In December of 2017, the SEC staff issued guidance which provides that companies that have not completed their accounting for the effects of the Tax Act, but can determine a reasonable estimate of those effects, should include a provisional amount based on their reasonable estimate in their financial statements. The guidance also allows companies to adjust the provisional amounts during a one year measurement period which is similar to the measurement period used when accounting for business combinations. In fiscal 2019, we finalized the provisional estimates of $0.2 million recorded in fiscal 2018, with no material change.

Income before income taxes consists of the following (for the fiscal years ended):


	(52 weeks)		(52 weeks)		(52 weeks)
(Amounts in thousands)	4/27/2019		4/28/2018		4/29/2017
United States	$	73,058	$	111,516	$	122,196
Foreign		22,269		17,374		8,544
Total	$	95,327	$	128,890	$	130,740

Income tax expense (benefit) consists of the following components (for the fiscal years ended):


	(52 weeks)		(52 weeks)		(53 weeks)
(Amounts in thousands)	4/27/2019		4/28/2018		4/29/2017
Federal:
– current	$	17,629	$	21,206	$	35,606
– deferred		(2,649)		16,401		2,349
State:
– current		6,199		4,886		5,194
– deferred		(933)		1,075		(1,703)
Foreign:
– current		4,919		3,820		2,388
– deferred		21		(93)		(78)
Total income tax expense	$	25,186	$	47,295	$	43,756

Our effective tax rate differs from the U.S. federal income tax rate for the following reasons:


	Fiscal Year Ended
(% of income before income taxes)	4/27/2019		4/28/2018		4/29/2017
Statutory tax rate	21.0	%	30.4	%	35.0	%
Increase (reduction) in income taxes resulting from:
Re-measurement of deferred taxes for changes in statutory U.S. tax rate	(0.2)		7.8		—
State income taxes, net of federal benefit	4.1		3.3		2.7
Tax effect of defined benefit pension plan termination	2.7		—		—
U.S. manufacturing benefit	-		(1.5)		(2.4)
Change in valuation allowance	0.6		(0.3)		(1.0)
U.S. research tax credits	(0.8)		(1.9)		—
Miscellaneous items	(1.0)		(1.1)		(0.8)
Effective tax rate	26.4	%	36.7	%	33.5	%

For our foreign operating units, we permanently reinvest the earnings and consequently do not record a deferred tax liability relative to the undistributed earnings. We have reinvested approximately $55.6 million of the earnings. After enactment of the Tax Act, the potential deferred tax attributable to these earnings would be approximately $3.1 million, primarily related to foreign withholding taxes and state income taxes.

The primary components of our deferred tax assets and (liabilities) were as follows:


(Amounts in thousands)	4/27/2019		4/28/2018
Assets
Deferred and other compensation	$	19,603	$	18,326
State income tax - net operating losses, credits and other		5,346		5,050
Warranty		5,707		5,348
Rent		2,714		2,971
Workers’ compensation		2,525		2,714
Employee benefits		1,479		2,343
Federal net operating losses, credits		2,032		—
Pension		91		—
Other		2,250		—
Valuation allowance		(2,312)		(1,224)
Total deferred tax assets		39,435		35,528
Liabilities
Property, plant and equipment		(10,523)		(7,684)
Inventory		(1,615)		(1,531)
Goodwill and other intangibles		(6,627)		(3,575)
Pension		—		(1,230)
Other		—		(243)
Net deferred tax assets	$	20,670	$	21,265

The deferred tax assets associated with loss carry forwards and the related expiration dates are as follows:


(Amounts in thousands)	Amount		Expiration
Federal net operating losses	$	2,032	Fiscal 2034 - 2038
Various U.S. state net operating losses (excluding federal tax effect)	$	5,012	Fiscal 2019 - 2038
Foreign capital losses	$	17	Indefinite

We evaluate our deferred taxes to determine if a valuation allowance is required. Accounting standards require that 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.

The evaluation of the amount of net deferred tax assets expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. We have forecasted future results using estimates management believes to be reasonable. We based these estimates on objective evidence such as expected trends resulting from certain leading economic indicators. Based upon our net deferred tax asset position at April 27, 2019, we estimate that about $69 million of future taxable income would need to be generated to fully recover our net deferred tax assets. The realization of deferred income tax assets is dependent on future events. Actual results inevitably will vary from management’s forecasts. Such variances could result in adjustments to the valuation allowance on deferred tax assets in future periods, and such adjustments could be material to the financial statements.

During fiscal 2019, we recorded a $1.1 million increase in our valuation allowance for deferred tax assets that are now considered more likely than not to be realized. This determination was primarily due to state net operating losses and the limitations on the realization of deferred tax assets related to executive compensation. A summary of the valuation allowance by jurisdiction is as follows:


		4/28/2018			4/27/2019
	Valuation				Valuation
Jurisdiction (Amounts in thousands)	Allowance		Change		Allowance
U.S. Federal	$	—	$	586	$	586
U.S. State		1,207		502		1,709
Foreign		17		—		17
Total	$	1,224	$	1,088	$	2,312

The remaining valuation allowance of $2.3 million primarily related to certain U.S. federal, state and foreign deferred tax assets. The U.S. federal deferred taxes are primarily due to limitations on the realization of deferred taxes related to executive compensation. The U.S. state deferred taxes are primarily related to state net operating losses.

As of April 27, 2019, we had a gross unrecognized tax benefit of $1.1 million related to uncertain tax positions in various jurisdictions. A reconciliation of the beginning and ending balance of these unrecognized tax benefits is as follows:


	(52 weeks)		(52 weeks)		(52 weeks)
(Amounts in thousands)	4/27/2019		4/28/2018		4/29/2017
Balance at the beginning of the period	$	1,014	$	620	$	1,821
Additions:
Positions taken during the current year		187		464		148
Positions taken during the prior year		—		25		—
Reductions:
Positions taken during the prior year		(36)		—		(4)
Decreases related to settlements with taxing authorities		—		—		(27)
Reductions resulting from the lapse of the statute of limitations		(96)		(95)		(1,318)
Balance at the end of the period	$	1,069	$	1,014	$	620

We recognize interest and penalties associated with uncertain tax positions in income tax expense. We had approximately $0.3 million accrued for interest and penalties as of both April 27, 2019, and April 28, 2018.

If recognized, $0.9 million of the total $1.0 million of unrecognized tax benefits would decrease our effective tax rate. We do not expect that the net liability for uncertain income tax positions will significantly change within the next 12 months. The remaining balance will be settled or released as tax audits are effectively settled, statutes of limitation expire or other new information becomes available.

Our U.S. federal income tax returns for fiscal years 2016 and subsequent are still subject to audit. Our U.S. federal income tax return for fiscal year 2016 is currently under audit. In addition, we conduct business in various states. The major states in which we conduct business are subject to audit for fiscal years 2015 and subsequent. Our foreign operations are subject to audit for fiscal years 2009 and subsequent.

Cash paid for taxes (net of refunds received) during the fiscal years ended April 27, 2019, April 28, 2018, and April 29, 2017, were $23.8 million, $37.1 million, and $33.7 million, respectively.