LA-Z-BOY INC

Note 17: Income Taxes

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

(Amounts in thousands)	4/29/2017		4/30/2016		4/25/2015
United States	$	122,196	$	115,750	$	96,605
Foreign		8,544		9,293		9,023

Total	$	130,740	$	125,043	$	105,628

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

(Amounts in thousands)	4/29/2017			4/30/2016		4/25/2015
Federal:
—current	$	35,606		$	32,403	$	28,887
—deferred		2,349			3,559		406
State:
—current		5,194			4,750		4,573
—deferred		(1,703	)		859		637
Foreign:
—current		2,388			2,345		2,281
—deferred		(78	)		164		170

Total income tax expense	$	43,756		$	44,080	$	36,954

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

	Fiscal Year Ended
(% of income from continuing operations before income taxes)	Fiscal Year Ended
	4/29/2017			4/30/2016			4/25/2015
Statutory tax rate		35.0	%		35.0	%		35.0	%
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit		2.7			3.4			3.5
U.S. manufacturing benefit		(2.4	)		(2.5	)		(2.1	)
Change in valuation allowance		(1.0	)		(0.3	)		(0.4	)
Miscellaneous items		(0.8	)		(0.3	)		(1.0	)

Effective tax rate		33.5	%		35.3	%		35.0	%

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 $27.6 million of the earnings. The potential deferred tax attributable to these earnings would be approximately $3.6 million.

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

(Amounts in thousands)	4/29/2017			4/30/2016
Assets
Deferred and other compensation	$	26,689		$	25,032
State income tax—net operating losses, credits and other		4,927			5,571
Warranty		8,261			7,817
Rent		4,768			4,184
Workers' compensation		3,707			3,870
Employee benefits		3,752			3,212
Other		4,663			5,026
Valuation allowance		(1,786	)		(3,625	)

Total deferred tax assets		54,981			51,087
Liabilities
Property, plant and equipment		(8,453	)		(7,089	)
Inventory		(3,052	)		(983	)
Goodwill and other intangibles		(3,345	)		(1,332	)

Net deferred tax assets	$	40,131		$	41,683

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

(Amounts in thousands)	Amount		Expiration
Various U.S. state net operating losses (excluding federal tax effect)	$	5,668		Fiscal 2018 - 2036
Foreign net operating losses		58		Indefinite
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 29, 2017, we estimate that about $100 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 2017, we recorded a $1.8 million decrease in our valuation allowance for deferred tax assets that are now considered more likely than not to be realized. This determination was primarily the result of our assessment of our cumulative pre-tax income in certain jurisdictions. A summary of the valuation allowance by jurisdiction is as follows:

Jurisdiction	4/30/2016 Valuation Allowance					4/29/2017 Valuation Allowance
(Amounts in thousands)	4/30/2016 Valuation Allowance		Change			4/29/2017 Valuation Allowance
U.S. state	$	3,606	$	(1,837	)	$	1,769
Foreign		19		(2	)		17

Total	$	3,625	$	(1,839	)	$	1,786

The remaining valuation allowance of $1.8 million primarily related to certain U.S. state and foreign deferred tax assets. The U.S. state deferred taxes are primarily related to state net operating losses.

As of April 29, 2017, we had a gross unrecognized tax benefit of $0.6 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:

(Amounts in thousands)	4/29/2017			4/30/2016			4/25/2015
Balance at the beginning of the period	$	1,821		$	2,226		$	2,972
Additions:
Positions taken during the current year		148			87			94
Reductions:
Positions taken during the prior year		(4	)		(321	)		(702	)
Decreases related to settlements with taxing authorities		(27	)		—			(25	)
Reductions resulting from the lapse of the statute of limitations		(1,318	)		(171	)		(113	)

Balance at the end of the period	$	620		$	1,821		$	2,226

We recognize interest and penalties associated with uncertain tax positions in income tax expense. We had approximately $0.2 million accrued for interest and penalties as of both April 29, 2017, and April 30, 2016, respectively.

If recognized, $0.4 million of the total $0.6 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 2014 and subsequent are still subject to audit. In addition, we conduct business in various states. The major states in which we conduct business are subject to audit for fiscal years 2013 and subsequent. Our wholesale business in Canada and our Thailand business are subject to audit for fiscal years 2008 and subsequent, and in Mexico, calendar years 2012 and subsequent.

Cash paid for taxes (net of refunds received) during the fiscal years ended April 29, 2017, April 30, 2016, and April 25, 2015, were $33.7 million, $34.5 million, and $34.4 million, respectively.