EXPRESS, INC. - 10-K filing on 2013-04-02

Income Taxes

12 Months Ended

Feb. 02, 2013

Prior to May 2, 2010, the Company was treated as a partnership for federal income tax purposes and, therefore, had not been subject to federal and state income tax (subject to exception in a limited number of state and local jurisdictions). On May 12, 2010, the Company elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code ("IRC"), effective May 2, 2010 and was, therefore, subject to federal and state tax expense beginning May 2, 2010.

The Reorganization, for tax purposes, was deemed a contribution by Express Parent of its assets and liabilities to the Company, followed by the liquidation of Express Parent. The Reorganization resulted in a taxable gain to Express Parent. Except in those few jurisdictions where Express Parent was taxed directly, the taxable gain flowed through to the members due to Express Parent's partnership tax treatment. The taxable gain correspondingly increased the tax basis in the assets acquired by the Company in the Reorganization. Also, as a result of the Reorganization, the Company had liabilities due to a management holding company and an affiliate of Golden Gate totaling $0.8 million and $4.8 million, respectively, as of January 29, 2011. The Company settled the liability to the management holding company by making a final cash payment during the first quarter of 2011. Additionally, the Company settled the gross liability payable to an affiliate of Golden Gate by making a final cash payment during the second quarter of 2011. In the first quarter of 2012, the Company recorded an additional pre-IPO tax liability of $0.3 million with an offsetting receivable from an affiliate of Golden Gate. The receivable from the affiliate of Golden Gate was settled in the second quarter of 2012.

The provision for income taxes consists of the following:



	2012			2011			2010
Current:	(in thousands)
U.S. federal	$	74,306		$	76,984		$	25,623
U.S. state and local	14,296			18,048			7,746
Foreign	165			156			—
Total	88,767			95,188			33,369
Deferred:
U.S. federal	3,346			714			(16,085		)
U.S. state and local	615			(949		)	(2,930		)
Foreign	(24		)	(85		)	—
Total	3,937			(320		)	(19,015		)
Provision for income taxes	$	92,704		$	94,868		$	14,354

The following table provides a reconciliation between the statutory federal income tax rate and the effective tax rate:



	2012		2011		2010
Federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax effect	4.3	%	4.7	%	4.5	%
Entity status change from partnership	—	%	—	%	(22.5	)%
Partnership income not taxable	—	%	—	%	(7.6	)%
Other items, net	0.7	%	0.6	%	0.7	%
Effective tax rate	40.0	%	40.3	%	10.1	%

The following table provides the effect of temporary differences that created deferred income taxes as of February 2, 2013 and January 28, 2012. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carry-forwards at the end of the respective periods.



	February 2, 2013			January 28, 2012
	(in thousands)
Deferred tax assets:
Accrued expenses and deferred compensation	$	24,776		$	22,417
Rent	12,703			7,831
Inventory	—			1,946
Other	164			—
Tax credits/carryforwards	478			114
Valuation allowance	(978		)	(290		)
Total deferred tax assets	37,143			32,018

Deferred tax liabilities:
Inventory	2,884			—
Prepaid expenses	2,895			3,767
Intangible assets	5,981			1,764
Property and equipment	9,372			5,710
Other	—			829
Total deferred tax liabilities	21,132			12,070
Net deferred tax asset/(liability)	$	16,011		$	19,948

Included in the valuation allowance against deferred tax assets are net operating loss carryovers from foreign subsidiaries totaling $0.2 million and $0.1 million as of February 2, 2013 and January 28, 2012, respectively. These net operating loss carryovers begin expiring in 2031.

As of February 2, 2013, the valuation allowance for foreign tax credit carryovers totaled $0.3 million. The Company did not have a valuation allowance for foreign tax credit as of January 28, 2012. The foreign tax credit carryovers begin expiring in 2021.

The amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carryforward periods are reduced or increased or if objective, negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to subjective evidence, such as the Company's projections for growth.

No other valuation allowances have been provided for deferred tax assets because management believes that it is more-likely-than-not that the full amount of the net deferred tax assets will be realized in the future.

Net deferred tax assets are classified within the Consolidated Balance Sheets and are included in other current assets for current deferred tax assets and separately identified as deferred taxes for non-current deferred tax assets. Net deferred tax liabilities are classified within the Consolidated Balance Sheets and are included in accrued expenses for current deferred tax liabilities and other long-term liabilities for non-current deferred tax liabilities. The following table summarizes net deferred tax assets:



	February 2, 2013			January 28, 2012
	(in thousands)
Current deferred tax assets	$	—		$	7,486
Current deferred tax liability	(797		)	—
Non-current deferred taxes	16,808			12,462
Net deferred tax assets	$	16,011		$	19,948

Uncertain Tax Positions

The Company evaluates tax positions using a more-likely-than-not recognition criterion.

A reconciliation of the beginning to ending unrecognized tax benefits amounts are as follows:



	February 2, 2013			January 28, 2012
	(in thousands)
Unrecognized tax benefits, beginning of year	$	1,416		$	144
Gross addition as result of Reorganization	—			—
Gross addition for tax positions of the current year	852			382
Gross addition for tax positions of the prior year	225			1,034
Reductions of tax positions of prior years for:
Changes in judgment/excess reserve	—			(144		)
Settlements during the period	(180		)	—
Lapses of applicable statutes of limitations	—			—
Unrecognized tax benefits, end of year	$	2,313		$	1,416

The amount of the above unrecognized tax benefits as of February 2, 2013 and January 28, 2012 that would impact the Company's effective tax rate, if recognized, is $2.3 million and $1.4 million, respectively.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of net interest in tax expense related to interest and penalties for 2012, 2011, and 2010 was negligible.

The Company does not expect material adjustments to the total amount of unrecognized tax benefits within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.

The Company is currently under examination by the IRS for the period ended January 29, 2011. Tax returns are generally subject to examination for 3 to 5 years after filing of the respective return.

As of February 2, 2013, United States taxes had not been provided on unremitted earnings of subsidiaries operating outside of the United States due to an overall deficit position.