Income Taxes

U.S. Tax Reform made significant changes in the taxation of our domestic and foreign earnings. The federal tax was lowered from 35% to 21% effective January 1, 2018, resulting in a blended federal rate applicable to our fiscal year ended February 3, 2018 to reflect the weighted average of the rate applicable to the period prior to the effective date and the period on and after the effective date. The change in the federal tax rate also required revaluation of our deferred tax assets and liabilities to reflect the enacted rate at which we expect those differences to reverse. U.S. Tax Reform moves the U.S. to a territorial taxation system under which the earnings of foreign subsidiaries will generally not be subject to U.S. tax upon distribution and imposed a one-time transition tax on the amount of previously untaxed earnings of those foreign subsidiaries measured as of November 2, 2017 or December 31, 2017, whichever resulted in the greater taxable amount. Additional changes included the increase in bonus depreciation available for certain assets acquired after September 27, 2017 and limitations on the deduction for certain expenses, including executive compensation and interest incurred in taxable years beginning on or after January 1, 2018. New taxes were imposed related to foreign income including, for years beginning after December 31, 2017, a tax on global intangible low-taxed income (“GILTI”) and disallowance of deduction for certain payments (the base erosion anti-abuse tax, or “BEAT”) and new deductions enacted for certain foreign-derived intangible income (“FDII”). As a result of the provisional revaluation impact on our deferred taxes and certain other items related to U.S. Tax Reform, we recognized a reduction in tax expense of $11.5 million in our Fiscal 2017 statement of operations.

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides us with up to one year to finalize accounting for the impacts of U.S. Tax Reform. Since our initial accounting for U.S Tax Reform impact is incomplete, we may include provisional amounts when reasonable estimates can be made or continue to apply the prior tax law if a reasonable estimate cannot be made. We have estimated provisional tax amounts related to our deferred income tax assets and liabilities, including the impacts of the change in corporate tax rate, executive compensation, our indefinite reinvestment assertion, the transition tax, GILTI, BEAT, and FDII. We have not yet elected an accounting policy related to how we will account for GILTI and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements as of February 3, 2018. We are still finalizing our calculations related to the impact of U.S. Tax Reform on our deferred tax assets and liabilities. The final impact of U.S. Tax Reform may differ from our provisional amounts recognized in Fiscal 2017 due to additional regulatory guidance that may be issued, us obtaining additional information to refine our estimated tax amounts and changes in current interpretations and assumptions. We expect to finalize our accounting for the impacts of U.S. Tax Reform during Fiscal 2018.

The following table summarizes our distribution between domestic and foreign earnings (loss) before income taxes and the provision (benefit) for income taxes (in thousands):



	Fiscal 2017		Fiscal 2016			Fiscal 2015
Earnings from continuing operations before income taxes:
Domestic	$	78,707	$	84,843		$	96,512
Foreign	4,184		1,620			(1,456		)
Earnings from continuing operations before income taxes	$	82,891	$	86,463		$	95,056

Income taxes:
Current:
Federal	$	11,710	$	19,704		$	33,205
State	3,775		4,475			4,789
Foreign	707		599			138
	16,192		24,778			38,132
Deferred—primarily Federal	1,690		8,108			(1,508		)
Deferred—Foreign	308		(922		)	(105		)
Income taxes	$	18,190	$	31,964		$	36,519

Reconciliations of the United States federal statutory income tax rates and our effective tax rates are summarized as follows:



	Fiscal 2017		Fiscal 2016		Fiscal 2015
Statutory tax rate (1)	33.7	%	35.0	%	35.0	%
State income taxes—net of federal income tax benefit	3.6	%	3.8	%	3.3	%
Impact of foreign operations rate differential (2)	(0.6	)%	(0.4	)%	0.6	%
Valuation allowance against foreign losses and other carry-forwards (3)	1.1	%	(0.6	)%	0.3	%
U.S. Tax Reform impact of change in tax rate on deferred tax amounts	(14.4	)%	—	%	—	%
Other, net	(1.5	)%	(0.8	)%	(0.8	)%
Effective tax rate for continuing operations	21.9	%	37.0	%	38.4	%

(1) The statutory tax rate for Fiscal 2017 is a blended rate that reflects the reduction of the federal corporate marginal tax rate from 35% to 21% effective January 1, 2018.

(2) Impact of foreign operations rate differential primarily reflects the rate differential between the United States and the respective foreign jurisdictions for any foreign income or losses, and the impact of any permanent differences.

(3) Valuation allowance against foreign losses and other carry-forwards primarily reflects the valuation allowance recorded due to our inability to recognize an income tax benefit related to certain operating loss carry-forwards and deferred tax assets during the period. The benefit in Fiscal 2016 was primarily due to the utilization of certain operating loss carryforward benefits against current year earnings and changes in our assessment of the likelihood of recognition of certain foreign operating loss carryforwards.

Deferred tax assets and liabilities included in our consolidated balance sheets are comprised of the following (in thousands):



	February 3, 2018			January 28, 2017
Deferred Tax Assets:
Inventories	$	12,207		$	14,886
Accrued compensation and benefits	7,660			11,817
Receivable allowances and reserves	1,630			2,561
Deferred rent and lease obligations	3,322			6,671
Operating loss and other carry-forwards	4,218			3,691
Other, net	3,739			3,960
Deferred tax assets	32,776			43,586
Deferred Tax Liabilities:
Depreciation and amortization	(10,210		)	(5,360		)
Acquired intangible assets	(31,327		)	(46,524		)
Deferred tax liabilities	(41,537		)	(51,884		)
Valuation allowance	(5,624		)	(4,115		)
Net deferred tax liability	$	(14,385	)	$	(12,413	)

As of February 3, 2018 and January 28, 2017 our operating loss and other carry-forwards primarily relate to our operations in Canada, Hong Kong and Japan, as well as certain states. The majority of these operating loss carry-forwards allow for carry-forward of at least 20 years and in some cases, indefinitely. The substantial majority of our valuation allowance of $5.6 million and $4.1 million as of February 3, 2018 and January 28, 2017, respectively, relates to the foreign and state operating loss carry-forwards and the deferred tax assets in those jurisdictions. The recent history of operating losses in certain jurisdictions is considered significant negative evidence against the realizability of these tax benefits. The amount of the valuation allowance considered necessary, however, could change in the future if our operating results or estimates of future taxable operating results changes, particularly if, in future years, objective evidence in the form of cumulative losses is no longer present in certain jurisdictions. Alternatively, if we generate operating losses in future periods in certain jurisdictions, we may determine it is necessary to increase valuation allowances for certain deferred tax assets.

No deferred tax liabilities related to our original investments in our foreign subsidiaries and foreign earnings and profits ("E&P"), if any, have historically been recorded in our consolidated balance sheet date, as substantially all our original investments and earnings related to our foreign subsidiaries have been considered reinvested outside of the United States. U.S. Tax Reform has made significant changes to how foreign earnings are taxed. We continue to assert that our investment in foreign subsidiaries and earnings are permanently reinvested on a provisional basis.

Accounting for income taxes requires that we offset all deferred tax liabilities and assets within each tax jurisdiction and present them as a single amount in our consolidated balance sheets, with all net deferred tax assets or deferred tax liabilities by jurisdiction recognized as non-current deferred tax assets or deferred tax liabilities in our consolidated balance sheets. The amounts of deferred income taxes included in the following line items in our consolidated balance sheets are as follows (in thousands):



	February 3, 2018			January 28, 2017
Assets:
Deferred tax assets	$	884		$	1,165
Liabilities:
Deferred tax liabilities	(15,269		)	(13,578		)
Net deferred tax liability	$	(14,385	)	$	(12,413	)