11. INCOME TAXES
The components of income (loss) before income taxes for Fiscal 2016, Fiscal 2015 and Fiscal 2014 were as follows (in thousands):
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | ||||||||||
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U.S. |
$ | 204,642 | $ | (267,113 | ) | $ | (261,478 | ) | ||||
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Foreign |
(152,894 | ) | 32,736 | 55,759 | ||||||||
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Total income (loss) before income taxes |
$ | 51,748 | $ | (234,377 | ) | $ | (205,719 | ) | ||||
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The components of income tax expense (benefit) for Fiscal 2016, Fiscal 2015 and Fiscal 2014 were as follows (in thousands):
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | ||||||||||
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Federal: |
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Current |
$ | (993 | ) | $ | 503 | $ | — | |||||
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Deferred |
(1,215 | ) | (5,907 | ) | (5,099 | ) | ||||||
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| (2,208 | ) | (5,404 | ) | (5,099 | ) | |||||||
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State |
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Current |
876 | 438 | 790 | |||||||||
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Deferred |
70 | 412 | 655 | |||||||||
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| 946 | 850 | 1,445 | ||||||||||
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Foreign |
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Current |
2,160 | 6,035 | 11,306 | |||||||||
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Deferred |
(3,049 | ) | 577 | (1,393 | ) | |||||||
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| (889 | ) | 6,612 | 9,913 | |||||||||
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Total income tax (benefit) expense |
$ | (2,151 | ) | $ | 2,058 | $ | 6,259 | |||||
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The provision for income taxes for Fiscal 2016, Fiscal 2015 and Fiscal 2014 differs from an amount computed at the statutory federal rate as follows:
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | ||||||||||
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U.S. income taxes at statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Earnings of foreign subsidiaries |
120.9 | (5.4 | ) | (13.0 | ) | |||||||
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Goodwill impairment |
120.1 | (18.7 | ) | (21.0 | ) | |||||||
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Deferred taxes |
8.9 | — | — | |||||||||
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State and local income taxes, net of federal tax benefit |
2.0 | 0.1 | 0.9 | |||||||||
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Other, net |
0.2 | (2.4 | ) | (4.4 | ) | |||||||
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Valuation allowance |
(264.5 | ) | (14.3 | ) | (9.2 | ) | ||||||
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Foreign rate differential |
(23.0 | ) | 5.0 | 8.4 | ||||||||
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Change in accrual for estimated tax contingencies |
(3.8 | ) | (0.2 | ) | 0.3 | |||||||
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| (4.2 | )% | (0.9 | )% | (3.0 | )% | |||||||
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In Fiscal 2016, the Company’s income tax benefit was $2.2 million and its effective income tax rate was (4.2)%, including income tax benefit of $136.8 million related to the effect of changes to its valuation allowance on deferred tax assets. Additionally, there was income tax expense of $62.2 million related to non-deductible goodwill impairment and income tax expense of $62.5 million on earnings of foreign subsidiaries. In Fiscal 2015, the Company’s income tax expense was $2.1 million and its effective income tax rate was (0.9)%, including income tax expense of $33.6 million related to the effect of changes to its valuation allowance on deferred tax assets. In Fiscal 2014, the Company’s income tax expense was $6.3 million and its effective income tax rate was (3.0)%, including income tax expense of $18.8 million related to the effect of changes to its valuation allowance on deferred tax assets.
The effective income tax rates for Fiscal 2016, Fiscal 2015 and Fiscal 2014 also differ from the statutory federal income tax rate of 35% due to the overall geographic mix of losses in jurisdictions with higher income tax rates and income in jurisdictions with lower income tax rates, the impact of earnings of foreign subsidiaries, including repatriations utilized to fund interest payments, and other permanent book to tax return adjustments.
The tax effects on the significant components of the Company’s net deferred tax liability as of January 28, 2017 and January 30, 2016 are as follows (in thousands):
| January 28, 2017 |
January 30, 2016 |
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Deferred tax assets: |
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Tax carryforwards |
$ | 37,736 | $ | 213,579 | ||||
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Debt related |
43,345 | — | ||||||
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Compensation and benefits |
4,137 | 4,372 | ||||||
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Deferred rent |
7,041 | 7,344 | ||||||
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Depreciation |
10,495 | 6,842 | ||||||
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Accrued expenses |
5,210 | 4,416 | ||||||
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Gift cards |
988 | 2,603 | ||||||
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Inventory |
2,604 | 2,573 | ||||||
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Total gross deferred tax assets |
111,556 | 241,729 | ||||||
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Valuation allowance |
(86,852 | ) | (223,697 | ) | ||||
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Total deferred tax assets, net |
24,704 | 18,032 | ||||||
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Deferred tax liabilities: |
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Tradename intangibles |
96,712 | 100,200 | ||||||
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Earnings from foreign subsidiaries |
20,205 | 11,102 | ||||||
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Debt related |
— | 2,386 | ||||||
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Lease rights |
3,517 | 4,218 | ||||||
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Other |
168 | 217 | ||||||
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Total deferred tax liabilities |
120,602 | 118,123 | ||||||
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Net deferred tax liability |
$ | (95,898 | ) | $ | (100,091 | ) | ||
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The deferred tax assets and deferred tax liabilities as of January 28, 2017 and January 30, 2016 are as follows (in thousands):
| January 28, 2017 |
January 30, 2016 |
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Non-current deferred tax assets |
$ | 3,357 | $ | 3,218 | ||||
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Non-current deferred tax liabilities, net of valuation allowance |
(99,255 | ) | (103,309 | ) | ||||
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Net deferred tax liability |
$ | (95,898 | ) | $ | (100,091 | ) | ||
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The amount and expiration dates of net operating loss carryforwards as of January 28, 2017, are as follows (in thousands):
| Amount | Expiration Date | |||||||
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Non-U.S. net operating loss carryforwards |
$ | 12,241 | 2017 – 2034 | |||||
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Non-U.S. net operating loss carryforwards |
10,707 | Indefinite | ||||||
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State net operating loss carryforwards |
14,788 | 2019 – 2037 | ||||||
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Total |
$ | 37,736 | ||||||
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In assessing the need for a valuation allowance recorded against deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Ultimately, the realization of deferred tax assets will depend on the existence of future taxable income. In making this assessment, management considers the scheduled reversal of deferred tax liabilities, past operating results, estimates of future taxable income and tax planning opportunities.
In Fiscal 2016, the Company recorded a decrease of $134.8 million in valuation allowance against deferred tax assets in the U.S. The decrease in our U.S. valuation allowance was primarily related to tax attribute reduction from excludable cancellation of debt income generated by the Exchange Offer. In Fiscal 2015, the Company recorded an increase of $33.9 million in valuation allowance against deferred tax assets in the U.S. In Fiscal 2014, the Company recorded an increase of $17.4 million in valuation allowance against deferred tax assets in the U.S. In Fiscal 2008, the Company recorded a charge of $95.8 million to establish a valuation allowance against its deferred tax assets in the U.S. The Company concluded that a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, such as cumulative losses in recent fiscal years in our U.S. operations. While the Company’s long-term financial outlook in the U.S. remains positive, the Company concluded that its ability to rely on its long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from its recent U.S. cumulative losses. The Company’s conclusion regarding the need for a valuation allowance against U.S. deferred tax assets could change in the future based on improvements in operating performance, which may result in the full or partial reversal of the valuation allowance. The foreign valuation allowances relate to net operating loss carryforwards that, in the opinion of management, are more likely than not to expire unutilized.
The net change in the total valuation allowances in Fiscal 2016, Fiscal 2015 and Fiscal 2014 was a decrease of $136.8 million, an increase of $33.6 million and an increase of $18.8 million, respectively.
U.S. income taxes have been recognized on the balance of accumulated unremitted earnings of the Company’s foreign subsidiaries as of January 28, 2017 of $59.3 million, as these accumulated earnings are not considered to be reinvested indefinitely. For years prior to the year ended January 28, 2017, the Company had not provided U.S. income taxes on the balance of accumulated unremitted earnings of the foreign subsidiaries as these undistributed earnings were considered to be reinvested indefinitely. This change in assertion was due mainly to (i) certain effects of the Exchange Offer which triggered a deemed dividend distribution to be recognized for U.S. income tax purposes and (ii) certain additional deemed dividend recognition by virtue of Subpart F, specifically §956, of the Internal Revenue Code. Together, these factors caused a repatriation event of foreign earnings which had historically been considered to have been reinvested indefinitely. The Company recognized U.S. income tax expense of $62.5 million, $12.9 million and $26.7 million in Fiscal 2016, Fiscal 2015 and Fiscal 2014 earnings, respectively, of its foreign subsidiaries. The Company expects that future earnings from its foreign subsidiaries will be repatriated.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | ||||||||||
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Beginning balance |
$ | 9,566 | $ | 9,223 | $ | 9,820 | ||||||
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Additions based on tax positions related to the current year |
792 | 1,341 | 1,037 | |||||||||
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Statute expirations |
(1,892 | ) | (998 | ) | (1,593 | ) | ||||||
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Settlements |
(470 | ) | — | (41 | ) | |||||||
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Ending balance |
$ | 7,996 | $ | 9,566 | $ | 9,223 | ||||||
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The amount of unrecognized tax benefits as of January 28, 2017 of $8.0 million, if recognized, would favorably affect the Company’s effective tax rate. These unrecognized tax benefits are classified as “Unfavorable lease obligations and other long-term liabilities” in the Company’s Consolidated Balance Sheets.
Interest and penalties related to unrecognized tax benefits are included in income tax expense. The Company had $2.2 million and $2.8 million for the payment of interest and penalties accrued as of January 28, 2017 and January 30, 2016, respectively, and are classified as “Unfavorable lease obligations and other long-term liabilities” in the Company’s Consolidated Balance Sheets. For Fiscal 2016, Fiscal 2015 and Fiscal 2014, the Company recognized $(0.6) million, $0.2 million and $(0.1) million, respectively, in interest and penalties.
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before Fiscal 2013, and with few exceptions, for state, and local, or non-U.S. income tax examinations for years before Fiscal 2008. We have also concluded tax examinations in our significant foreign tax jurisdictions including the France through Fiscal 2013, Austria through Fiscal 2010, United Kingdom through Fiscal 2008, Switzerland through Fiscal 2009, and Canada through Fiscal 2008.
The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.