14. Income Taxes
Overview
A summary of the components of the benefit for income taxes is as follows:
|
(Dollars in millions) |
|
For the Year Ended February 3, 2018 |
|
|
For the Year Ended January 28, 2017 |
|
|
For the Year Ended January 30, 2016 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
17.7 |
|
|
$ |
(3.8 |
) |
|
$ |
(1.2 |
) |
|
State and local |
|
|
0.1 |
|
|
|
1.8 |
|
|
|
5.1 |
|
|
Foreign |
|
|
— |
|
|
|
(0.2 |
) |
|
|
— |
|
|
|
|
|
17.8 |
|
|
|
(2.2 |
) |
|
|
3.9 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(103.7 |
) |
|
|
(10.5 |
) |
|
|
(127.4 |
) |
|
State and local |
|
|
(19.6 |
) |
|
|
5.4 |
|
|
|
(23.8 |
) |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
(123.3 |
) |
|
|
(5.1 |
) |
|
|
(151.2 |
) |
|
Benefit for income taxes recorded on the consolidated statement of operations |
|
|
(105.5 |
) |
|
|
(7.3 |
) |
|
|
(147.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes charged (credited) to shareholders’ equity (deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes (benefit) arising from the change in financial instrument liability credited to OCI |
|
|
6.7 |
|
|
|
4.4 |
|
|
|
(4.4 |
) |
|
Total benefit for income taxes |
|
$ |
(98.8 |
) |
|
$ |
(2.9 |
) |
|
$ |
(151.7 |
) |
Tax reform
On December 22, 2017, H.R.1, or the Tax Cuts and Jobs Act (the “Act” or “Tax Reform”) was signed into law. The Act reduced the corporate federal tax rate from 35% to 21% effective January 1, 2018. The Company calculated its provision for current federal income tax in fiscal 2017 using a rate of 33.7%, which reflects a blend of (i) the former federal tax rate of 35% and (ii) the new federal tax rate of 21%. The federal tax rate of 21% will be fully effective in fiscal 2018. As a result of the new federal tax rate, the Company remeasured its deferred tax assets and liabilities, primarily through income tax expense, using the enacted rate which the Company expects to be in effect when temporary differences reverse. The remeasurement of net deferred tax liabilities resulted in the recognition of a benefit for income taxes of $18.5 million.
Among its many provisions, the Act imposed a mandatory one-time transition tax on undistributed foreign earnings. As of December 22, 2017, the Company was able to determine a reasonable estimate of the transition tax related to its unremitted foreign earnings. The Company recorded a charge of $1.4 million to provide for federal taxes on undistributed foreign earnings of $9 million. Additionally, the Company reversed its liability for uncertain tax positions associated with undistributed foreign earnings and recognized a benefit of $1.4 million.
Accounting for taxes
With respect to the Company’s Parent
Group is included in the consolidated federal income tax return of its Parent, which includes all of its wholly owned subsidiaries. Pursuant to its tax sharing policy, Group calculates its tax liabilities on a standalone basis, and the financial statements of the Company account for income taxes at the Group level. The federal tax return, however, is filed at the Parent level. The difference between the entity at which the provision is calculated and the entity which files the tax return gives rise to intercompany balances. For more information on the intercompany balances, see note 16.
With respect to the Company’s subsidiaries
Each subsidiary of Group files separate, or combined where required, state tax returns in required jurisdictions. Group and its subsidiaries have entered into a tax sharing agreement providing that each of the subsidiaries will reimburse Group for its share of income taxes based on the proportion of such subsidiaries’ tax liability on a separate return basis to the total tax liability of Group.
With respect to Tax Reform
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which provided guidance to registrants with respect to the accounting for the Tax Reform when it does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the effect of changes in the Act. The amounts the Company recorded as a result of Tax Reform are preliminary, and the final amounts may differ from preliminary amounts recorded due to a number of factors such as (i) changes in estimates, interpretations and assumptions of the Company, (ii) changes in interpretations, issuance of new guidance, and legislative actions of the IRS, (iii) changes in accounting standards or related interpretations by standard setters, and (iv) future actions by states within the United States that have not currently adopted the Act. As the Company finalizes its accounting for the Tax Reform, results of operations may be impacted.
Reconciliation of rates
A reconciliation between the effective tax and the U.S. federal statutory income tax rate is as follows:
|
|
|
For the Year Ended February 3, 2018 |
|
|
For the Year Ended January 28, 2017 |
|
|
For the Year Ended January 30, 2016 |
|
|||
|
Federal income tax rate |
|
|
33.7 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Change in tax rate |
|
|
8.0 |
|
|
|
— |
|
|
|
— |
|
|
State and local income taxes, net of federal benefit |
|
|
4.4 |
|
|
|
(4.0 |
) |
|
|
0.9 |
|
|
Foreign rate differential |
|
|
2.1 |
|
|
|
19.5 |
|
|
|
0.6 |
|
|
Income tax credits |
|
|
0.5 |
|
|
|
3.7 |
|
|
|
— |
|
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
(25.6 |
) |
|
Uncertain tax positions |
|
|
(0.2 |
) |
|
|
(7.1 |
) |
|
|
(0.3 |
) |
|
Valuation allowances |
|
|
(1.8 |
) |
|
|
(26.7 |
) |
|
|
(0.4 |
) |
|
Other |
|
|
(0.9 |
) |
|
|
3.3 |
|
|
|
0.4 |
|
|
Effective tax rate |
|
|
45.8 |
% |
|
|
23.7 |
% |
|
|
10.6 |
% |
Deferred taxes
A summary of the tax effect of temporary differences which give rise to deferred tax assets and liabilities is as follows:
|
(Dollars in millions) |
|
February 3, 2018 |
|
|
January 28, 2017 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Rent |
|
$ |
28.5 |
|
|
$ |
35.4 |
|
|
Foreign net operating losses |
|
|
18.2 |
|
|
|
13.2 |
|
|
Customer liabilities |
|
|
9.3 |
|
|
|
13.4 |
|
|
Transaction costs |
|
|
8.9 |
|
|
|
7.4 |
|
|
Share-based payments |
|
|
8.3 |
|
|
|
11.3 |
|
|
Accrued bonus |
|
|
7.0 |
|
|
|
— |
|
|
Charitable contribution carryforward |
|
|
6.9 |
|
|
|
9.4 |
|
|
State taxes and interest |
|
|
3.8 |
|
|
|
5.5 |
|
|
Sales returns |
|
|
2.8 |
|
|
|
4.3 |
|
|
State net operating losses |
|
|
1.1 |
|
|
|
1.6 |
|
|
Financial instruments |
|
|
1.0 |
|
|
|
8.0 |
|
|
Tax credit carryforward |
|
|
— |
|
|
|
1.1 |
|
|
Other |
|
|
2.1 |
|
|
|
3.7 |
|
|
|
|
|
97.9 |
|
|
|
114.3 |
|
|
Less: Valuation allowance |
|
|
(25.0 |
) |
|
|
(20.3 |
) |
|
Deferred tax assets, net of valuation allowance |
|
|
72.9 |
|
|
|
94.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(80.6 |
) |
|
|
(170.8 |
) |
|
Difference in book and tax basis for property and equipment |
|
|
(11.8 |
) |
|
|
(55.2 |
) |
|
Prepaid catalog and other prepaid expenses |
|
|
(10.0 |
) |
|
|
(16.2 |
) |
|
Deferred tax liabilities |
|
|
(102.4 |
) |
|
|
(242.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability |
|
$ |
(29.5 |
) |
|
$ |
(148.2 |
) |
Valuation allowance
The Company regularly assesses the need for a valuation allowance related to its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on a weighing process of available evidence, whether it is more-likely-than-not that its deferred tax assets will not be realized. Prior to the Act, in fiscal 2016, the Company determined that negative evidence outweighed the positive evidence and recorded a valuation allowance related to it deferred tax asset balance.
Tax Reform, however, had a significant effect on the available evidence in the Company’s assessment of its deferred tax assets. The Act will substantially reduce the Company’s ability to deduct interest expense in fiscal 2018 and beyond. The inability to use interest deductions either in a current year, or carried forward to future years, has increased the Company’s projections of future taxable income, thereby changing the Company’s assessment of the likelihood of the realizing deferred tax assets at February 3, 2018. Therefore, the Company recorded a benefit of $1.1 million to reverse the valuation allowance recorded against temporary differences deductible at the federal level, or in states that adopted the Act. After the reversal, the remaining balance of the valuation allowance is $25.0 million, which reflects (i) a full valuation allowance of $21.5 million against its foreign deferred tax assets, primarily a result of carry forwards of net operating losses and (ii) a reserve of $3.5 million for temporary differences deductible in certain states that did not adopt the Act, and therefore interest expense currently remains fully deductible in those jurisdictions.
The future limitation on interest deductions will generate a significant carry forward of unutilized interest deductions. The Company will assess the need for a valuation allowance related to the deferred tax assets recognized as a result of the carry forward. If projected taxable income is not sufficient to absorb the interest deductions carried forward, a valuation allowance may be recorded as early as in the first quarter of fiscal 2018.
Foreign earnings
The Company recorded a charge of $1.4 million to provide for a mandatory one-time transition tax on undistributed foreign earnings of $9 million. As of December 31, 2017, cash, cash equivalents and short-term investments held outside of the United States in our international subsidiaries was $27.3 million. The Act imposes a tax on future earnings of our international subsidiaries. Since taxes have been provided on cumulative historical international earnings, and will be paid on future international earnings, the Company may repatriate current cash held by our international subsidiaries with no additional tax liabilities.
Uncertain tax positions
As of February 3, 2018, the Company has $25.9 million in liabilities associated with uncertain tax positions (including interest and penalties of $4.1 million) reflected in other liabilities. The amount, if recognized, that would affect the effective tax rate is $19.2 million. While the Company expects the amount of unrecognized tax benefits to change in the next 12 months, the change is not expected to have a significant effect on the estimated effective annual tax rate, financial position, results of operations or cash flows. However, the outcome of tax matters is uncertain and unforeseen results can occur.
A roll-forward of unrecognized tax benefits is as follows:
|
(Dollars in millions) |
|
For the Year Ended February 3, 2018 |
|
|
For the Year Ended January 28, 2017 |
|
||
|
Balance at beginning of period |
|
$ |
26.0 |
|
|
$ |
23.4 |
|
|
Additions for tax positions taken during current year |
|
|
4.6 |
|
|
|
5.2 |
|
|
Additions for tax positions taken during prior years |
|
|
0.4 |
|
|
|
— |
|
|
Reductions for tax positions taken during prior years |
|
|
(1.4 |
) |
|
|
(0.4 |
) |
|
Settlements |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
Expirations of statutes of limitations |
|
|
(3.9 |
) |
|
|
(2.0 |
) |
|
Balance at end of period |
|
$ |
25.3 |
|
|
$ |
26.0 |
|
The federal tax returns for the periods ended January 2013 through January 2016 are currently under examination. Various state and local jurisdiction tax authorities are in the process of examining income tax returns or hearing appeals for certain tax years ranging from 2009 to 2016. The results of these audits and appeals are not expected to have a significant effect on the results of operations or financial position.
As of February 3, 2018, the Company has state and local net operating loss carryovers, net of unrecognized tax benefits, of approximately $17.6 million. These carryovers are available to offset future taxable income for state and local tax purposes and expire primarily in November 2031.