The provision for income taxes consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
Current tax expense: | | | | | | |
Federal | | $ | 143.8 |
| | $ | 178.7 |
| | $ | 158.4 |
|
State | | 13.5 |
| | 16.3 |
| | 18.0 |
|
Foreign | | 29.2 |
| | 28.9 |
| | 29.6 |
|
| | 186.5 |
| | 223.9 |
| | 206.0 |
|
Deferred tax expense (benefit): | | | | | | |
Federal | | (1.2 | ) | | 0.2 |
| | 29.3 |
|
State | | (0.2 | ) | | 3.6 |
| | (3.3 | ) |
Foreign | | (33.6 | ) | | (5.3 | ) | | (16.8 | ) |
| | (35.0 | ) | | (1.5 | ) | | 9.2 |
|
Total income tax expense | | $ | 151.5 |
| | $ | 222.4 |
| | $ | 215.2 |
|
The components of earnings before income tax expense consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
United States | | $ | 446.8 |
| | $ | 553.5 |
| | $ | 558.8 |
|
International | | 57.9 |
| | 71.7 |
| | 49.5 |
|
Total | | $ | 504.7 |
| | $ | 625.2 |
| | $ | 608.3 |
|
The following is a reconciliation of income tax expense (benefit) computed at the U.S. Federal statutory tax rate to income tax expense (benefit) reported in our consolidated statements of operations:
|
| | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
Federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal effect | | 1.7 |
| | 2.1 |
| | 2.0 |
|
Foreign income tax rate differential | | (0.9 | ) | | (1.0 | ) | | (0.4 | ) |
Change in valuation allowance | | 4.1 |
| | (0.9 | ) | | 1.8 |
|
Change in unrecognized tax benefits | | 2.3 |
| | 0.9 |
| | (0.2 | ) |
Subpart F income | | 1.3 |
| | 0.9 |
| | 2.7 |
|
Interest income from hybrid securities | | (0.6 | ) | | (1.6 | ) | | (5.2 | ) |
Realization of losses in foreign operations not previously benefited(1) | | (8.3 | ) | | — |
| | (2.2 | ) |
Loss on investment in foreign subsidiary | | (3.2 | ) | | — |
| | — |
|
Other (including permanent differences)(2) | | (1.4 | ) | | 0.2 |
| | 1.9 |
|
| | 30.0 | % | | 35.6 | % | | 35.4 | % |
| |
(1) | In fiscal 2016, we adopted a plan of reorganization specific to certain foreign operations which resulted in our ability to recognize the benefit of foreign net operating loss carryforwards that were previously unrecognized in affected jurisdictions. As a result, we recognized a tax benefit of $42.1 million in the fourth quarter of fiscal 2016, which is subject to a partial valuation allowance of $14.8 million. The valuation allowance established for this tax benefit is reflected in the line item “Change in valuation allowance.” |
| |
(2) | Other is comprised of numerous items, none of which is greater than 1.75% of earnings before income taxes. |
Differences between financial accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities which are presented in the table below (in millions). Certain prior year balances have been reclassified to conform to current year presentation.
|
| | | | | | | | |
| | January 28, 2017 | | January 30, 2016 |
Deferred tax asset: | | | | |
Inventory | | $ | 26.7 |
| | $ | 26.5 |
|
Deferred rents | | 8.3 |
| | 8.9 |
|
Stock-based compensation | | 12.0 |
| | 16.5 |
|
Net operating losses | | 89.6 |
| | 52.2 |
|
Customer liabilities | | 19.5 |
| | 26.1 |
|
Property and equipment | | 3.4 |
| | — |
|
Foreign tax credit carryover | | 4.1 |
| | 3.9 |
|
Accrued compensation | | 26.3 |
| | 25.9 |
|
Other | | 22.1 |
| | 6.6 |
|
Total deferred tax assets | | 212.0 |
| | 166.6 |
|
Valuation allowance | | (39.4 | ) | | (18.8 | ) |
Total deferred tax assets, net | | 172.6 |
| | 147.8 |
|
Deferred tax liabilities: | | | | |
Property and equipment | | — |
| | (11.6 | ) |
Goodwill | | (75.5 | ) | | (89.0 | ) |
Prepaid expenses | | (5.3 | ) | | (6.6 | ) |
Intangible assets | | (47.9 | ) | | (30.3 | ) |
Other | | (7.9 | ) | | (0.9 | ) |
Total deferred tax liabilities | | (136.6 | ) | | (138.4 | ) |
Net deferred tax assets | | $ | 36.0 |
| | $ | 9.4 |
|
The above amounts are reflected in the consolidated financial statements as: | | | | |
Deferred income taxes - assets | | $ | 59.0 |
| | $ | 39.0 |
|
Deferred income taxes - liabilities | | $ | (23.0 | ) | | $ | (29.6 | ) |
We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Internal Revenue Service (“IRS”) is currently examining our U.S. income tax returns for the fiscal years 2010 through 2015. We do not anticipate any adjustments that would result in a material impact on our consolidated financial statements as a result of these audits. We are no longer subject to U.S. federal income tax examination for years before and including the fiscal year ended January 30, 2010.
With respect to state and local jurisdictions and countries outside of the United States, we and our subsidiaries are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to state, local or foreign audits.
As of January 28, 2017, we have $25.4 million of net operating loss ("NOL") carryforwards in various foreign jurisdictions that expire in years 2017 through 2035, as well as $229.1 million of foreign NOL carryforwards that have no expiration date. In addition, we have $4.1 million of foreign tax credit carryforwards that expire in years 2022 through 2026. We also have $64.0 million of Federal NOL carryovers acquired through the ThinkGeek acquisition that will expire in years 2020 through 2035.
As of January 28, 2017, the gross amount of unrecognized tax benefits was approximately $42.1 million. If we were to prevail on all uncertain tax positions, the net effect would be a benefit to our effective tax rate of $36.5 million, exclusive of any benefits related to interest and penalties. A reconciliation of the changes in the gross balances of unrecognized tax benefits follows (in millions):
|
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2016 | | 2015 | | 2014 |
Beginning balance of unrecognized tax benefits | | $ | 31.9 |
| | $ | 21.4 |
| | $ | 20.6 |
|
Increases related to current period tax positions | | 3.5 |
| | 4.0 |
| | 1.0 |
|
Increases related to prior period tax positions | | 7.9 |
| | 9.0 |
| | 6.1 |
|
Reductions as a result of a lapse of the applicable statute of limitations | | (0.2 | ) | | (1.0 | ) | | (0.5 | ) |
Reductions as a result of settlements with taxing authorities | | (1.0 | ) | | (1.5 | ) | | (5.8 | ) |
Ending balance of unrecognized tax benefits | | $ | 42.1 |
| | $ | 31.9 |
| | $ | 21.4 |
|
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of January 28, 2017, January 30, 2016 and January 31, 2015, we had approximately $7.2 million, $4.9 million and $4.6 million, respectively, in interest and penalties related to unrecognized tax benefits accrued, of which approximately $2.3 million, $0.4 million and $0.6 million of expense were recognized through income tax expense in fiscal 2016, 2015 and 2014. If we were to prevail on all uncertain tax positions, the reversal of these accruals related to interest would also be a benefit to our effective tax rate.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease within the next 12 months as a result of settling ongoing audits. However, as audit outcomes and the timing of audit resolutions are subject to significant uncertainty, and given the nature and complexity of the issues involved, we are unable to reasonably estimate the possible amount of change in the unrecognized tax benefits, if any, that may occur within the next 12 months as a result of ongoing examinations. Nevertheless, we believe we are adequately reserved for our uncertain tax positions as of January 28, 2017.
Deferred income taxes have not been provided for on the approximately $671.1 million of undistributed earnings generated by certain foreign subsidiaries as of January 28, 2017 because we intend to permanently reinvest such earnings outside the United States. We do not currently require, nor do we have plans for, the repatriation of retained earnings from these subsidiaries. However, in the future, if we determine it is necessary to repatriate these funds, or we sell or liquidate any of these subsidiaries, we may be required to provide for income taxes on the repatriation. We may also be required to withhold foreign taxes depending on the foreign jurisdiction from which the funds are repatriated. The effective rate of tax on such repatriations may materially differ from the federal statutory tax rate, thereby having a material impact on tax expense in the year of repatriation; however, we cannot reasonably estimate the amount of such a tax event.