EXPRESS, INC. - 10-K filing on 2016-03-30

Income Taxes

12 Months Ended

Jan. 30, 2016

The provision for income taxes consists of the following:



	2015			2014			2013
Current:	(in thousands)
U.S. federal	$	72,222		$	29,884		$	64,071
U.S. state and local	12,425			6,491			12,815
Foreign	224			565			548
Total	84,871			36,940			77,434
Deferred:
U.S. federal	(8,715		)	6,884			757
U.S. state and local	(1,983		)	(558		)	(1,541		)
Foreign	(2		)	(35		)	(23		)
Total	(10,700		)	6,291			(807		)
Provision for income taxes	$	74,171		$	43,231		$	76,627

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



	2015		2014		2013
Federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax effect	3.6	%	4.1	%	3.8	%
Other items, net	0.3	%	(0.3	)%	0.9	%
Effective tax rate	38.9	%	38.8	%	39.7	%

The following table provides the effect of temporary differences that created deferred income taxes as of January 30, 2016 and January 31, 2015. 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 30, 2016			January 31, 2015
	(in thousands)
Deferred tax assets:
Accrued expenses and deferred compensation	$	40,540		$	30,667
Rent	28,551			25,605
Lease financing obligations	28,492			29,072
Inventory	1,778			—
Other	1,774			2,104
Tax credits/carryforwards	214			—
Valuation allowance	(2,081		)	(1,668		)
Total deferred tax assets	99,268			85,780

Deferred tax liabilities:
Inventory	—			5,915
Prepaid expenses	4,177			3,762
Intangible assets	17,996			13,844
Property and equipment	55,868			51,732
Total deferred tax liabilities	78,041			75,253
Net deferred tax asset	$	21,227		$	10,527

The net increase in the total valuation allowance attributable to foreign operations for the years ended January 30, 2016, and January 31, 2015 was $0.4 million and $0.3 million, respectively. The foreign capital loss carryforward as of January 30, 2016 and January 31, 2015 was $0.3 million and $0.4 million, respectively. The Company has established a full valuation allowance related to the foreign capital loss carryforward. The foreign capital loss carryforward period is indefinite.

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.

Prior to the early adoption of ASU 2015-17 on a prospective basis,net deferred tax assets were classified within the Consolidated Balance Sheets and were 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 were classified within the Consolidated Balance Sheets and were included in accrued expenses for current deferred tax liabilities and other long-term liabilities for non-current deferred tax liabilities. All net deferred tax assets and liabilities are now classified as non-current within the Consolidated Balance Sheets. Refer to Note 1 of the Consolidated Financial Statements for additional information on the adoption of ASU 2015-17. The following table summarizes net deferred tax assets:



	January 30, 2016		January 31, 2015
	(in thousands)
Current deferred tax liability	$	—	$	(1,844	)
Non-current deferred tax asset	21,227		12,371
Net deferred tax assets	$	21,227	$	10,527

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 is as follows:



	January 30, 2016			January 31, 2015			February 1, 2014
	(in thousands)
Unrecognized tax benefits, beginning of year	$	1,651		$	4,091		$	2,313
Gross addition for tax positions of the current year	767			346			1,469
Gross addition for tax positions of the prior year	7,174			129			309
Settlements	(57		)	(2,137		)	—
Reduction for tax positions of prior years	(29		)	(628		)	—
Lapse of statute of limitations	—			(150		)	—
Unrecognized tax benefits, end of year	$	9,506		$	1,651		$	4,091

The amount of the above unrecognized tax benefits as of January 30, 2016, January 31, 2015, and February 1, 2014 that would impact the Company's effective tax rate, if recognized, is $9.5 million, $1.7 million, and $4.1 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 was $0.7 million for 2015 and immaterial for 2014 and 2013. As of January 30, 2016 and January 31, 2015, the Company had accrued interest of $0.8 million and $0.1 million, respectively.

The Company is subject to examination by the IRS for years subsequent to 2012. The Company is also generally subject to examination by various U.S. state and local and non-U.S. tax jurisdictions for the years subsequent to 2011. There are ongoing U.S. state and local audits covering tax years 2012 through 2014. The Company does not expect the results from any income tax audit to have a material impact on the Company’s financial statements.

The Company believes that over the next twelve months, it is reasonably possible that up to $7.4 million of unrecognized tax benefits could be resolved as the result of the expiration of the statute of limitations. Final settlement of these issues 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.