NOTE 9 — INCOME TAXES
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. The Company performs an evaluation of the realizability of the Company’s deferred tax assets on a quarterly basis. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent cumulative losses, recent and projected future taxable income, and prudent and feasible tax planning strategies. In making this determination, the Company places greater emphasis on recent cumulative losses and recent taxable income due to the inherent lack of subjectivity associated with these factors. The estimates and assumptions used by the Company in computing the income taxes reflected in the Company’s consolidated financial statements could differ from the actual results reflected in the income tax returns filed during the subsequent year. Adjustments are recorded based on filed returns when such returns are finalized or the related adjustments are identified.
Significant components of the provision for income taxes are as follows:
|
| | | | | | | | | | | |
| Year ended January 31, |
| 2013 | | 2012 | | 2011 |
| (In thousands) |
| | | (As restated) | | (As restated) |
Current: | | | | | |
Federal | $ | 25,230 |
| | $ | 65,508 |
| | $ | 46,662 |
|
State | 2,622 |
| | 1,692 |
| | 911 |
|
Foreign | 41,333 |
| | 37,861 |
| | 28,037 |
|
Total current | 69,185 |
| | 105,061 |
| | 75,610 |
|
Deferred: | | | | | |
Federal | 11,329 |
| | (22,624 | ) | | (2,068 | ) |
State | 1,103 |
| | (422 | ) | | 1,842 |
|
Foreign | (35,191 | ) | | (10,906 | ) | | 7,456 |
|
Total deferred | (22,759 | ) | | (33,952 | ) | | 7,230 |
|
| $ | 46,426 |
| | $ | 71,109 |
| | $ | 82,840 |
|
The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:
|
| | | | | |
| Year ended January 31, |
| 2013 | | 2012 | | 2011 |
| | | (As restated) | | (As restated) |
U.S. statutory rate | 35.0% | | 35.0% | | 35.0% |
State income taxes, net of federal benefit | 1.2 | | 0.4 | | 0.6 |
Net changes in deferred tax valuation allowances | (9.0) | | (3.4) | | (1.5) |
Tax on foreign earnings different than U.S. rate | (9.9) | | (9.9) | | (8.5) |
Nondeductible penalties | 0.5 | | 0.0 | | 0.0 |
Nondeductible interest | 0.8 | | 1.6 | | 1.4 |
Reserve established for foreign income tax contingencies | 0.5 | | 0.1 | | 0.6 |
Reversal of previously accrued income tax reserves | 0.0 | | (0.4) | | (0.2) |
Effect of company-owned life insurance | (0.4) | | 0.0 | | (0.5) |
Disposal of subsidiaries | 0.0 | | 3.2 | | 0.0 |
Other, net | 1.4 | | (0.5) | | 1.1 |
| 20.1% | | 26.1% | | 28.0% |
In fiscal 2013 and fiscal 2012, the Company recorded income tax benefits of $25.1 million and $13.6 million, respectively, for the reversal of deferred tax valuation allowances related to specific European jurisdictions which had been recorded in prior fiscal years. The income tax benefit recorded in fiscal 2012 was substantially offset by an income tax expense associated with the write-off of deferred and other income tax assets related to the closure of the Brazil in-country commercial operations.
The components of pretax income are as follows: |
| | | | | | | | | | | |
| Year ended January 31, |
| 2013 | | 2012 | | 2011 |
| | | (As restated) | | (As restated) |
| (In thousands) |
United States | $ | 108,700 |
| | $ | 131,662 |
| | $ | 133,771 |
|
Foreign | 120,766 |
| | 140,649 |
| | 162,061 |
|
| $ | 229,466 |
| | $ | 272,311 |
| | $ | 295,832 |
|
The significant components of the Company’s deferred tax liabilities and assets are as follows: |
| | | | | | | |
| January 31, |
| 2013 | | 2012 |
| | | (As restated) |
| (In thousands) |
Deferred tax liabilities: | | | |
Depreciation and amortization | $ | 81,679 |
| | $ | 43,160 |
|
Capitalized marketing program costs | 3,456 |
| | 4,008 |
|
Goodwill | 4,004 |
| | 2,711 |
|
Deferred costs currently deductible | 4,870 |
| | 14,760 |
|
Other, net | 5,074 |
| | 9,179 |
|
Total deferred tax liabilities | 99,083 |
| | 73,818 |
|
Deferred tax assets: | | | |
Accrued liabilities | 50,039 |
| | 43,099 |
|
Loss carryforwards | 124,536 |
| | 128,738 |
|
Amortizable goodwill | 15,253 |
| | 16,109 |
|
Depreciation and amortization | 6,706 |
| | 4,036 |
|
Disallowed interest expense | 28,069 |
| | 16,773 |
|
Other, net | 12,908 |
| | 18,709 |
|
| 237,511 |
| | 227,464 |
|
Less: valuation allowances | (142,375 | ) | | (158,348 | ) |
Total deferred tax assets | 95,136 |
| | 69,116 |
|
Net deferred tax liability | $ | (3,947 | ) | | $ | (4,702 | ) |
The net change in the deferred tax valuation allowances in fiscal 2013 was a decrease of $16.0 million primarily resulting from the $25.1 million reversal of a deferred tax valuation allowance related to a specific European jurisdiction as discussed previously. The net change in the deferred tax valuation allowances in fiscal 2012 was a decrease of $27.6 million primarily resulting from the utilization of net operating losses and the net change in the deferred tax valuation allowances in fiscal 2011 was an increase of $0.1 million. The valuation allowances at both January 31, 2013 and 2012 primarily relate to foreign net operating loss carryforwards. The Company’s foreign net operating loss carryforwards totaled $606.8 million and $640.5 million at January 31, 2013 and 2012, respectively. The majority of the net operating losses have an indefinite carryforward period with the remaining portion expiring in fiscal years 2014 through 2031. The Company considers all positive and negative evidence available in determining the potential of realizing deferred tax assets, including the scheduled reversal of temporary differences, recent cumulative losses, recent and projected future taxable income, and prudent and feasible tax planning strategies. In making this determination, the Company places greater emphasis on recent cumulative losses and recent taxable income due to the inherent lack of subjectivity associated with these factors. To the extent that the Company generates consistent taxable income within those operations with valuation allowances, the Company may reduce the valuation allowances, thereby reducing the income tax expense and increasing net income in the period the determination was made.
In connection with the SDG acquisition during fiscal 2013, the Company recorded a $30.1 million long-term deferred tax liability and a $3.1 million short-term deferred tax asset (see also Note 6 - Acquisitions).
At January 31, 2013, there are $290.5 million of consolidated cumulative undistributed earnings of foreign subsidiaries. It is not currently practical to estimate the amount of unrecognized deferred U.S. income tax that might be payable if any earnings were to be distributed by individual foreign subsidiaries.
A reconciliation of the beginning and ending balances of the total amount of gross unrecognized tax benefits, excluding accrued interest and penalties, for the years ended January 31, 2013 and 2012 and 2011 is as follows (in thousands, as restated):
|
| | | |
Gross unrecognized tax benefits at January 31, 2010 | $ | 3,107 |
|
Increases in tax positions for prior years | 2,742 |
|
Increases in tax positions for current year | 86 |
|
Expiration of statutes of limitation | (860 | ) |
Gross unrecognized tax benefits at January 31, 2011 | 5,075 |
|
Increases in tax positions for prior years | 1,590 |
|
Decreases in tax positions for prior years | (208 | ) |
Increases in tax positions for current year | 56 |
|
Expiration of statutes of limitation | (791 | ) |
Settlements | (1,990 | ) |
Changes due to translation of foreign currencies | (47 | ) |
Gross unrecognized tax benefits at January 31, 2012 | 3,685 |
|
Increases in tax positions for prior years | 2,890 |
|
Decreases in tax positions for prior years | (127 | ) |
Increases in tax positions for current year | 171 |
|
Expiration of statutes of limitation | (38 | ) |
Settlements | (1,106 | ) |
Changes due to translation of foreign currencies | 124 |
|
Gross unrecognized tax benefits at January 31, 2013 | $ | 5,599 |
|
At January 31, 2013, 2012 and 2011, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $4.8 million, $2.5 million and $5.1 million, respectively.
Unrecognized tax benefits that have a reasonable possibility of significantly decreasing within the 12 months following January 31, 2013 totaled $0.8 million and were primarily related to the foreign taxation of certain transactions. Consistent with prior periods, the Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company’s accrued interest at January 31, 2013, would not have a material impact on the effective tax rate if reversed. The provision for income taxes for each of the fiscal years ended January 31, 2013, 2012 and 2011 includes interest expense on unrecognized income tax benefits for current and prior years which is not significant to the Company’s Consolidated Statement of Income. The change in the balance of accrued interest for fiscal 2013, 2012 and 2011, includes the current year end accrual, an interest benefit resulting from the expiration of statutes of limitation, and the translation adjustments on foreign currencies.
The Company conducts business primarily in the Americas and Europe and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign tax jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. The Company is no longer subject to examinations by the Internal Revenue Service for years prior to fiscal 2010. Income tax returns of various foreign jurisdictions for fiscal 2006 and forward are currently under taxing authority examination or remain subject to audit.
