Income Taxes
The components of earnings from continuing operations before income taxes is comprised of the following:
|
| | | | | | | | | | | |
In thousands | 2017 | | 2016 | | 2015 |
United States | $ | 129,819 |
| | $ | 136,178 |
| | $ | 150,682 |
|
Foreign | 21,595 |
| | 15,355 |
| | 6,307 |
|
Total Earnings from Continuing Operations before Income Taxes | $ | 151,414 |
| | $ | 151,533 |
| | $ | 156,989 |
|
Income tax expense from continuing operations is comprised of the following:
|
| | | | | | | | | | | |
In thousands | 2017 | | 2016 | | 2015 |
Current | | | | | |
U.S. federal | $ | 36,998 |
| | $ | 46,515 |
| | $ | 43,146 |
|
International | 5,245 |
| | 3,542 |
| | 292 |
|
State | 5,918 |
| | 8,220 |
| | 8,966 |
|
Total Current Income Tax Expense | 48,161 |
| | 58,277 |
| | 52,404 |
|
Deferred | | | | | |
U.S. federal | 2,980 |
| | (1,249 | ) | | 4,422 |
|
International | 1,182 |
| | 868 |
| | 636 |
|
State | 1,232 |
| | (1,744 | ) | | 154 |
|
Total Deferred Income Tax Expense (Benefit) | 5,394 |
| | (2,125 | ) | | 5,212 |
|
Total Income Tax Expense – Continuing Operations | $ | 53,555 |
| | $ | 56,152 |
| | $ | 57,616 |
|
Discontinued operations were recorded net of income tax expense (benefit) of approximately $(0.3) million, $(0.5) million and $(1.1) million in Fiscal 2017, 2016 and 2015, respectively.
As a result of the exercise of stock options and vesting of restricted stock during Fiscal 2017, 2016 and 2015, the Company realized an additional income tax benefit of approximately $0.3 million, $0.2 million and $3.1 million, respectively. These tax benefits are reflected as an adjustment to additional paid-in capital.
Note 9
Income Taxes, Continued
Deferred tax assets and liabilities are comprised of the following:
|
| | | | | | | |
| January 28, | | January 30, |
In thousands | 2017 | | 2016 |
Identified intangibles | $ | (31,079 | ) | | $ | (29,763 | ) |
Prepaids | (3,274 | ) | | (3,390 | ) |
Convertible bonds | (1,196 | ) | | (1,799 | ) |
Tax over book depreciation | (3,014 | ) | | — |
|
Total deferred tax liabilities | (38,563 | ) | | (34,952 | ) |
Options | — |
| | 101 |
|
Deferred rent | 5,488 |
| | 5,119 |
|
Pensions | 3,396 |
| | 4,409 |
|
Expense accruals | 10,413 |
| | 9,577 |
|
Uniform capitalization costs | 16,361 |
| | 14,644 |
|
Book over tax depreciation | — |
| | 9,778 |
|
Provisions for discontinued operations and restructurings | 2,179 |
| | 6,111 |
|
Inventory valuation | 3,728 |
| | 3,954 |
|
Tax net operating loss and credit carryforwards | 2,450 |
| | 2,493 |
|
Allowances for bad debts and notes | 491 |
| | 378 |
|
Deferred compensation and restricted stock | 7,147 |
| | 6,706 |
|
Other | 4,458 |
| | 3,825 |
|
Gross deferred tax assets | 56,111 |
| | 67,095 |
|
Deferred tax asset valuation allowance | (4,305 | ) | | (3,352 | ) |
Deferred tax asset net of valuation allowance | 51,806 |
| | 63,743 |
|
Net Deferred Tax Assets | $ | 13,243 |
| | $ | 28,791 |
|
The deferred tax balances have been classified in the Consolidated Balance Sheets as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Net current asset | $ | 21,194 |
| | $ | 28,965 |
|
Net non-current asset | 85 |
| | 959 |
|
Net non-current liability | (8,036 | ) | | (1,133 | ) |
Net Deferred Tax Assets | $ | 13,243 |
| | $ | 28,791 |
|
Note 9
Income Taxes, Continued
Reconciliation of the United States federal statutory rate to the Company’s effective tax rate from continuing operations is as follows:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
U. S. federal statutory rate of tax | 35.00 | % | | 35.00 | % | | 35.00 | % |
State taxes (net of federal tax benefit) | 3.46 |
| | 2.82 |
| | 3.80 |
|
Foreign rate differential | (2.93 | ) | | (2.60 | ) | | (1.56 | ) |
Change in valuation allowance | 0.88 |
| | (0.58 | ) | | 0.57 |
|
Permanent items | 1.11 |
| | 2.19 |
| | 2.13 |
|
Uncertain federal, state and foreign tax positions | (0.90 | ) | | 1.23 |
| | (3.06 | ) |
Other | (1.25 | ) | | (1.00 | ) | | (0.18 | ) |
Effective Tax Rate | 35.37 | % | | 37.06 | % | | 36.70 | % |
The provision for income taxes resulted in an effective tax rate for continuing operations of 35.37% for Fiscal 2017, compared with an effective tax rate of 37.06% for Fiscal 2016. The tax rate for Fiscal 2017 was lower primarily due to the release of tax reserves.
As of January 28, 2017, January 30, 2016 and January 31, 2015, the Company had a federal net operating loss carryforward, which was assumed in one of the prior year acquisitions, of $0.0 million, $1.0 million and $1.2 million, respectively, which expire in fiscal years 2025 through 2030. The reduction of the federal net operating loss carryforward for Fiscal 2017 resulted from the SureGrip Footwear sale on December 25, 2016.
As of January 28, 2017, January 30, 2016 and January 31, 2015, the Company had state net operating loss carryforwards of $0.4 million, $0.5 million and $0.0 million, respectively, which expire in fiscal years 2020 through 2037.
As of January 28, 2017, January 30, 2016 and January 31, 2015, the Company had state tax credits of $0.4 million, $0.6 million and $0.4 million, respectively. These credits expire in fiscal years 2018 through 2024.
As of January 28, 2017, January 30, 2016 and January 31, 2015, the Company had foreign net operating loss carryforwards of $7.3 million, $7.4 million and $6.8 million, respectively, which have no expiration.
As of January 28, 2017, the Company has provided a valuation allowance of approximately $4.3 million on deferred tax assets associated primarily with foreign fixed assets for which management has determined it is more likely than not that the deferred tax assets will not be realized. The $0.9 million net increase in the valuation allowance during Fiscal 2017 from the $3.4 million provided for as of January 30, 2016 relates to increases of $0.8 million in foreign net operating losses and increases of $0.1 million in fixed asset-related deferred tax assets that will likely never be realized. Management believes that it is more likely than not that the remaining deferred tax assets will be fully realized.
Note 9
Income Taxes, Continued
As of January 28, 2017, the Company has not provided for withholding or United States federal income taxes on approximately $64.4 million of accumulated undistributed earnings of its foreign subsidiaries as they are considered by management to be indefinitely reinvested. If these undistributed earnings were not considered to be indefinitely reinvested, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. The determination of the amount of unrecognized deferred tax liability related to these temporary differences is not practicable at this time as this could be significantly impacted by the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.
The methodology in the Income Tax Topic of the Codification prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for Fiscal 2017, 2016 and 2015.
|
| | | | | | | | | | | |
In thousands | 2017 | | 2016 | | 2015 |
Unrecognized Tax Benefit – Beginning of Period | $ | 14,639 |
| | $ | 3,997 |
| | $ | 10,960 |
|
Gross Increases (Decreases) – Tax Positions in a Prior Period | (7,585 | ) | | 9,328 |
| | 231 |
|
Gross Increases (Decreases) – Tax Positions in a Current Period | 491 |
| | 1,403 |
| | (287 | ) |
Settlements | (742 | ) | | — |
| | — |
|
Lapse of Statutes of Limitations | (1,181 | ) | | (89 | ) | | (6,907 | ) |
Unrecognized Tax Benefit – End of Period | $ | 5,622 |
| | $ | 14,639 |
| | $ | 3,997 |
|
The amount of unrecognized tax benefits as of January 28, 2017, January 30, 2016 and January 31, 2015 which would impact the annual effective rate if recognized were $2.5 million, $3.9 million and $2.7 million, respectively. The amount of unrecognized tax benefits may change during the next twelve months but the Company does not believe the change, if any, will be material to the Company's consolidated financial position or results of operations.
The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense on the Consolidated Statements of Operations. Related to the uncertain tax benefits noted above, the Company recorded interest and penalties of approximately $0.8 million
benefit and $0.0 million benefit, respectively, during Fiscal 2017, $0.6 million expense and $0.0 million benefit, respectively, during Fiscal 2016 and $(0.1) million and $0.0 million benefit, respectively, during Fiscal 2015. The Company recognized a liability for accrued interest and penalties of $0.6 million and $0.1 million, respectively, as of January 28, 2017, $1.5 million and $0.1 million, respectively, as of January 30, 2016 and $0.8 million and $0.1 million, respectively, as of January 31, 2015. The long-term portion of the unrecognized tax benefits and related accrued interest and penalties are included in deferred rent and other long-term liabilities on the Consolidated Balance Sheets.
Note 9
Income Taxes, Continued
Income tax reserves are determined using the methodology required by the Income Tax Topic of the Codification.
The Company and its subsidiaries file income tax returns in federal and in many state and local jurisdictions as well as foreign jurisdictions. With few exceptions, the Company's state and local income tax returns for fiscal years ended February 1, 2014 and beyond remain subject to examination. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitation generally ranging from two to six years. The Company's US federal income tax return for the fiscal years ended January 31, 2015 and beyond remain subject to examination.