INCOME TAXES

12 Months Ended

Jul. 01, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income tax benefit consists of the following:

	Fiscal Year Ended
	July 1, 2023		July 2, 2022
	(in thousands)
Current income tax provision (benefit):
United States	$	998	$	(2,179)
Foreign	2,134		2,012
	3,132		(167)
Deferred income tax provision (benefit):
United States	(2,130)		443
Foreign	141		38
	(1,989)		481
Total income tax provision	$	1,143	$	314

The Company has gross tax credit carryforwards of approximately $9.8 million at July 1, 2023 consisting of federal research and development (R&D) tax credits.

Management has reviewed all deferred tax assets for purposes of determining whether a valuation allowance may be required. A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. Based upon the Company’s profitability, forecasted income, and evaluation of all other positive and negative evidence, management determined that it is more likely than not that the deferred tax assets will be realized.

In the fourth quarter of fiscal year 2022, the Company, with its fiscal year 2021 federal income tax return, made automatic changes in tax accounting methods that created a fiscal year 2021 tax net operating loss. This loss was carried back to the tax years ending in 2016, 2017, and 2019, resulting in a tax benefit of $0.6 million due to the higher federal income tax rate in effect in the years ending in 2016 and 2017.

On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded related to the Company’s principal product line in Vietnam (the “Tax Holiday”). Under the Tax Holiday, the tax rate applied to income derived from this product line will be zero percent for four years beginning with fiscal year 2021, then five percent for nine years, then ten percent for one year (as opposed to the normal twenty percent Vietnamese statutory rate).

The Company evaluated tax law changes and regulatory guidance issued through the quarter. Such changes and regulations include guidance under Sec. 162(m), Sec. 245A, Sec. 951A, foreign tax credits, and rules relating to consolidated NOL carryback claims, a new book minimum tax on certain large corporations, and an excise tax on corporate stock buybacks among other provisions. The Company evaluated the ongoing impact of these law and regulatory changes, which did not have a material impact on its provision for income taxes.

Subsequent to the end of the fiscal year ending June 27, 2020, the Treasury Department issued final regulations applicable to the Company’s position with respect to the U.S. taxability of foreign earnings under the global intangible low taxed income (also known as “GILTI”) regime and the deductibility of interest expense under IRC Section 163(j). These regulations did not have a material impact to the Company's income tax positions.

The 2017 Tax Cuts and Jobs Act (TCJA) mandated that, for tax years after fiscal year 2022, certain costs incurred for research and development (R&D) activities would no longer be allowed for immediate deduction but would be capitalized and amortized over 5 years (for R&D activities performed domestically) or 15 years (for R&D activities performed abroad). The Company began capitalizing and amortizing such costs in fiscal year 2023, resulting in an increase to income taxes payable that was largely offset by the utilization of R&D credit carryovers.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in years beginning in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is taking advantage of this NOL carryback provision by carrying back the fiscal year 2021 NOL to the fiscal 2016 and 2017 years, as described above. In addition, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification did not have a material impact on the fiscal year 2020 or fiscal year 2021 provisions for income taxes. Also, under the CARES Act, AMT credits not previously refunded for the tax year beginning in 2018 are refundable in the tax year beginning in 2019 rather than in years beginning in 2019-2021, and taxpayers can elect to claim 100% of the AMT credits in the first taxable year beginning in 2018 by applying for a tentative refund claim on or before December 31, 2020. The Company has made this election by applying for a tentative refund claim. The Company took advantage of the deferred payment payroll taxes provision, resulting in decreased deductible payroll tax payments, and increased taxable income, in fiscal years 2020 and 2021. Other aspects of the CARES Act did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In future years, repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions regarding to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.8 million of withholding tax. There would be no offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes will not apply to future repatriations from Mexico or Vietnam.

The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company expects to repatriate approximately $7.6 million from China, in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

The Company’s effective tax rate differs from the federal tax rate as follows:

	Fiscal Year Ended
	July 1, 2023		July 2, 2022
	(in thousands)
Federal income tax provision at statutory rates	$	1,322	$	775
State income taxes, net of federal tax effect	(25)		86
Foreign tax rate differences	137		336
Federal rate differences applied to net operating loss carryback	—		(593)
Effect of income tax credits	(1,020)		(920)
Previously unrecognized tax benefits	(75)		146
Inflation adjustments	118		178
Tax penalties & interest	—		179
Global Intangible Low-Taxed Income (GILTI) tax	33		59
Provision to return reconciliation	52		(91)
Equity compensation shortfall	73		104
Foreign Exchange Gains/Losses Unrealized for Tax Purposes	277		23
Other	251		32
Income tax provision (benefit)	$	1,143	$	314

Prior year presentation of certain items in the above table has been adjusted to reflect current year classification.

The domestic and foreign components of income before income taxes were:

	Fiscal Year Ended
	July 1, 2023		July 2, 2022
	(in thousands)
Domestic	$	(1,086)	$	(2,890)
Foreign	7,386		6,581
Income before income taxes	$	6,300	$	3,691

Deferred income tax assets and liabilities consist of the following at:

	July 1, 2023		July 2, 2022
	(in thousands)
Deferred tax assets:
Net operating loss	$	—	$	486
Tax credit carryforwards, net	6,812		7,990
Inventory	267		247
Identifiable intangibles	308		370
Accruals	2,421		2,406
PPE	1,328		1,200
ASC 606 deferred costs	4,802		4,216
Lease liabilities	3,775		3,671
Interest expense deduction carryforward	977		580
Research and development expenses	3,860		—
Other	271		465
Deferred income tax assets	$	24,821	$	21,631
Deferred tax liabilities:
Accrued withholding tax - unremitted earnings	(754)		(754)
Right-of-use assets	(3,857)		(3,663)
Tax capital lease liabilities	(2,832)		(2,385)
ASC 606 accelerated revenue	(4,599)		(3,736)
Other	(799)		(1,102)
Deferred income tax liabilities	$	(12,841)	$	(11,640)
Net deferred income tax assets	$	11,980	$	9,991
Balance sheet caption reported in:
Long-term deferred income tax asset	$	12,254	$	10,055
Long-term deferred income tax liability	(274)		(64)
Net deferred income tax asset	$	11,980	$	9,991

Uncertain Tax Positions:

The Company has R&D tax credits that approximate $9.8 million that have 20-year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2032 to 2043.

As of July 1, 2023, the Company had unrecognized tax benefits of $3.0 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 2003 to 2023.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Fiscal Year Ended
	July 1, 2023		July 2, 2022
	(in thousands)
Beginning Balance	$	2,998	$	4,863
Additions based on tax positions related to the current year	120		286
Adjustment to prior year tax positions & amended tax returns	(15)		(2,296)
Lapse of statute of limitations	(75)		145
Ending Balance	$	3,028	$	2,998

The $3.0 million of unrecognized tax benefits at the end of fiscal year 2023, if recognized, would reduce the effective tax rate. Management does not anticipate any material changes to this amount during the next 12 months.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in its income tax provision. The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements, except for

$0.2 million in fiscal year 2022. The Company is subject to income tax in the U.S. federal jurisdiction, various state jurisdictions, Mexico, China and Vietnam. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdiction.