Entity information:
17. Income Taxes

For financial reporting purposes, income (loss) before income tax provision (benefit) includes the following components:

 

     January 28,      January 30,      January 31,  
     2017      2016      2015  
     (in thousands)  

Domestic

    $ 8,873      $ (19,447 )     $ 1,404  

Foreign

      6,033        11,723        7,213  
  

 

 

     

 

 

     

 

 

  

Total

    $ 14,906      $ (7,724 )     $ 8,617  
  

 

 

     

 

 

     

 

 

  

The income tax provision (benefit) consisted of the following components for each of the years ended:

 

     January 28,      January 30,      January 31,  
     2017      2016      2015  
     (in thousands)  

Current income taxes:

   

Federal

    $ (2,748 )     $ 5      $ 398  

State

      (286 )       205        505  

Foreign

      1,215        1,939        1,159  
  

 

 

     

 

 

     

 

 

  

Total current income taxes

      (1,819 )       2,149        2,062  
  

 

 

     

 

 

     

 

 

  

Deferred income taxes:

         

Federal

      2,147        (2,246 )       41,225  

State

      (47 )       (617 )       2,974  

Foreign

      108        282        (469 ) 
  

 

 

     

 

 

     

 

 

  

Total deferred income taxes

      2,208        (2,581 )       43,730  
  

 

 

     

 

 

     

 

 

  

Total

    $ 389      $ (432 )     $ 45,792  
  

 

 

     

 

 

     

 

 

  

 

The Company’s effective income tax rate was as follows for each of the years ended:

 

     January 28,     January 30,     January 31,  
     2017     2016     2015  

Statutory federal income tax rate

      35.0 %      35.0 %      35.0 % 

(Decrease) increase resulting from State income taxes, net of federal income tax benefit

      (1.1 %)      5.2 %      (1.7 %) 

Foreign tax rate differential

      (9.7 %)      35.9 %      (28.8 %) 

Change in reserves

      0.6 %      (2.2 %)      3.3 % 

Change in valuation allowance

      (8.0 %)      (38.6 %)      506.9 % 

Non-deductible items

      9.5 %      (32.2 %)      14.7 % 

Prior year tax provision adjustments

      2.5 %      1.8 %      (0.6 %) 

Change in deferred rate

      (0.6 %)      4.1 %      (0.4 %) 

Pension termination benefit

      (25.2 %)      0.0 %      0.0 % 

Other

      (0.4 %)      (3.4 %)      3.0 % 
  

 

 

    

 

 

    

 

 

  

Total

      2.6 %      5.6 %      531.4 % 
  

 

 

    

 

 

    

 

 

  

Deferred income taxes are provided for the temporary differences between financial reporting basis and the tax basis of the Company’s assets and liabilities. The tax effects of temporary differences were as follows, as of the years ended:

 

     January 28,      January 30,  
     2017      2016  
     (in thousands)  

Deferred tax assets:

      

Inventory

    $ 5,104      $ 6,251  

Accounts receivable

      1,306        1,295  

Accrued expenses

      8,208        7,930  

Net operating losses

      19,294        19,882  

Deferred pension obligation

      —          4,741  

Stock compensation

      2,882        3,497  

Fixed assets

      7,474        7,142  

Intangible assets

      3,122        3,681  

Other

      4,354        4,434  
  

 

 

     

 

 

  
     51,744        58,853  
  

 

 

     

 

 

  

Deferred tax liabilities:

      

Intangible assets

      (38,869 )       (36,642 ) 

Prepaid expenses

      (1,604 )       (1,993 ) 
  

 

 

     

 

 

  
     (40,473 )       (38,635 ) 
  

 

 

     

 

 

  

Valuation allowance

      (48,052 )       (54,791 ) 
  

 

 

     

 

 

  

Net deferred tax liability

    $ (36,781 )     $ (34,573 ) 
  

 

 

     

 

 

  

During fiscal 2009, the Company initially recorded a $1.0 million deferred tax asset with realized and unrealized losses associated with marketable securities. Management believes it is more likely than not that the related deferred tax asset associated with these losses will not be realized due to tax limitations imposed on the utilization of capital losses. During fiscal 2014, the deferred tax asset associated with these losses was reduced by $0.1 million relating to the expiration of capital loss carryforwards and the reassessment of the deferred tax rate. The balance of the valuation allowance associated with the unrealized losses associated with marketable securities for fiscal 2017 and 2016 was $0.9 million, respectively.

 

During fiscal years 2017 and 2016, the Company realized tax-effected losses of $0.6 million and $0.1 million, respectively, associated with the operations of its U.K. subsidiary. The fiscal 2017 loss of $0.6 million includes a true-up for the utilization of net operating losses based on the fiscal 2016 tax computation. For U.K. tax purposes, the operating loss has an indefinite carryforward period. Based upon operating results from the three most recent fiscal years, including fiscal 2017, management of the Company has determined that its U.K. subsidiary represents a cumulative loss company. Therefore, management has determined that a valuation allowance for deferred income tax assets is necessary. The balance of the valuation allowance associated with the U.K. operating loss carryforward for fiscal 2017 and 2016 was $2.3 million and $2.1 million, respectively. During fiscal 2017, the net increase in valuation allowance was $0.2 million, which was attributable to an increase in the valuation allowance related to the fiscal 2017 loss of $0.9 million and a decrease in the valuation allowance of $0.7 million related to the fiscal 2016 true-up, changes in the foreign exchange rate, and a change in the enacted rate. There is no tax benefit associated with the increase of $0.2 million as the asset and the valuation allowance changes offset each other.

During fiscal years 2017 and 2016, the Company realized tax-effected losses of $0.1 million and $0.2 million, respectively, associated with the operations of its Hong Kong subsidiary. Based upon operating results from the three most recent fiscal years, including fiscal 2017, management of the Company has determined that its Hong Kong subsidiary represents a cumulative loss company. Therefore, management has determined that a valuation allowance for deferred income tax assets is necessary. The balance of the valuation allowance associated with the Hong Kong subsidiary for fiscal 2017 and 2016 was $1.2 million and $1.0 million, respectively. During fiscal 2017, the increase in the valuation allowance was $0.2 million, which was attributable to the addition of the fiscal 2017 loss and the difference between the actual and estimated prior year losses. There is no tax expense associated with the increase of $0.2 million as the asset and the valuation allowance changes offset each other.

During fiscal years 2017 and 2016, the Company realized tax-effected losses of $0.4 million and $0.2 million, respectively, associated with the operations of its Mexican subsidiary. Based upon operating results from the three most recent fiscal years, including fiscal 2017, management of the Company has determined that its Mexican subsidiary represents a cumulative loss company. Therefore, management has determined that a valuation allowance for deferred income tax assets is necessary. The balance of the valuation allowance associated with the Mexican subsidiary for fiscal 2017 and 2016 was $0.6 million and $0.6 million, respectively. During fiscal 2017, the increase in the valuation allowance associated with the fiscal 2017 loss was offset by a decrease in the valuation allowance related to the changes in the foreign exchange rate, and differences between the actual and estimated prior year loss. There is no tax benefit associated with any change in the deferred tax asset as the asset and the valuation allowance changes offset each other.

In connection with the 2003 Perry Ellis Menswear acquisition, the Company originally acquired a net deferred tax asset of approximately $53.5 million, net of a $20.3 million valuation allowance. Additionally, the acquisition of Perry Ellis Menswear caused an “ownership change” for federal income tax purposes. As a result, the use of any net operating losses existing at the date of the ownership change to offset future taxable income of the Company is limited by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). As of the acquisition date, Perry Ellis Menswear had available federal net operating losses of which approximately $56.0 million expired unutilized as a result of the annual usage limitations under Section 382.

The Company had available at January 28, 2017, a net federal operating tax loss carry-forward of approximately $32.2 million and an additional $1.3 million of net operating tax loss carry-forward from stock options, which will benefit additional paid-in capital when the loss is utilized.

The following table reflects the expiration of the remaining federal net operating losses:

 

Fiscal Year

    (in thousands)  

2018

    $ 5,386  

2019 - 2024

      20,893  

2025 - 2028

      —    

Thereafter

      5,955  
  

 

 

  
   $ 32,234  
  

 

 

  

In addition to the Company’s U.S. federal net operating loss, the Company has reflected in its income tax provision deferred tax assets associated with net operating losses generated in various U.S. state jurisdictions. However, with respect to jurisdictions where the Company either has limited operations or statutory limitations on the use of acquired net operating losses, the ability to utilize such losses is restricted. Therefore, management has determined that a valuation allowance for deferred income tax assets is necessary, as the assets are not expected to be fully realized. The balance of the valuation allowance associated with U.S. state net operating losses in states where use is restricted for fiscal 2017 and 2016 was $3.2 million and $2.7 million, respectively. During fiscal 2017, the valuation allowance increased by $0.5 and during fiscal 2016 the valuation allowance did not change.

At the end of fiscal 2017, the Company had a $1.3 million deferred tax asset relating to charitable contribution carryovers. These charitable contributions originated in fiscal years 2013 through 2017. Management believes it is more likely than not that the deferred tax asset associated with the charitable contributions that originated in 2013 through 2017 will not be realized during the carryforward period, which begins to expire in fiscal year 2018. The balance of the valuation allowance associated with charitable contributions whose use will be restricted due to carryforward limitations for fiscal 2017 and 2016 was $1.3 million and $1.3 million, respectively. During fiscal 2017 the valuation allowance did not change and during fiscal 2016 the valuation allowance decreased by $0.1 million.

At the end of fiscal 2017, the Company maintained a $38.6 million valuation allowance against its remaining domestic deferred tax asset; including, but not limited to, the federal net operating loss carryforward and the U.S. state net operating loss carryforwards, whose utilization is not restricted by factors beyond the Company’s control. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Although the Company recognized pretax earnings during fiscal 2017, by itself that does not represent sufficient positive evidence that its deferred tax asset will be realized to warrant the Company removing the valuation allowances established against the U.S. deferred tax assets. Additionally, the Company’s cumulative pretax results for the past 36 months still remain in a loss position. The Company would be able to remove the valuation allowances in future periods when positive evidence outweighs the negative evidence from the relevant look-back period. However, the actual timing and amount of potential removal of the valuation allowances currently cannot be reliably estimated. The short-term consequence of being unable to record deferred tax benefits may cause the Company’s effective tax rate to change significantly from period to period. The balance of the valuation allowance associated with the remaining deferred tax assets whose utilization is not restricted by factors beyond the Company’s control, for fiscal 2017 and 2016 was $38.6 million and $46.2 million, respectively. During fiscal 2017 and 2016, the valuation allowance decreased by $7.6 million and increased $3.8 million, respectively.

Deferred taxes have not been recognized on approximately $79.7 million of unremitted earnings of certain foreign subsidiaries of the Company based on the “indefinite reversal” criteria. No provision is made for income tax that would be payable upon the distribution of earnings, and it is not practicable to determine the amount of the related unrecognized deferred income tax liability because of the complexity of the hypothetical calculation.

 

The federal and state income tax provisions do not reflect the tax savings resulting from deductions associated with the Company’s stock option plans. These savings were $0, $0, and ($0.2) million for fiscal 2017, 2016 and 2015, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company’s U.S. federal income tax returns for fiscal 2011 through 2017 are open tax years. The statute of limitations related to the Company’s 2011, 2012 and 2013 U.S. federal tax years was extended by agreement with the Internal Revenue Service until June 30, 2018. The Company’s state and foreign tax filings are subject to varying statutes of limitations. The Company’s unrecognized state tax benefits are related to state tax returns open from 2006 through 2017, depending on each state’s particular statute of limitation. As of January 28, 2017, the examination by the Internal Revenue Service for the Company’s 2011, 2012, and 2013 U.S. federal tax years is still ongoing. The Company received a Notice of Proposed Adjustment from the Internal Revenue Service which proposed adjustments to taxable income for fiscal 2011, 2012 and 2013 of $6.1 million, $5.3 million and $6.8 million respectively. The Company has not established uncertain tax position reserves related to this matter as the Company believes its positions will be sustained upon appeal or, if necessary, through litigation. Furthermore, various other state and local income tax returns are also under examination by taxing authorities.

As of January 30, 2016, the Company had a $1.1 million liability recorded for unrecognized tax benefits, which included interest and penalties of $0.2 million. As of January 28, 2017, the Company had a $1.2 million liability recorded for unrecognized tax benefits, which included interest and penalties of $0.3 million. All of the unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate.

A reconciliation of the beginning balance of the Company’s unrecognized tax benefits and the ending amount of the unrecognized tax benefits is as follows as of:

 

     January 28,      January 30,      January 31,  
     2017      2016      2015  
     (in thousands)  

Balance at beginning of period

    $ 1,091      $ 1,018      $ 841  

Additions based on tax positions related to the current year

      87        98        80  

Deductions based on tax positions related to the current year

      —          —          (7 ) 

Additions for tax positions of prior years

      33        123        327  

Reductions for tax positions of prior years

      (29 )       (2 )       (46 ) 

Reductions due to lapses of statutes of limitations

      —          (49 )       —    

Settlements

      —          (97 )       (177 ) 
  

 

 

     

 

 

     

 

 

  

Balance at end of period

    $ 1,182      $ 1,091      $ 1,018  
  

 

 

     

 

 

     

 

 

  

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. During fiscal 2017, there was a $0.1 million increase in interest and penalties, comparatively. For fiscal 2016 and 2015, the Company recognized approximately $0.0 million and $0.1 million in interest and penalties, respectively. The Company had approximately $0.3 million and $0.2 million for the payment of interest and penalties accrued at January 28, 2017 and January 30, 2016, respectively.

In the next twelve months it is reasonably possible the Company could resolve the examinations related to the 2011, 2012 and 2013 tax years.