Income Taxes
Taxes on Income
Domestic and foreign pretax (loss) income is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| | (millions) |
Domestic | | $ | (1,451.0 | ) | | $ | (56.0 | ) | | $ | (303.1 | ) |
Foreign | | 36.8 |
| | 47.7 |
| | 62.5 |
|
Total loss before (benefit) provision for income taxes | | $ | (1,414.2 | ) | | $ | (8.3 | ) | | $ | (240.6 | ) |
The (benefit) provision for current and deferred income taxes is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
Current: | | (millions) |
Federal | | $ | 6.9 |
| | $ | 7.7 |
| | $ | (20.8 | ) |
State and local | | 12.6 |
| | 10.2 |
| | 8.8 |
|
Foreign | | 4.9 |
| | 12.5 |
| | 14.8 |
|
| | 24.4 |
| | 30.4 |
| | 2.8 |
|
Deferred: | | |
| | |
| | |
|
Federal | | (308.3 | ) | | (21.7 | ) | | 0.9 |
|
State and local | | (64.8 | ) | | (3.2 | ) | | (6.5 | ) |
Foreign | | 1.8 |
| | (1.9 | ) | | (1.0 | ) |
| | (371.3 | ) | | (26.8 | ) | | (6.6 | ) |
Total (benefit) provision for income taxes | | $ | (346.9 | ) | | $ | 3.6 |
| | $ | (3.8 | ) |
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and income taxes provided are as set forth below: |
| | | | | | | | | | | |
| Fiscal Years Ended |
| July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| (millions) |
Benefit for income taxes at the U.S. federal statutory rate | $ | (495.0 | ) | | $ | (2.9 | ) | | $ | (84.3 | ) |
Increase (decrease) due to: | | | | | |
State and local income taxes, net of federal benefit | (39.7 | ) | | 2.4 |
| | 4.1 |
|
Tax benefit related to deferred compensation | — |
| | — |
| | (13.7 | ) |
Goodwill impairment | 184.3 |
| | — |
| | 91.6 |
|
Net change relating to uncertain income tax benefits | 3.2 |
| | 3.3 |
| | (0.7 | ) |
Indefinitely reinvested foreign earnings | — |
| | 0.1 |
| | 1.7 |
|
Other – net | 0.3 |
| | 0.7 |
| | (2.5 | ) |
Total (benefit) provision for income taxes | $ | (346.9 | ) | | $ | 3.6 |
| | $ | (3.8 | ) |
As more fully described in Note 6, the Company recorded goodwill impairment charges of $596.3 million during Fiscal 2017, of which $69.8 million for maurices (using the pro rata method) was tax deductible and the remaining $526.5 million was non-deductible for income tax purposes and treated as a permanent item.
Tax Incentives
In connection with the Company’s relocation of its dressbarn and corporate offices to New Jersey, as well as the expansion of its distribution centers in Ohio and Indiana, the Company was approved for various state and local tax incentives. In order to receive these incentives, the Company will generally need to meet certain minimum employment or expenditure commitments, as well as comply with periodic reporting requirements. These incentives, estimated to total approximately $43.2 million, are expected to be recognized over a 10-15 year period. Approximately $6.1 million was recognized in Fiscal 2017, $2.9 million in Fiscal 2016 and $2.0 million in Fiscal 2015.
Deferred Taxes
Significant components of the Company's net deferred tax liabilities are as follows: |
| | | | | | | | |
| | July 29,
2017 | | July 30,
2016 |
Deferred tax assets (a): | | (millions) |
Inventories | | $ | 35.6 |
| | $ | 31.4 |
|
Net operating loss carryforwards and tax credits | | 66.6 |
| | 38.3 |
|
Accrued payroll and benefits | | 83.1 |
| | 91.5 |
|
Share-based compensation | | 25.0 |
| | 24.8 |
|
Straight-line rent | | 62.2 |
| | 57.3 |
|
Federal benefit of uncertain tax positions | | 20.6 |
| | 19.4 |
|
Gift cards and merchandise credits | | 16.8 |
| | 14.3 |
|
Other | | 23.2 |
| | 23.1 |
|
Total deferred tax assets | | 333.1 |
| | 300.1 |
|
Deferred tax liabilities: | | | | |
Depreciation | | 125.0 |
| | 148.9 |
|
Amortization | | 197.7 |
| | 512.8 |
|
Foreign unremitted earnings | | 47.1 |
| | 40.1 |
|
Other | | 21.7 |
| | 22.7 |
|
Total deferred tax liabilities | | 391.5 |
| | 724.5 |
|
Valuation allowance | | (16.9 | ) | | (12.9 | ) |
Net deferred tax liabilities | | $ | (75.3 | ) | | $ | (437.3 | ) |
_______
(a) Deferred tax assets of $4.0 million as of July 29, 2017 and $4.9 million as of July 30, 2016 are included within Other assets.
As of July 29, 2017, we have not provided deferred U.S. income taxes on approximately $37.6 million of undistributed earnings from non-U.S. subsidiaries, as these earnings are indefinitely reinvested. If the Company elects to distribute these foreign earnings in the future, they could be subject to additional income taxes. Determination of the amount of any unrecognized deferred income tax liability is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Net Operating Loss Carry Forwards
As of July 29, 2017, the Company had U.S. Federal net operating loss carryforwards of $79.3 million and state net operating loss carryforwards of $278.3 million that are available to offset future U.S. Federal and state taxable income. The U.S. Federal net operating losses have a twenty-year carryforward period, with $52.2 million to expire in fiscal 2036 and $27.1 million to expire in fiscal 2037. The state net operating losses have carryforward periods of five to twenty years, with varying expiration dates and amounts as follows: $25.3 million in one to five years, $16.0 million in six to ten years, $43.3 million in eleven to fifteen years and $193.7 million in sixteen to twenty years.
Uncertain Income Tax Benefits
Reconciliation of Liabilities
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is presented below:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| | (millions) |
Unrecognized tax benefit beginning balance | | $ | 43.2 |
| | $ | 34.1 |
| | $ | 29.9 |
|
Additions related to the ANN Acquisition | | — |
| | 9.6 |
| | — |
|
Additions related to current period tax positions | | 2.0 |
| | 2.2 |
| | 1.6 |
|
Additions related to tax positions in prior years | | 1.9 |
| | 1.0 |
| | 6.7 |
|
Reductions related to prior period tax positions | | (0.2 | ) | | (3.0 | ) | | (3.2 | ) |
Reductions related to settlements with taxing authorities | | (0.1 | ) | | — |
| | (0.3 | ) |
Reductions related to expiration of statute of limitations | | (1.5 | ) | | (0.7 | ) | | (0.6 | ) |
Unrecognized tax benefit ending balance | | $ | 45.3 |
| | $ | 43.2 |
| | $ | 34.1 |
|
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits is presented below:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| | (millions) |
Accrued interest and penalties beginning balance | | $ | 17.2 |
| | $ | 11.5 |
| | $ | 13.8 |
|
Additions related to the ANN Acquisition | | — |
| | 4.3 |
| | — |
|
Additions (reductions) charged to expense, net | | 2.2 |
| | 1.4 |
| | (2.3 | ) |
Accrued interest and penalties ending balance | | $ | 19.4 |
| | $ | 17.2 |
| | $ | 11.5 |
|
The Company’s liability for unrecognized tax benefits (including accrued interest and penalties), which is primarily included in Other non-current liabilities in the accompanying consolidated balance sheets, was $61.1 million as of July 29, 2017 and $56.8 million as of July 30, 2016.
Future Changes in Unrecognized Tax Benefits
The amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company anticipates that the balance of the liability for unrecognized tax benefits will decrease by approximately $2.5 million during the next twelve months. However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future. The Company’s portion of gross unrecognized tax benefits that would affect its effective tax rate, including interest and penalties, is $40.7 million.
The Company files tax returns in the U.S. federal and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2010.