Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted in the United States. The Act includes a number of changes to existing U.S. tax laws that impact the Company including the reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Act also provides for a one-time transition tax on indefinitely reinvested foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including the elimination of certain domestic deductions and credits and additional limitations on the deductibility of executive compensation.

The Company recognized the income tax effects of the Act in its financial statements for the year ended February 3, 2018 in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), which provides SEC staff guidance for the application of ASC Topic 740, "Income Taxes" ("ASC 740"), in the reporting period in which the Act was signed into law. As such, the Company’s Fiscal 2018 financial results reflected the income tax effects of the Act for which accounting under ASC 740 was incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the Act have not been completed and a reasonable estimate could not be determined as of February 3, 2018. The Company's Fiscal 2019 financial results reflected all tax effects from the Act.

The changes to existing U.S. tax laws as a result of the Act, which have the most significant impact on the Company’s provision for income taxes as of February 2, 2019 are as follows:

Reduction of the U.S. Corporate Income Tax Rate

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were adjusted to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a $5.3 million increase in income tax expense for the year ended February 3, 2018 and a corresponding $5.3 million decrease in net deferred tax assets as of February 3, 2018.

Transition Tax on Foreign Earnings

The Company recognized a provisional income tax expense of $4.5 million for the year ended February 3, 2018 related to the one-time transition tax on indefinitely reinvested foreign earnings.

The adjustments to the deferred tax assets and liabilities and the liability for the transition tax on indefinitely reinvested foreign earnings, including the analysis of the Company's ability to fully utilize foreign tax credits associated with the transition tax, are provisional amounts estimated based on information reviewed as of February 3, 2018. The Company recorded an additional expense of $1.3 million in Fiscal 2019, as the one-time transition tax of $5.8 million was finalized.

Note 9

Income Taxes, Continued

The components of earnings from continuing operations before income taxes is comprised of the following:



In thousands	2019			2018		2017
United States	$	84,807		$	58,137	$	98,185
Foreign	(6,548		)	10,852		14,573
Total Earnings from Continuing Operations before Income Taxes	$	78,259		$	68,989	$	112,758

Income tax expense from continuing operations is comprised of the following:



In thousands	2019		2018			2017
Current
U.S. federal	$	13,657	$	25,093		$	24,535
International	1,649		5,421			3,291
State	4,029		3,828			4,687
Total Current Income Tax Expense	19,335		34,342			32,513
Deferred
U.S. federal	3,632		1,491			4,704
International	2,594		(3,498		)	1,182
State	1,474		(54		)	1,477
Total Deferred Income Tax Expense (Benefit)	7,700		(2,061		)	7,363
Total Income Tax Expense – Continuing Operations	$	27,035	$	32,281		$	39,876

Discontinued operations were recorded net of income tax expense (benefit) of approximately $(27.5) million, $(22.7) million and $13.4 million in Fiscal 2019, 2018 and 2017, respectively.

As a result of the exercise of stock options and vesting of restricted stock during Fiscal 2017, the Company realized an additional income tax benefit of approximately $0.3 million. These tax benefits are reflected as an adjustment to additional paid-in capital prior to Fiscal 2018. In Fiscal 2019 and 2018, the Company recognized additional income tax expense of $0.4 million and $2.2 million, respectively, due to the write-off of deferred tax assets in excess of the benefits of the tax deduction resulting from share-based compensation for vested awards as a component of the provision for income taxes following the adoption of ASC 718 in the first quarter of Fiscal 2018.

Note 9

Income Taxes, Continued

Deferred tax assets and liabilities are comprised of the following:



	February 2,			February 3,
In thousands	2019			2018
Identified intangibles	$	(3,265	)	$	(4,821	)
Prepaids	(1,638		)	(2,226		)
Convertible bonds	—			(372		)
Tax over book depreciation	—			(6,167		)
Pensions	(1,802		)	—
Gross deferred tax liabilities	(6,705		)	(13,586		)
Pensions	—			562
Deferred rent	11,081			14,214
Book over tax depreciation	2,739			—
Expense accruals	5,061			6,896
Uniform capitalization costs	7,938			9,549
Provisions for discontinued operations and restructurings	730			1,045
Inventory valuation	908			1,798
Tax net operating loss and credit carryforwards	15,766			3,682
Allowances for bad debts and notes	318			382
Deferred compensation and restricted stock	3,814			4,709
Other	39			2,177
Gross deferred tax assets	48,394			45,014
Deferred tax asset valuation allowance	(20,354		)	(6,351		)
Deferred tax asset net of valuation allowance	28,040			38,663
Net Deferred Tax Assets	$	21,335		$	25,077

The deferred tax balances have been classified in the Consolidated Balance Sheets as follows:



	2019		2018
Net non-current asset	$	21,335	$	25,077
Net non-current liability	—		—
Net Deferred Tax Assets	$	21,335	$	25,077

Note 9

Income Taxes, Continued

Reconciliation of the United States federal statutory rate to the Company’s effective tax rate from continuing operations is as follows:



	2019		2018		2017
U. S. federal statutory rate of tax	21.00	%	33.72	%	35.00	%
State taxes (net of federal tax benefit)	5.67		3.58		4.07
Foreign rate differential	(2.56	)	(5.66	)	(3.38	)
Change in valuation allowance	11.51		1.95		1.18
Impact of statutory rate change	—		7.74		—
Credits	(2.65	)	(1.80	)	(1.20	)
Permanent items	2.27		2.77		1.37
Uncertain federal, state and foreign tax positions	(1.68	)	(1.36	)	(1.21	)
Transition tax	2.23		6.47		—
Other	(1.24	)	(0.62	)	(0.47	)
Effective Tax Rate	34.55	%	46.79	%	35.36	%

The provision for income taxes resulted in an effective tax rate for continuing operations of 34.55% for Fiscal 2019, compared with an effective tax rate of 46.79% for Fiscal 2018. The tax rate for Fiscal 2019 was lower primarily due the reduction of the U.S. federal statutory rate from 35% to 21%.

As of February 2, 2019, February 3, 2018 and January 28, 2017, the Company had state net operating loss carryforwards of $5.7 million (against which a $3.3 million valuation allowance has been provided), $0.9 million and $0.4 million, respectively, which expire in fiscal years 2022 through 2039, and a federal net operating loss carryforward of $15.8 million for the fiscal year ended February 2, 2019, which has no expiration.

As of February 2, 2019, February 3, 2018 and January 28, 2017, the Company had state tax credits of $0.4 million at the end of each year. These credits expire in fiscal years 2020 through 2025.

As of February 2, 2019, February 3, 2018 and January 28, 2017, the Company had foreign net operating loss carryforwards of $28.4 million, $10.4 million and $7.3 million, respectively, which expire in 20 years.

As of February 2, 2019, the Company has provided a total valuation allowance of approximately $20.4 million on deferred tax assets associated primarily with foreign and state net operating losses for which management has determined it is more likely than not that the deferred tax assets will not be realized. The $14.0 million net increase in valuation allowance during Fiscal 2019 from the $6.4 million provided for as of February 3, 2018 relates to increases of $5.3 million in foreign net operating losses and increases of $5.4 million in fixed asset-related and other deferred tax assets that will likely never be realized. The Company has also provided a valuation on state net operating loss carryforwards of $3.3 million. Management believes that it is more likely than not that the remaining deferred tax assets will be fully realized.

Note 9

Income Taxes, Continued

Because of the transition tax on deemed repatriation required by the Act, the Company was subject to tax in Fiscal 2018 on the entire amount of its previously undistributed earnings from foreign subsidiaries as of December 31, 2017. Beginning in 2018, the Act will generally provide a 100% deduction for U.S. federal tax purposes of dividends received by the Company from its foreign subsidiaries.

The Act established new tax rules designed to tax U.S. companies on Global Intangible Low-Taxed Income ("GILTI") earned by foreign subsidiaries. The Company elected, as permitted in FASB Staff Q&A - Topic 740 - No. 5, to treat any future GILTI tax liabilities as period costs and will expense those liabilities in the period incurred. The Company therefore will not record deferred taxes associated with the GILTI provision for the Act. Because of losses in foreign jurisdictions, there was no liability for GILTI in Fiscal 2019

The methodology in ASC 740 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for Fiscal 2019, 2018 and 2017.



In thousands	2019			2018			2017
Unrecognized Tax Benefit – Beginning of Period	$	3,701		$	5,622		$	14,639
Gross Increases (Decreases) – Tax Positions in a Prior Period	—			(15		)	(7,585		)
Gross Increases (Decreases) – Tax Positions in a Current Period	(638		)	(166		)	491
Settlements	—			—			(742		)
Lapse of Statutes of Limitations	(1,228		)	(1,740		)	(1,181		)
Unrecognized Tax Benefit – End of Period	$	1,835		$	3,701		$	5,622

The amount of unrecognized tax benefits as of February 2, 2019, February 3, 2018 and January 28, 2017 which would impact the annual effective rate if recognized were $0.6 million, $0.6 million and $2.5 million, respectively. The amount of unrecognized tax benefits may change during the next twelve months but the Company does not believe the change, if any, will be material to the Company's consolidated financial position or results of operations.

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense on the Consolidated Statements of Operations. Related to the uncertain tax benefits noted above, the Company recorded interest and penalties of approximately $0.1 million

benefit and $0.0 million benefit, respectively, during Fiscal 2019, $0.2 million benefit and $0.0 million benefit, respectively, during Fiscal 2018 and $0.8 million benefit and $0.0 million benefit, respectively,

during Fiscal 2017. The Company recognized a liability for accrued interest and penalties of $0.4 million and $0.1 million, respectively, as of February 2, 2019, $0.4 million and $0.1 million, respectively, as of February 3, 2018, and $0.6 million and $0.1 million, respectively, as of January 28, 2017. The

Note 9

Income Taxes, Continued

long-term portion of the unrecognized tax benefits and related accrued interest and penalties are included in deferred rent and other long-term liabilities on the Consolidated Balance Sheets.

The Company and its subsidiaries file income tax returns in federal and in many state and local jurisdictions as well as foreign jurisdictions. With few exceptions, the Company's state and local income tax returns for fiscal years ended January 31, 2016 and beyond remain subject to examination. In addition, the Company has subsidiaries in various foreign jurisdictions that have statutes of limitation generally ranging from two to six years. The Company's US federal income tax returns for the fiscal years ended January 31, 2016 and beyond remain subject to examination.