Income Taxes

12 Months Ended

May 26, 2019

INCOME TAXES

The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35.0 percent to 21.0 percent effective January 1, 2018. In accordance with FASB ASC 740, for the fiscal year ended May 27, 2018, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $79.3 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of May 27, 2018 and a corresponding income tax benefit reflected in our consolidated statements of earnings for the fiscal year ended May 27, 2018. The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. In fiscal 2019, we concluded our analysis of the accounting impact of the Tax Act pursuant to SEC Staff Accounting Bulletin 118 and recorded immaterial adjustments to the provisional amounts.

Total income tax expense was allocated as follows:



	Fiscal Year Ended
(in millions)	May 26, 2019			May 27, 2018			May 28, 2017
Earnings from continuing operations	$	63.7		$	1.9		$	154.8
Earnings from discontinued operations	(1.8		)	(4.8		)	(4.2		)
Total consolidated income tax expense (benefit)	$	61.9		$	(2.9	)	$	150.6

The components of earnings from continuing operations before income taxes and the provision for income taxes thereon are as follows:



	Fiscal Year Ended
(in millions)	May 26, 2019			May 27, 2018			May 28, 2017
Earnings from continuing operations before income taxes:
U.S.	$	780.7		$	602.7		$	632.3
Foreign	1.6			3.0			5.0
Earnings from continuing operations before income taxes	$	782.3		$	605.7		$	637.3
Income taxes:
Current:
Federal	$	(7.2	)	$	10.2		$	160.5
State and local	20.3			8.9			22.2
Foreign	1.4			1.8			1.3
Total current	$	14.5		$	20.9		$	184.0
Deferred (principally U.S.):
Federal	$	44.9		$	(25.1	)	$	(24.1	)
State and local	4.3			6.1			(5.1		)
Total deferred	$	49.2		$	(19.0	)	$	(29.2	)
Total income taxes	$	63.7		$	1.9		$	154.8

The following table is a reconciliation of the U.S. statutory income tax rate to the effective income tax rate from continuing operations included in the accompanying consolidated statements of earnings:



	Fiscal Year Ended
	May 26, 2019		May 27, 2018		May 28, 2017
U.S. statutory rate	21.0	%	29.4	%	35.0	%
State and local income taxes, net of federal tax benefits	2.4		1.8		1.7
Enactment of the Tax Act	—		(13.1	)	—
Benefit of federal income tax credits	(10.8	)	(12.8	)	(9.2	)
Other, net	(4.5	)	(5.0	)	(3.2	)
Effective income tax rate	8.1	%	0.3	%	24.3	%

As of May 26, 2019, we had estimated current prepaid state and federal income taxes of $2.8 million and $38.8 million, respectively, which is included on our accompanying consolidated balance sheets as prepaid income taxes and estimated current state and federal income taxes payable of $5.6 million and $6.0 million, respectively, which is included on our accompanying consolidated balance sheets as accrued income taxes.

As of May 26, 2019, we had unrecognized tax benefits of $27.0 million, which represents the aggregate tax effect of the differences between tax return positions and benefits recognized in our consolidated financial statements, all of which would favorably affect the effective tax rate if resolved in our favor. Included in the balance of unrecognized tax benefits at May 26, 2019, is $11.6 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. The $11.6 million relates to items that would impact our effective income tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



(in millions)
Balances at May 27, 2018	$	17.4
Additions related to current-year tax positions	4.6
Additions related to prior-year tax positions	7.2
Net additions due to settlements with taxing authorities	0.7
Reductions to tax positions due to statute expiration	(2.9		)
Balances at May 26, 2019	$	27.0

Interest recorded on reserves for uncertain tax positions was included in income tax expense in our consolidated statements of earnings as follows:



	Fiscal Year Ended
(in millions)	May 26, 2019		May 27, 2018		May 28, 2017
Interest recorded on unrecognized tax benefits	$	1.5	$	0.8	$	0.6

At May 26, 2019, we had $1.8 million accrued for the payment of interest associated with unrecognized tax benefits.

For U.S. federal income tax purposes, we participate in the IRS’s Compliance Assurance Process (CAP), whereby our U.S. federal income tax returns are reviewed by the IRS both prior to and after their filing. Income tax returns are subject to audit by state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. The major jurisdictions in which the Company files income tax returns include the U.S. federal jurisdiction, Canada, and all states in the U.S. that have an income tax. With a few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before fiscal 2019, and state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2015.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:



(in millions)	May 26, 2019			May 27, 2018
Accrued liabilities	$	69.2		$	66.6
Compensation and employee benefits	119.9			99.8
Deferred rent and interest income	91.1			81.1
Net operating loss, credit and charitable contribution carryforwards	75.3			71.9
Other	5.9			5.3
Gross deferred tax assets	$	361.4		$	324.7
Valuation allowance	(29.7		)	(26.6		)
Deferred tax assets, net of valuation allowance	$	331.7		$	298.1
Trademarks and other acquisition related intangibles	(211.5		)	(201.8		)
Buildings and equipment	(247.7		)	(176.9		)
Capitalized software and other assets	(24.6		)	(24.4		)
Other	(4.8		)	(9.0		)
Gross deferred tax liabilities	$	(488.6	)	$	(412.1	)
Net deferred tax liabilities	$	(156.9	)	$	(114.0	)

We have deferred tax assets of $15.4 million reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between fiscal 2020 and fiscal 2038. We have deferred tax assets of $16.5 million of federal and $39.9 million state tax credits, before federal benefit and valuation allowance, which expire at various dates between fiscal 2019 and fiscal 2039. Additionally, we have deferred tax assets of $11.1 million reflecting the benefit of foreign loss carryforwards, before valuation allowance, which have an indefinite life.

We have taken current and potential future expirations into consideration when evaluating the need for valuation allowances against these deferred tax assets. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which our deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances at May 26, 2019.