Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.1.9
Income Taxes
12 Months Ended
Jan. 31, 2015
Income Taxes  
Income Taxes

7. INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities as of the respective year-end balance sheets for The Michaels Companies, Inc. and MSI are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Michaels Companies, Inc.

 

 

Michaels Stores, Inc.

 

 

Fiscal Year

 

 

Fiscal Year

 

 

2014

  

2013

 

 

2014

  

2013

Gross deferred tax assets:

  

 

 

 

 

 

 

  

 

 

 

 

 

Accrued liabilities

 

$

13 

 

$

14 

 

 

$

13 

 

$

14 

State income taxes

 

 

 

 

 

 

 

 

 

Vacation accrual

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

16 

 

 

22 

 

 

 

16 

 

 

22 

Deferred rent

 

 

15 

 

 

17 

 

 

 

15 

 

 

17 

Gift cards

 

 

 

 

 

 

 

 

 

Self-insurance

 

 

19 

 

 

19 

 

 

 

19 

 

 

19 

Original issue discount write-off

 

 

33 

 

 

41 

 

 

 

33 

 

 

41 

Federal, State and foreign net operating losses

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

10 

 

 

 

 

 

10 

Total gross deferred tax assets

 

 

130 

 

 

148 

 

 

 

130 

 

 

148 

Valuation allowance

 

 

(5)

 

 

(9)

 

 

 

(5)

 

 

(9)

Total deferred tax assets, net of valuation allowance

 

 

125 

 

 

139 

 

 

 

125 

 

 

139 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

 

(8)

 

 

(10)

 

 

 

(8)

 

 

(10)

Property and equipment

 

 

(34)

 

 

(25)

 

 

 

(34)

 

 

(25)

Unremitted earnings

 

 

(2)

 

 

 —

 

 

 

(2)

 

 

 —

Cancellation of debt income

 

 

(32)

 

 

(40)

 

 

 

(32)

 

 

(40)

Total deferred tax liabilities

 

 

(76)

 

 

(75)

 

 

 

(76)

 

 

(75)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred tax assets

 

$

49 

 

$

64 

 

 

$

49 

 

$

64 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

 

38 

 

 

38 

 

 

 

38 

 

 

38 

Non-current portion

 

 

11 

 

 

26 

 

 

 

11 

 

 

26 

Total

 

$

49 

 

$

64 

 

 

$

49 

 

$

64 

 

 

The reconciliation between the actual provision for income tax and the provision for income tax calculated by applying the federal statutory tax rate of 35% is as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Michaels Companies, Inc.

 

Michaels Stores, Inc.

 

 

Fiscal Year

 

Fiscal Year

 

    

2014

    

2013

    

2012

 

2014

    

2013

    

2012

Income tax provision at statutory rate

 

$

123 

 

$

133 

 

$

111 

 

$

146 

 

$

144 

 

$

111 

State income taxes, net of federal income tax effect

 

 

11 

 

 

 

 

 

 

13 

 

 

 

 

Federal tax credits

 

 

(2)

 

 

(1)

 

 

 

 

(2)

 

 

(1)

 

 

Unrecognized tax benefits

 

 

 

 

 —

 

 

(1)

 

 

 

 

 —

 

 

(1)

State valuation allowance

 

 

(4)

 

 

(1)

 

 

 

 

(4)

 

 

(1)

 

 

Other

 

 

 

 

(3)

 

 

(1)

 

 

 —

 

 

(3)

 

 

(1)

Total provision for income tax

 

$

134 

 

$

136 

 

$

115 

 

$

157 

 

$

148 

 

$

115 

 

The federal, state and international provision for income tax for The Michaels Companies, Inc. and MSI are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Michaels Companies, Inc.

 

Michaels Stores, Inc.

 

 

 

Fiscal Year

 

Fiscal Year

 

 

    

2014

    

2013

    

2012

    

2014

    

2013

    

2012

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

  

$

90 

  

$

114 

  

$

92 

  

$

111 

  

$

125 

  

$

92 

 

State

 

 

19 

 

 

15 

 

 

10 

 

 

21 

 

 

15 

 

 

10 

 

International

 

 

10 

 

 

11 

 

 

20 

 

 

10 

 

 

11 

 

 

20 

 

Total current

 

 

119 

 

 

140 

 

 

122 

 

 

142 

 

 

151 

 

 

122 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

20 

 

 

(1)

 

 

(7)

 

 

20 

 

 

 

 

(7)

 

State

 

 

(2)

 

 

(4)

 

 

 

 

(2)

 

 

(4)

 

 

 

International

 

 

(3)

 

 

 

 

(1)

 

 

(3)

 

 

 

 

(1)

 

Total deferred

 

 

15 

 

 

(4)

 

 

(7)

 

 

15 

 

 

(3)

 

 

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

134 

 

$

136 

 

$

115 

 

$

157 

 

$

148 

 

$

115 

 

 

A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.  In evaluating our ability to realize our deferred tax assets we considered sources of future taxable income, including future reversals of existing taxable temporary differences, forecast of future profitability, taxable income in prior carryback years and tax-planning strategies. The valuation allowance recorded, net of the federal benefit, against our deferred tax assets totaled $5 million and $9 million as of January 31, 2015 and February 1, 2014, respectively.

 

At January 31, 2015, we had state net operating loss carryforwards to reduce future taxable income of approximately $8 million, net of federal tax benefits, expiring at various dates between fiscal 2015 and fiscal 2032. Cash paid for income taxes totaled $112 million, $145 million and $108 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.

 

Uncertain Tax Positions

 

We operate in a number of tax jurisdictions and are subject to examination of our income tax returns by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740, Income Taxes, we recognize the benefits of uncertain tax positions in our consolidated financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.

 

A reconciliation of gross unrecognized tax benefits, including reduction of deferred tax assets for state operating losses, from the end of fiscal year 2013 through the end of fiscal 2014 is as follows  (in millions):

 

 

 

 

 

 

    

 

 

 

 

 

 

Balance at beginning of year

 

$

12 

 

Additions based on tax positions related to the current year

 

 

 

Additions for tax positions related to prior years

 

 

 

Reductions for expiration of statute of limitations

 

 

(2)

 

Balance at end of year

 

$

17 

 

 

Included in the balance of unrecognized tax benefits at January 31, 2015 is $5 million which, if recognized, would affect tax expense. Our policy is to classify all income-tax related interest and penalties as income tax expense. At January 31, 2015 and February 1, 2014, the total amount of interest and penalties accrued within the tax liability was $3 million and $2 million, respectively. There was no material interest and penalties recognized in the consolidated statements of comprehensive income in fiscal years 2014, 2013 and 2012.  

 

In the normal course of business, we are subject to examination by taxing authorities in major Canadian, U.S. Federal and U.S. State jurisdictions. The periods subject to examination for our federal return are fiscal 2010 to fiscal 2014, fiscal 2007 to fiscal 2014 for our Canadian returns and fiscal 2009 to fiscal 2014 for all major state tax returns. The pretax income from foreign operations for fiscal 2014, fiscal 2013 and fiscal 2012 totaled $38 million, $39 million and $52 million, respectively.