Note 11. Income Taxes

Income tax provision

Effective May 4, 2025, the Company adopted ASU 2023-09, "Improvements to Income Tax Disclosures," on a prospective basis. In accordance with the categories required by the update, the reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate of 21% and the consolidated provision for income taxes is shown below:

The effective tax rate for fiscal 2026 differs from the U.S. federal statutory tax rate of 21% primarily due to an unfavorable effect of U.S. tax on foreign income of $17.7 million, primarily from GILTI taxes.

The effective tax rate for fiscal 2025 differs from the U.S. federal statutory tax rate of 21% primarily due to an increase in a valuation allowance for deferred tax assets of $13.5 million and an unfavorable effect of U.S. tax on foreign income of $11.5 million, primarily from GILTI taxes, partially offset by a favorable decrease in tax reserves of $4.0 million.

In fiscal 2024, the effective income tax rate was favorably affected by pre-tax losses in operations, the amount of income earned in foreign jurisdictions with lower tax rates of $5.1 million and research and development expenditures of $1.5 million. These are offset by non-deductible goodwill impairment of $22.7 million, withholding taxes of $3.2 million, and U.S. tax on foreign income of $3.5 million of which GILTI taxes is the main component.

Deferred income taxes and valuation allowances

The Company recorded a net deferred tax asset for U.S. and foreign income taxes of $9.8 million and $11.0 million as of May 2, 2026 and May 3, 2025, respectively. In assessing the realizability of the deferred tax assets, the Company considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. Ultimately, the realization of the deferred tax asset is dependent upon the generation of sufficient earnings in future periods in which these temporary items can be utilized. In that regard, the Company recorded a valuation allowance of $21.1 million related to federal, state, and foreign net operating loss carryovers and other credits as it determined that these deferred tax assets are not more likely than not to be realized.

As of May 2, 2026, the Company had available $30.6 million of federal, $114.4 million of state, and $0.6 million of foreign gross operating loss carryforwards with a valuation allowance of $25.9 million for federal, $111.9 million for state, and $0.2 million for foreign. The U.S. federal net operating loss carryforwards will substantially start to expire in 2028 and beyond. The state net operating loss carryforwards will substantially start to expire in 2036 and beyond. Total unused credits are $30.9 million as of May 2, 2026, the majority of which can be carried forward indefinitely.

Indefinite reinvestment

The Company has not provided for deferred income taxes on the undistributed earnings of foreign subsidiaries except for certain identified amounts. The amount the Company expects to repatriate is based on a variety of factors including current year earnings of the foreign subsidiaries, foreign investment needs, and U.S. cash flow considerations. The Company considers the remaining undistributed foreign earnings that are not specifically identified of approximately $340.4 million to be indefinitely reinvested. It is not practicable to determine the amount of deferred tax liability on such foreign earnings as the actual tax liability is dependent on circumstances that exist when the remittance occurs.

Unrecognized tax benefits

The Company operates in multiple jurisdictions throughout the world and the income tax returns of its subsidiaries in various jurisdictions are subject to periodic examination by the tax authorities. The Company regularly assesses the status of these examinations and the various outcomes to determine the adequacy of its provision for income taxes. The amount of gross unrecognized tax benefits totaled $0.8 million and $0.8 million as of May 2, 2026 and May 3, 2025, respectively. The amount for May 2, 2026, of unrecognized benefits that, if recognized, would favorably affect the effective tax rate if resolved in the Company’s favor is $0.6 million. The Company recognizes interest and penalties related to income tax uncertainties in income tax expense. Accrued interest and penalties were $0.1 million and $0.1 million at May 2, 2026 and May 3, 2025, respectively.

At May 2, 2026, the expected change to the total amount of unrecognized tax benefits in the next twelve months is approximately $0.2 million due to potential expiration of statute of limitations.

The U.S. federal statute of limitations remains open for fiscal years ended on or after 2023 and for state tax purposes on or after fiscal year 2022. Tax authorities may have the ability to review and adjust net operating losses or tax credits that were generated prior to these fiscal years. In the major foreign jurisdictions, fiscal 2022 and subsequent periods remain open and subject to examination by taxing authorities.