INCOME TAXES
The provision for income taxes recognized by the Company during the fiscal fourth quarter of 2017 reflects certain provisional estimates for the accounting of the December 22, 2017 enactment of tax law changes known as the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 Act"). The provisional accounting for the 2017 Act is permitted by SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, issued in late December 2017. Any subsequent adjustments to provisional accounting estimates will be reflected in income tax provisions/benefits during one or more periods in fiscal 2018.
The 2017 Act reduces the United States federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.
During the fourth quarter of fiscal 2017, the Company recognized an income tax benefit amount of $40.0 million related to the accounting for the enactment of the 2017 Act. This benefit is included as a component of income tax expense in the Company's statement of operations for the fiscal year ended December 30, 2017. As described below, this $40.0 million income tax benefit is comprised of a provisional tax expense of $10.4 million related to foreign earnings, offset by an income tax benefit of $50.4 million related the remeasurement of certain deferred income tax balances. The Company will continue to refine its calculations as additional analysis is completed.
Deferred tax assets and liabilities
During the fourth quarter of fiscal 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally a 21% federal rate. The remeasurement resulted in an income tax benefit of $50.4 million. The Company also analyzed the impact of expensing qualified capital expenditures acquired after Sept. 27, 2017 and the related impact of this change on its income tax expense.
Provisional estimates
The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P") that the Company previously deferred from United States income taxes. The Company recorded a provisional estimate for the one-time transition tax liability for all of its foreign subsidiaries, resulting in an increase in income tax expense of approximately $10.4 million during the fourth quarter of fiscal 2017. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U. S. federal taxation and finalizes the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable, but the related cumulative temporary difference as of December 30, 2017 would not result in a material incremental deferred tax liability.
The Company also analyzed the impact of expensing qualified capital expenditures acquired after September 27, 2017 and estimated that the related impact of this change will not have a material effect on its income tax expense.
PROVISION FOR INCOME TAXES
The provision for income taxes consisted of the following:
|
| | | | | | | | | | | |
| For the fiscal year ended |
(dollars in thousands) | December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
Current tax provision: | | | | | |
Federal | $ | 117,676 |
| | $ | 113,326 |
| | $ | 103,316 |
|
State | 11,368 |
| | 11,407 |
| | 10,277 |
|
Foreign | 14,116 |
| | 11,937 |
| | 8,116 |
|
Total current provision | $ | 143,160 |
| | $ | 136,670 |
| | $ | 121,709 |
|
| | | | | |
Deferred tax provision (benefit): | | | | | |
Federal | $ | (55,149 | ) | | $ | 1,435 |
| | $ | 6,577 |
|
State | 339 |
| | 345 |
| | 1,193 |
|
Foreign | (82 | ) | | (486 | ) | | 887 |
|
Total deferred provision | (54,892 | ) | | 1,294 |
| | 8,657 |
|
Total provision | $ | 88,268 |
| | $ | 137,964 |
| | $ | 130,366 |
|
The foreign portion of the tax position substantially relates to Canada, Hong Kong, China, and Mexico income taxes on the Company's international operations and foreign tax withholdings related to the Company's foreign royalty income. The components of income before income taxes were as follows:
|
| | | | | | | | | | | |
| For the fiscal year ended |
(dollars in thousands) | December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
Domestic | $ | 325,580 |
| | $ | 345,304 |
| | $ | 335,955 |
|
Foreign | 65,452 |
| | 50,766 |
| | 32,233 |
|
Total | $ | 391,032 |
| | $ | 396,070 |
| | $ | 368,188 |
|
EFFECTIVE RATE RECONCILIATION
The difference between the Company's effective income tax rate and the federal statutory tax rate is reconciled below:
|
| | | | | | | | |
| For the fiscal year ended |
| December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal income tax benefit | 2.1 | % | | 2.3 | % | | 2.5 | % |
Impact of foreign operations | (2.7 | )% | | (2.1 | )% | | (1.3 | )% |
Settlement of uncertain tax positions | (0.3 | )% | | (0.4 | )% | | (0.8 | )% |
Benefit from stock-based compensation | (1.3 | )% | | — | % | | — | % |
Imposition of transition tax on foreign subsidiaries | 2.7 | % | | — | % | | — | % |
Revaluation of deferred taxes | (12.9 | )% | | — | % | | — | % |
Total | 22.6 | % | | 34.8 | % | | 35.4 | % |
The Company and its subsidiaries file a consolidated United States federal income tax return, as well as separate and combined income tax returns in numerous state and foreign jurisdictions.
During the first quarter of fiscal 2015, the Internal Revenue Service completed an income tax audit for fiscal years 2011 through 2013. As a result of the settlement of this audit and an ongoing state income tax audit, the Company recognized prior-year income tax benefits of approximately $1.8 million in the first quarter of fiscal 2015. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2013.
DEFERRED TAXES
Components of deferred tax assets and liabilities were as follows:
|
| | | | | | | |
(dollars in thousands) | December 30, 2017 | | December 31, 2016 |
Deferred tax assets: | Assets (Liabilities) |
Accounts receivable allowance | $ | 3,632 |
| | $ | 3,873 |
|
Inventory | 5,353 |
| | 9,226 |
|
Accrued liabilities | 9,895 |
| | 16,037 |
|
Equity-based compensation | 6,796 |
| | 9,967 |
|
Deferred employee benefits | 7,870 |
| | 10,340 |
|
Deferred rent | 24,567 |
| | 46,685 |
|
Other | 2,407 |
| | 5,192 |
|
Total deferred tax assets | 60,520 |
| | 101,320 |
|
Deferred tax liabilities: | | | |
Depreciation | (49,509 | ) | | (90,317 | ) |
Tradename and licensing agreements | (89,143 | ) | | (101,632 | ) |
Other | (4,774 | ) | | (4,541 | ) |
Total deferred tax liabilities | (143,426 | ) | | (196,490 | ) |
| | | |
Net deferred tax asset (liability) | $ | (82,906 | ) | | $ | (95,170 | ) |
Amounts recognized in the consolidated balance sheets:
|
| | | | | | | |
(dollars in thousands) | December 30, 2017 | | December 31, 2016 |
| Assets (Liabilities) |
Deferred tax assets | $ | 1,942 |
| | $ | 35,486 |
|
Deferred tax liabilities | (84,848 | ) | | (130,656 | ) |
Net deferred tax asset (liability) | $ | (82,906 | ) | | $ | (95,170 | ) |
At December 30, 2017, deferred tax assets are a component of non-current Other assets on the Company's consolidated balance sheet.
UNCERTAIN TAX POSITIONS
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits:
|
| | | |
(dollars in thousands) | |
Balance at January 3, 2015 | $ | 11,311 |
|
Additions based on tax positions related to fiscal 2015 | 2,840 |
|
Additions for prior year tax positions | (260 | ) |
Reductions for lapse of statute of limitations | (1,427 | ) |
Reductions for prior year tax settlements | (3,049 | ) |
Balance at January 2, 2016 | $ | 9,415 |
|
Additions based on tax positions related to fiscal 2016 | 2,849 |
|
Reductions for prior year tax positions | (39 | ) |
Reductions for lapse of statute of limitations | (995 | ) |
Reductions for prior year tax settlements | (693 | ) |
Balance at December 31, 2016 | $ | 10,537 |
|
Additions based on tax positions related to fiscal 2017 | 3,380 |
|
Reductions for prior year tax positions | (120 | ) |
Reductions for lapse of statute of limitations | (1,604 | ) |
Balance at December 30, 2017 | $ | 12,193 |
|
As of December 30, 2017, the Company had gross unrecognized tax benefits of approximately $12.2 million, of which $10.3 million, if ultimately recognized, will affect the Company's effective tax rate in the period settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions. Because of deferred tax accounting, changes in the timing of these deductions would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authorities.
Included in the reserves for unrecognized tax benefits are approximately $1.8 million of reserves for which the statute of limitations is expected to expire within the next fiscal year. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective tax rate for fiscal 2018 and the effective tax rate in the quarter in which the benefits are recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. During fiscal 2017, 2016, and 2015, interest expense recorded on uncertain tax positions was not significant. The Company had accrued interest on uncertain tax positions of approximately $1.0 million and $0.8 million as of December 30, 2017 and December 31, 2016, respectively.