Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.20.1
INCOME TAXES
12 Months Ended
Feb. 01, 2020
INCOME TAXES  
INCOME TAXES

9. INCOME TAXES

The following table provides details on our earnings before income taxes (in thousands):

Fiscal Year

 

    

2019

    

2018

    

2017

 

United States

$

(17,678)

$

73,775

$

90,629

Foreign

 

44,690

 

42,527

 

31,005

Total

$

27,012

$

116,302

$

121,634

The provision for income taxes consists of the following (in thousands):

Fiscal Year

 

    

2019

    

2018

    

2017

 

Current tax expense:

    

    

    

Federal

$

4,231

$

7,295

$

25,578

State

 

2,196

 

4,853

 

5,055

Foreign

 

4,726

 

13,764

 

10,049

Deferred tax (benefit) expense:

Federal and state

 

(8,919)

 

(2,472)

 

(21,607)

Foreign

 

(589)

 

(5,734)

 

15,542

Total

$

1,645

$

17,706

$

34,617

In December 2017, the U.S. enacted the Tax Reform Act. The changes included in the Tax Reform Act are broad and complex, which impacted our consolidated financial statements in fiscal 2017 and fiscal 2018 including, but not limited to: reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and requiring a one-time transition tax on certain unrepatriated earnings of non-U.S. subsidiaries that may electively be paid over eight years. The transition tax resulted in certain previously untaxed non-U.S. earnings being included in the U.S. federal and state 2017 taxable income.

The Tax Reform Act also enacted new tax laws which include, but are not limited to: a Base Erosion Anti-abuse Tax (“BEAT”), which is a new minimum tax, generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, a provision designed to tax currently global intangible low taxed income (“GILTI”), a provision that may limit the amount of currently deductible interest expense, the repeal of the domestic production incentives, limitations on the deductibility of certain executive compensation, and limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.  

Shortly after the Tax Reform Act was enacted, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Reform Act’s impact. SAB 118 provided a measurement period, which in no case should extend beyond one year from the Tax Reform Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Reform Act. In accordance with SAB 118, a company must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete, a company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined.

As a result, in fiscal 2017, we recorded a provisional discrete net tax benefit of $0.3 million related to the Tax Reform Act, which consisted of a benefit from deferred tax remeasurement offset by additional provision for transition tax.  During the fourth quarter of fiscal 2018, we completed our accounting for the effects of the Tax Reform Act and recorded a discrete net tax benefit of $6.1 million, including finalization of deferred tax remeasurement, transition tax and a rate change for foreign exchange remeasurement on previously taxed earnings and profits.

In addition, during 2018, we finalized our policy and have elected to use the period cost method for GILTI provisions and therefore have not recorded deferred taxes for basis differences expected to reverse in future periods.

A reconciliation of the statutory federal income tax rate to our effective tax rate is as follows:

Fiscal Year

 

    

2019

    

2018

    

2017

 

Federal statutory rate

21.0

%

21.0

%

33.7

%

State income taxes, net of federal benefit

 

(1.5)

4.1

1.4

Uncertain tax positions

 

0.1

(0.5)

(15.1)

Foreign tax rate differential

 

(21.7)

4.3

(1.9)

Amortizable tax goodwill

 

(4.3)

(1.2)

Foreign income taxed in the U.S.

15.8

1.8

Return to provision

(6.5)

(4.2)

(2.5)

Valuation allowance

 

34.5

1.0

7.9

Tax credits

 

(45.6)

(6.1)

(9.9)

Impact of change to permanent reinvestment of foreign earnings

2.1

4.6

14.2

Impact of Tax Reform Act

(5.2)

(0.2)

Inventory donations

(7.1)

(1.7)

(1.3)

Stock compensation

9.2

2.3

Impact of ASC 810

3.7

0.6

Meals and entertainment

 

2.4

0.5

0.4

Other

 

(0.3)

(0.7)

0.7

 

6.1

%

15.2

%

28.5

%

In fiscal 2019, our effective income tax rate was 6.1% and is lower than the U.S. statutory rate primarily due to benefits from foreign tax credits offset by a net increased valuation allowance. In fiscal 2018, our effective income tax rate from continuing operations was 15.2% and is lower than the U.S. statutory rate primarily due to the impact of the Tax Reform Act and usage of tax credits, which are partially offset by state income tax changes related to the Tax Reform Act and foreign earnings with higher tax rates in these jurisdictions.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of February 1, 2020, it is more likely than not that we will realize the benefits of the deferred tax assets, except as discussed below.

During 2019, valuation allowances recorded against deferred tax assets increased by $9.4 million. The increase in valuation allowances related to charitable contributions and various state tax attributes of $14.7 million and was primarily driven by uncertainties regarding the future realization of tax attributes recorded in multiple jurisdictions.  The increase in valuation allowances was partially offset by a decrease of $5.3 million related to tax credits due to sustained profitability which allows us to release the valuation allowance on these tax attributes.  

At February 1, 2020, we had tax attributes including federal net operating loss (“NOL”), state NOL and U.S. capital loss carryforwards of approximately $6.2 million, $236.7 million and $21.1 million, respectively.  The federal NOL can be can be carried forward indefinitely, the state NOL carryforwards will expire between fiscal 2020 and 2039, and the capital loss can be carried forward 5 years.  At February 1, 2020, we also had $15.8 million of foreign tax credit carryforwards, which will expire between fiscal 2021 and fiscal 2029.

At February 1, 2020 and February 2, 2019, we had net non-current deferred tax liabilities of $22.0 million and $43.0 million, respectively.  We have a valuation allowance of $30.1 million against certain state deferred tax assets and foreign tax credits for which we have concluded it is more likely than not that we will not recognize the asset.

Total deferred tax assets and liabilities and the related temporary differences as of February 1, 2020 and February 2, 2019 were as follows (in thousands):

    

February 1,

    

February 2,

 

2020

2019

 

Deferred tax assets:

Accrued rent and other expenses

$

20,439

$

27,098

Accrued compensation

 

10,408

 

17,667

Accrued inventory reserves

 

8,159

 

5,654

Interest rate swap

8,649

1,558

Operating lease liabilities

 

218,257

 

9,249

Other

 

98

 

6,617

Tax attributes

 

56,955

 

32,030

Total deferred tax assets

 

322,965

 

99,873

Valuation allowance

 

(30,123)

 

(20,686)

Net deferred tax assets

 

292,842

 

79,187

Deferred tax liabilities:

Property and equipment

 

(40,656)

 

(47,287)

Capitalized inventory costs

 

(12,050)

 

(12,538)

Intangibles

 

(40,558)

 

(41,176)

Investment in foreign subsidiaries

(11,239)

(12,321)

Operating lease right-of-use assets

(206,023)

Other

(4,356)

(8,863)

Total deferred tax liabilities

 

(314,882)

 

(122,185)

Net deferred tax liabilities

$

(22,040)

$

(42,998)

In accordance with the guidance regarding accounting for uncertainty in income taxes, we classify uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year and recognize interest and/or penalties related to income tax matters in income tax expense. As of February 1, 2020 and February 2, 2019, the total amount of accrued interest related to uncertain tax positions was $0.1 million and $0.1 million, respectively.

The following table summarizes the activity related to our uncertain tax positions (in thousands):

    

February 1,

    

February 2,

 

2020

2019

 

Gross uncertain tax positions, beginning balance

$

619

$

1,154

Increase in tax positions for prior years

 

 

Decrease in tax positions for prior years

 

 

(535)

Increase in tax positions due to business combinations

Increase in tax positions for current year

 

 

Decrease in tax positions for current year

 

 

Settlements

 

 

Lapse from statute of limitations

 

 

Gross uncertain tax positions, ending balance

$

619

$

619

Of the $0.6 million in uncertain tax positions as of February 1, 2020, $0.6 million, if recognized, would reduce our income tax expense and effective tax rate. We do not expect material changes in the total amount of uncertain tax positions within the next 12 months as the outcome of tax matters is uncertain and unforeseen results can occur.

We are subject to routine compliance examinations on tax matters by various tax jurisdictions in the ordinary course of business.  Tax return years which are open to examinations range from fiscal 2014 through fiscal 2018.  Our tax jurisdictions primarily consist of the United States, Canada, the United Kingdom, and Hong Kong as well as their states, territories, provinces and other political subdivisions. We are currently under IRS examination for fiscal year 2016.  A number of U.S. state examinations are ongoing.