Income Taxes:
Substantially all of the Company’s income before income taxes for the three years ended February 2, 2018 is subject to taxation in the United States. Income tax disclosures as of and for the period ended February 3, 2017 have been restated to adjust for the impacts from the correction of fiscal 2017 revenues as described in Note 1. The provision for income taxes for each of the periods presented include the following:
|
| | | | | | | | | | | |
| Year Ended |
| February 2,
2018 |
| | February 3,
2017 |
| | January 29,
2016 |
|
| (in millions) |
Current: | | | | | |
Federal | $ | 3 |
| | $ | 59 |
| | $ | 51 |
|
State | 2 |
| | 12 |
| | 12 |
|
Deferred: | | | | | |
Federal | 26 |
| | 2 |
| | 5 |
|
State | 4 |
| | (4 | ) | | (2 | ) |
Total | $ | 35 |
| | $ | 69 |
| | $ | 66 |
|
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes for each of the periods presented follows:
|
| | | | | | | | | | | |
| Year Ended |
| February 2,
2018 |
| | February 3,
2017 |
| | January 29,
2016 |
|
| (in millions) |
Statutory federal income tax rate(1) | 33.7 | % | | 35.0 | % | | 35.0 | % |
Amount computed at the blended statutory federal income tax rate | $ | 72 |
| | $ | 74 |
| | $ | 64 |
|
State income taxes, net of federal tax benefit | 8 |
| | 6 |
| | 6 |
|
Research and development credits | (3 | ) | | (8 | ) | | (2 | ) |
Federal income tax reduction per the Tax Act | (17 | ) | | — |
| | — |
|
Manufacturer's deduction | (1 | ) | | (2 | ) | | (4 | ) |
Non-deductible acquisition costs | — |
| | — |
| | 2 |
|
Excess tax benefits for stock-based compensation | (22 | ) | | — |
| | — |
|
Work opportunity tax credit | (1 | ) | | (1 | ) | | — |
|
Other | (1 | ) | | — |
| | — |
|
Total | $ | 35 |
| | $ | 69 |
| | $ | 66 |
|
Effective income tax rate | 16.5 | % | | 32.7 | % | | 36.0 | % |
| |
(1) | The statutory federal income tax rate for fiscal 2018 is a blended rate due to the Tax Act. See Note 1. |
The effective income tax rate for fiscal 2018 is lower than fiscal 2017 primarily due to $22 million in excess tax benefits in the current year as well as the effect of the federal rate change of $17 million due to the Tax Act. The excess tax benefits are related to employee share-based compensation as a result of the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, see “Accounting Standards Updates” in Note 1. The effective income tax rate in fiscal 2017 was lower than fiscal 2016 primarily due increased research and development credits in fiscal 2017.
Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of:
|
| | | | | | | |
| February 2,
2018 |
| | February 3,
2017 |
|
| (in millions) |
Accrued vacation and bonuses | $ | 18 |
| | $ | 27 |
|
Accrued liabilities | 3 |
| | 8 |
|
Deferred compensation | 14 |
| | 22 |
|
Stock awards | 9 |
| | 17 |
|
Net operating loss carry-forward & tax credits-carry forward | 12 |
| | 21 |
|
Accumulated other comprehensive loss | — |
| | 1 |
|
Valuation allowance | (1 | ) | | (1 | ) |
Total deferred tax assets | 55 |
| | 95 |
|
Deferred revenue | (20 | ) | | (28 | ) |
Fixed asset basis differences | (6 | ) | | (6 | ) |
Purchased intangible assets | (51 | ) | | (69 | ) |
Accumulated other comprehensive income | (1 | ) | | — |
|
Total deferred tax liabilities | (78 | ) | | (103 | ) |
Net deferred tax liabilities | $ | (23 | ) | | $ | (8 | ) |
For fiscal 2018, net deferred tax liabilities are presented as deferred income taxes on the consolidated balance sheets. For fiscal 2017, net federal deferred tax liabilities of $10 million are presented as deferred income taxes, and net state deferred tax assets of $2 million are presented in other assets on the consolidated balance sheets. Deferred tax assets for both periods presented include state research tax credit carryforwards for which the Company has set up a valuation allowance.
The changes in the unrecognized tax benefits, excluding accrued interest and penalties, were:
|
| | | | | | | | | | | |
| Year Ended |
| February 2,
2018 |
| | February 3,
2017 |
| | January 29,
2016 |
|
| (in millions) |
Unrecognized tax benefits at beginning of the year | $ | 5 |
| | $ | — |
| | $ | — |
|
Additions for tax positions related to prior years | 1 |
| | 2 |
| | — |
|
Additions for tax positions related to the current year | 1 |
| | 3 |
| | — |
|
Unrecognized tax benefits at end of the year | $ | 7 |
| | $ | 5 |
| | $ | — |
|
Unrecognized tax benefits that, if recognized, would affect the effective income tax rate | $ | 7 |
| | $ | 5 |
| | $ | — |
|
Unrecognized tax benefits for fiscal 2018 of $6 million are presented as other long-term liabilities and $1 million is classified as a reduction to the corresponding deferred tax asset, presented in other assets on the consolidated balance sheets. Unrecognized tax benefits for fiscal 2017 of $4 million are presented as other long-term liabilities and $1 million is classified as a reduction to the corresponding deferred tax asset. We do not believe that it is reasonably possible that the unrecognized tax benefits will materially change in the next 12 months.
For the periods presented, there was not a significant amount of accrued interest and penalties recognized in the consolidated balance sheets and statements of income and comprehensive income. Tax interest and tax penalties, if any, would be included in income tax expense.
Beginning with fiscal 2014, the Company has filed income tax returns in the U.S. and various state jurisdictions, which may be subject to routine compliance reviews by the IRS and other taxing authorities. While the Company believes it has adequate accruals for uncertain tax positions, the tax authorities may determine that the Company owes taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities. The Company’s tax returns for fiscal years 2014 through 2017 remain subject to examination by the IRS and various other tax jurisdictions. The Company is not responsible for any tax items on operations before the separation except for Scitor’s tax returns that remain subject to examination by the U.S. Internal Revenue Service and various other tax jurisdictions from 2005 through the acquisition.
In fiscal 2016 the Company acquired all of Scitor’s stock in a transaction taxable to the selling shareholders. The Company inherited Scitor’s historical tax basis in deductible goodwill, certain other intangible assets, and operating loss carryforwards. At the date of the acquisition, the tax deductible goodwill was $136 million and the tax deductible identified intangible assets were $163 million. The Company inherited a federal and state net operating loss of $90 million subject to Internal Revenue Code Section 382 limitations. The Company expects to utilize these losses completely by fiscal 2020. The net operating losses will begin to expire in fiscal 2027.
The Company has $6 million of state credit carryforwards that will begin to expire in fiscal 2026.