Bath & Body Works, Inc. - 10-K filing on 2014-03-21

Income Taxes

12 Months Ended

Feb. 01, 2014

The following table provides the components of the Company’s provision for income taxes for 2013, 2012 and 2011:



	2013		2012			2011
	(in millions)
Current:
U.S. Federal	$	407	$	432		$	357
U.S. State	90		67			46
Non-U.S.	28		18			11
Total	525		517			414
Deferred:
U.S. Federal	11		14			6
U.S. State	3		4			1
Non-U.S.	4		(7		)	(44		)
Total	18		11			(37		)
Provision for Income Taxes	$	543	$	528		$	377

The Non-U.S. component of pre-tax income, arising principally from overseas operations, was income of $131 million for 2013, income of $1 million for 2012 and a loss of $37 million for 2011. The 2012 income included the impact of the $93 million impairment of goodwill and other intangible assets at La Senza. The 2011 loss included the impact of the $232 million impairment of goodwill and other intangible assets at La Senza as well as the Non-U.S. portion of the gain on the divestiture of the third-party apparel sourcing business of $105 million.

The 2011 Non-U.S. deferred benefit of $44 million is primarily the result of the reversal of a deferred tax liability associated with the La Senza trade name established upon the acquisition of La Senza.

The Company's income taxes payable has been reduced by the excess tax benefits from employee stock plan awards. For stock options, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and exercise. For restricted stock, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and vesting. The Company had net excess tax benefits from equity awards of $36 million, $116 million and $48 million in 2013, 2012 and 2011, respectively, which were reflected as increases to equity.

The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for 2013, 2012 and 2011:



	2013		2012		2011
Federal Income Tax Rate	35.0	%	35.0	%	35.0	%
State Income Taxes, Net of Federal Income Tax Effect	3.8	%	4.0	%	4.0	%
Impact of Non-U.S. Operations	(1.4	)%	1.1	%	(2.2	)%
Express Charitable Contribution	—	%	—	%	(5.0	)%
Non-deductible Impairment of Goodwill and Other Intangible Assets	—	%	2.4	%	4.3	%
Non-U.S. Portion of the Divestiture of Third-party Apparel Sourcing Business	—	%	—	%	(3.0	)%
Other Items, Net	0.1	%	(1.3	)%	(2.4	)%
Effective Tax Rate	37.5	%	41.2	%	30.7	%

Deferred Taxes

The following table provides the effect of temporary differences that cause deferred income taxes as of February 1, 2014 and February 2, 2013. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective year.



	February 1, 2014									February 2, 2013
	Assets			Liabilities			Total			Assets			Liabilities			Total
	(in millions)
Leases	$	46		$	—		$	46		$	43		$	—		$	43
Non-qualified Retirement Plan	94			—			94			86			—			86
Property and Equipment	—			(219		)	(219		)	—			(190		)	(190		)
Goodwill	—			(15		)	(15		)	—			(15		)	(15		)
Trade Names and Other Intangibles	—			(139		)	(139		)	—			(138		)	(138		)
State Net Operating Loss Carryforwards	21			—			21			23			—			23
Non-U.S. Operating Loss Carryforwards	161			—			161			151			—			151
Valuation Allowance	(183		)	—			(183		)	(171		)	—			(171		)
Other, Net	71			—			71			67			—			67
Total Deferred Income Taxes	$	210		$	(373	)	$	(163	)	$	199		$	(343	)	$	(144	)

As of February 1, 2014, the Company had available for state income tax purposes net operating loss carryforwards which expire, if unused, in the years 2014 through 2033. The Company has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance has been provided for the deferred tax asset.

As of February 1, 2014, the Company had available for non-U.S. tax purposes net operating loss carryforwards which expire, if unused, in the years 2027 through 2033. The Company has determined that it is more likely than not that all of the net operating loss carryforwards will not be realized and a valuation allowance has been provided for the net deferred tax assets, including the net operating loss carryforwards, of the related tax loss entities.

As of February 1, 2014, accumulated undistributed earnings from non-U.S. subsidiaries are $113 million. Any unrecognized deferred income tax liability resulting from these foreign earnings is not expected to reverse in the foreseeable future; furthermore, the undistributed foreign earnings are permanently 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 on these undistributed foreign earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

Income tax payments were $468 million for 2013, $336 million for 2012 and $400 million for 2011.

Uncertain Tax Positions

The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal, state & non-U.S. tax jurisdictions for 2013, 2012 and 2011, without interest and penalties:



	2013			2012			2011
	(in millions)
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year	$	185		$	146		$	147
Increases in Unrecognized Tax Benefits for Prior Years	39			13			4
Decreases in Unrecognized Tax Benefits for Prior Years	(54		)	(19		)	(33		)
Increases in Unrecognized Tax Benefits as a Result of Current Year Activity	37			52			45
Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities	(34		)	(1		)	(9		)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations	(6		)	(6		)	(8		)
Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year	$	167		$	185		$	146

Of the $167 million, $185 million and $146 million of total unrecognized tax benefits at February 1, 2014, February 2, 2013, and January 28, 2012, respectively, approximately $143 million, $160 million and $131 million, respectively, represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. These amounts are net of the offsetting tax effects from other tax jurisdictions.

Of the total unrecognized tax benefits, it is reasonably possible that $118 million could change in the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.

The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. The Company recognized interest and penalties expense (benefit) of $4 million, $1 million and $(7) million in 2013, 2012, and 2011, respectively. The Company has accrued approximately $30 million and $26 million for the payment of interest and penalties as of February 1, 2014 and February 2, 2013, respectively. Accrued interest and penalties are included within Other Long-term Liabilities on the Consolidated Balance Sheets.

The Company files U.S. federal income tax returns as well as income tax returns in various states and in non-U.S. jurisdictions. At the end of 2013, the Company was subject to examination by the IRS for 2010 through 2012. The Company is also subject to various U.S. state and local income tax examinations for the years 2004 to 2012. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2003 to 2012. In some situations, the Company determines that it does not have a filing requirement in a particular tax jurisdiction. Where no return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, additional years may be reviewed by the tax authority. The Company believes it has appropriately accounted for uncertainties related to this issue.