EXPRESS, INC. - 10-K filing on 2015-03-27

Income Taxes

12 Months Ended

Jan. 31, 2015

The provision for income taxes consists of the following:



	2014			2013			2012
Current:	(in thousands)
U.S. federal	$	29,884		$	64,071		$	74,306
U.S. state and local	6,491			12,815			14,296
Foreign	565			548			165
Total	36,940			77,434			88,767
Deferred:
U.S. federal	6,884			757			3,346
U.S. state and local	(558		)	(1,541		)	615
Foreign	(35		)	(23		)	(24		)
Total	6,291			(807		)	3,937
Provision for income taxes	$	43,231		$	76,627		$	92,704

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



	2014		2013		2012
Federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax effect	4.1	%	3.8	%	4.3	%
Other items, net	(0.3	)%	0.9	%	0.7	%
Effective tax rate	38.8	%	39.7	%	40.0	%

The following table provides the effect of temporary differences that created deferred income taxes as of January 31, 2015 and February 1, 2014. 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.



	January 31, 2015			February 1, 2014
	(in thousands)
Deferred tax assets:
Accrued expenses and deferred compensation	$	30,667		$	27,554
Rent	25,605			21,854
Lease financing obligations	29,072			5,972
Other	2,104			1,515
Tax credits/carryforwards	—			214
Valuation allowance	(1,668		)	(1,366		)
Total deferred tax assets	85,780			55,743

Deferred tax liabilities:
Inventory	5,915			2,532
Prepaid expenses	3,762			4,827
Intangible assets	13,844			9,530
Property and equipment	51,732			22,036
Total deferred tax liabilities	75,253			38,925
Net deferred tax asset	$	10,527		$	16,818

The net deferred tax asset at February 1, 2014 shown above excludes a foreign deferred tax asset of $0.4 million and a corresponding valuation allowance of $0.4 million attributable to other comprehensive income for the period ended February 1, 2014.

The net increase in the total valuation allowance attributable to foreign operations for the years ended January 31, 2015, and February 1, 2014 was $0.3 million and $0.4 million, respectively. The foreign capital loss carryforward as of January 31, 2015 and February 1, 2014 was $0.4 million. The Company has established a full valuation allowance related to the foreign capital loss carryforward. The foreign capital loss carryforward period is indefinite.

The foreign tax credit carryforward as of February 1, 2014 was $0.2 million and was offset by a full valuation allowance. As of January 31, 2015, the Company fully utilized its foreign tax credit carryforward.

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.

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



	January 31, 2015			February 1, 2014
	(in thousands)
Current deferred tax liability	$	(1,844	)	$	(740	)
Non-current deferred taxes	12,371			17,558
Net deferred tax assets	$	10,527		$	16,818

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 are as follows:



	January 31, 2015			February 1, 2014		January 28, 2012
	(in thousands)
Unrecognized tax benefits, beginning of year	$	4,091		$	2,313	$	1,416
Gross addition for tax positions of the current year	346			1,469		852
Gross addition for tax positions of the prior year	129			309		225
Settlements	(2,137		)	—		(180		)
Reduction for tax positions of prior years	(628		)	—		—
Lapse of statute of limitations	(150		)	—		—
Unrecognized tax benefits, end of year	$	1,651		$	4,091	$	2,313

The amount of the above unrecognized tax benefits as of January 31, 2015, February 1, 2014, and February 2, 2013 that would impact the Company's effective tax rate, if recognized, is $1.7 million, $4.1 million, and $2.3 million, respectively.

During the second quarter of 2014, the Internal Revenue Service (IRS) completed its examination of the Company’s 2012, 2011, and 2010 income tax returns. The Company released gross uncertain tax positions of $2.1 million and the related accrued interest of $0.1 million as a result of the conclusion of this examination.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The total amount of net interest in tax expense related to interest and penalties included in the consolidated statements of comprehensive income for 2014, 2013, and 2012 was immaterial. As of January 31, 2015 and February 1, 2014, the Company had accrued interest of $0.1 million and $0.2 million, respectively.

The Company is subject to examination by the IRS for years subsequent to 2012. The Company is also generally subject to various U.S. state and local income tax and non-U.S. tax jurisdictions for the years subsequent to 2010.

Over the next twelve months, it is reasonably possible that the resolution of state tax examinations could reduce the Company's unrecognized tax benefits by $0.1 million. Final settlement of these audits may result in payments that are more or less than this amount, but the Company does not anticipate the resolution of these matters will result in a material change to its consolidated financial position or results of operations.

The Company's Canadian subsidiary has an accumulated deficit, thus we have not provided for income taxes in the United States on undistributed earnings.