14. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, and requiring a mandatory deemed repatriation tax on undistributed earnings of U.S. owned foreign subsidiaries (“Transition Tax”). The Tax Act also adopts elements of a modified territorial tax system, revises the rules governing foreign tax credits, and permits certain capital expenditures to be expensed immediately, as well as modifying or repealing many deductions and credits. Certain changes became effective for Fiscal 2017, while others become effective for Fiscal 2018.
As a result of the Tax Act, the Company recorded an estimated tax benefit of $12.1 million in the fourth quarter of Fiscal 2017 consisting of:
|
|
• |
a $3.5 million charge on previously undistributed foreign earnings as of December 31, 2017, net of estimated tax credits |
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|
• |
a $12.1 million benefit on the re-measurement of deferred tax assets and liabilities and tax reserves to the lower base federal corporate tax rate of 21% |
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|
• |
a $3.5 million benefit of a lower blended U.S. corporate tax rate as reflected in the starting point of the effective tax rate reconciliation table below |
In December 2017, the Securities and Exchange Commission (“SEC”) issued interpretive guidance under SAB 118 that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The estimated tax impacts of the Transition Tax, re-measurement of deferred tax assets and liabilities, and other items are recorded as provisional amounts in accordance with SAB 118. Given the significant complexity of the Tax Act, anticipated guidance from the Internal Revenue Service on implementing the Tax Act, and the potential for additional guidance from the SEC or the FASB related to the Tax Act or additional information becoming available, the Company’s provisional net benefit may be adjusted during 2018 within the allowable measurement period. Other provisions of the Tax Act that impact future tax years are still being assessed.
The Fiscal 2017 impact of the Tax Act is reflected in the tables below.
The components of income before income taxes from continuing operations were:
|
|
|
For the Years Ended |
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|||||||||
|
|
|
February 3, |
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|
January 28, |
|
|
January 30, |
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|||
|
(In thousands) |
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
|
U.S. |
|
$ |
255,621 |
|
|
$ |
315,199 |
|
|
$ |
289,697 |
|
|
Foreign |
|
|
31,552 |
|
|
|
20,063 |
|
|
|
32,174 |
|
|
Total |
|
$ |
287,173 |
|
|
$ |
335,262 |
|
|
$ |
321,871 |
|
The significant components of the Company’s deferred tax assets and liabilities were as follows:
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|
|
February 3, |
|
|
January 28, |
|
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|
(In thousands) |
|
2018 |
|
|
2017 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Rent |
|
$ |
20,753 |
|
|
$ |
27,843 |
|
|
Net operating loss |
|
|
9,232 |
|
|
|
5,364 |
|
|
Inventories |
|
|
8,900 |
|
|
|
10,693 |
|
|
Deferred compensation |
|
|
7,698 |
|
|
|
24,042 |
|
|
State tax credits |
|
|
7,492 |
|
|
|
6,574 |
|
|
Accruals not currently deductible |
|
|
5,631 |
|
|
|
8,613 |
|
|
Foreign tax credits |
|
|
3,123 |
|
|
|
22,269 |
|
|
Employee compensation and benefits |
|
|
1,599 |
|
|
|
13,206 |
|
|
Other |
|
|
4,936 |
|
|
|
9,380 |
|
|
Gross deferred tax assets |
|
|
69,364 |
|
|
|
127,984 |
|
|
Valuation allowance |
|
|
(7,096 |
) |
|
|
(7,266 |
) |
|
Total deferred tax assets |
|
$ |
62,268 |
|
|
$ |
120,718 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
(46,165 |
) |
|
$ |
(63,546 |
) |
|
Prepaid Expenses |
|
$ |
(3,736 |
) |
|
$ |
(5,079 |
) |
|
Other |
|
|
(3,023 |
) |
|
|
(2,843 |
) |
|
Total deferred tax liabilities |
|
$ |
(52,924 |
) |
|
$ |
(71,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net |
|
$ |
9,344 |
|
|
$ |
49,250 |
|
The net decrease in deferred tax assets and liabilities was primarily due to decreases in the deferred tax assets for foreign tax credit carryovers, deferred compensation and employee compensation and benefits, partially offset by a decrease in the deferred tax liability for property and equipment basis differences.
As of February 3, 2018, the Company had deferred tax assets related to state and foreign net operating loss carryovers of $2.1 million and $7.1 million, respectively that could be utilized to reduce future years’ tax liabilities. A portion of these net operating loss carryovers begin expiring in the year 2018 and some have an indefinite carryforward period. Management believes it is more likely than not that the foreign net operating loss carryovers will not reduce future years’ tax liabilities in certain jurisdictions. As such a valuation allowance of $7.1 million has been recorded on the deferred tax assets related to the cumulative foreign net operating loss carryovers.
The Company has foreign tax credit carryovers in the amount of $3.1 million and $22.3 million as of February 3, 2018 and January 28, 2017, respectively. The foreign tax credit carryovers begin to expire in Fiscal 2020 to the extent not utilized. No valuation allowance has been recorded on the foreign tax credit carryovers as the Company believes it is more likely than not that the foreign tax credits will be utilized prior to expiration.
The Company has state income tax credit carryforwards of $7.5 million (net of federal tax) and $6.6 million (net of federal tax) as of February 3, 2018 and January 28, 2017, respectively. These income tax credits can be utilized to offset future state income taxes and have a carryforward period of 10 to 16 years. They will begin to expire in Fiscal 2023.
Significant components of the provision for income taxes from continuing operations were as follows:
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|
|
For the Years Ended |
|
|||||||||
|
|
|
February 3, |
|
|
January 28, |
|
|
January 30, |
|
|||
|
(In thousands) |
|
2018 |
|
|
2017 |
|
|
2016 |
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|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
31,763 |
|
|
$ |
93,961 |
|
|
$ |
86,122 |
|
|
Foreign taxes |
|
|
3,404 |
|
|
|
3,168 |
|
|
|
3,836 |
|
|
State |
|
|
9,600 |
|
|
|
11,137 |
|
|
|
13,032 |
|
|
Total current |
|
|
44,767 |
|
|
|
108,266 |
|
|
|
102,990 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
36,345 |
|
|
$ |
12,057 |
|
|
$ |
5,606 |
|
|
Foreign taxes |
|
|
(1,130 |
) |
|
|
(268 |
) |
|
|
(1,977 |
) |
|
State |
|
|
3,028 |
|
|
|
2,758 |
|
|
|
1,961 |
|
|
Total deferred |
|
|
38,243 |
|
|
|
14,547 |
|
|
|
5,590 |
|
|
Provision for income taxes |
|
$ |
83,010 |
|
|
$ |
122,813 |
|
|
$ |
108,580 |
|
The Company previously considered the earnings in its foreign subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. Under the Tax Act, the Company recorded an estimated Transition Tax payable of $3.5 million, net of estimated tax credits, on approximately $42.9 million of previously undistributed foreign earnings. The Company is currently analyzing the tax liability, if any, under the Tax Act for its remaining outside basis differences in its foreign subsidiaries and assessing how the Tax Act will impact the Company's prior assertion of indefinite reinvestment. The Company has yet to determine whether it plans to change its prior assertion and repatriate earnings. As such, no change has been made with respect to the assertion of indefinite reinvestment for the year ended February 3, 2018. The Company will record the tax effects of any change in its prior assertion in the period that it completes its analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability related to its foreign investments, if practicable.
The following table summarizes the activity related to our unrecognized tax benefits:
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|
For the Years Ended |
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|
(In thousands) |
|
February 3, 2018 |
|
|
January 28, 2017 |
|
|
January 30, 2016 |
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|||
|
Unrecognized tax benefits, beginning of the year balance |
|
$ |
7,093 |
|
|
$ |
5,748 |
|
|
$ |
12,609 |
|
|
Increases in current period tax positions |
|
|
1,913 |
|
|
|
1,884 |
|
|
|
2,727 |
|
|
Increases in tax positions of prior periods |
|
|
624 |
|
|
|
464 |
|
|
|
— |
|
|
Settlements |
|
|
(744 |
) |
|
|
— |
|
|
|
— |
|
|
Lapse of statute of limitations |
|
|
(517 |
) |
|
|
(362 |
) |
|
|
(516 |
) |
|
Decreases in tax positions of prior periods |
|
|
(1,083 |
) |
|
|
(641 |
) |
|
|
(9,072 |
) |
|
Unrecognized tax benefits, end of the year balance |
|
$ |
7,286 |
|
|
$ |
7,093 |
|
|
$ |
5,748 |
|
As of February 3, 2018, the gross amount of unrecognized tax benefits was $7.3 million, of which $6.6 million would affect the effective income tax rate if recognized. The gross amount of unrecognized tax benefits as of January 28, 2017 was $7.1 million, of which $5.8 million would affect the effective income tax rate if recognized.
Unrecognized tax benefits increased by $0.2 million during Fiscal 2017, increased by $1.3 million during Fiscal 2016 and decreased by $6.9 million during Fiscal 2015. Over the next twelve months the Company believes it is reasonably possible the unrecognized tax benefits could decrease by as much as $4.8 million as a result of federal and state tax settlements, statute of limitations lapses, and other changes to the reserves.
The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties related to unrecognized tax benefits included in the Consolidated Balance Sheet were $1.0 million and $1.4 million as of February 3, 2018 and January 28, 2017, respectively. An immaterial amount of interest and penalties were recognized in the provision for income taxes during Fiscal 2017, Fiscal 2016 and Fiscal 2015.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”). As part of the CAP, tax years are audited on a real-time basis so that all or most issues are resolved prior to the filing of the federal tax return. The IRS has completed examinations under CAP through January 28, 2017, for which the majority of the issues have been resolved. The Company does not anticipate that any adjustments will result in a material change to its financial position, results of operations or cash flows. With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, generally, the Company and its subsidiaries are no longer subject to income tax audits for tax years before 2011. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from these years.
A reconciliation between the statutory federal income tax rate and the effective income tax rate from continuing operations follows:
|
|
|
For the Years Ended |
|
|||||||||
|
|
|
February 3, |
|
|
January 28, |
|
|
January 30, |
|
|||
|
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|||
|
Federal income tax rate |
|
|
33.7 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes, net of federal income tax effect |
|
|
2.9 |
|
|
|
2.8 |
|
|
|
3.1 |
|
|
Foreign rate differential |
|
|
(1.9 |
) |
|
|
(1.7 |
) |
|
|
(1.6 |
) |
|
Impact of Tax Cuts and Jobs Act |
|
|
(3.0 |
) |
|
|
0.0 |
|
|
|
0.0 |
|
|
Valuation allowance changes, net |
|
|
(0.2 |
) |
|
|
0.4 |
|
|
|
(1.1 |
) |
|
Change in unrecognized tax benefits |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
(1.5 |
) |
|
Other |
|
|
(2.9 |
) |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
|
|
28.9 |
% |
|
|
36.6 |
% |
|
|
33.7 |
% |