Red Lobster 2015 Annual Report Download - page 53

DARDEN RESTAURANTS, INC. | 2015 ANNUAL REPORT 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
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
2015 2014 2013
U.S. statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefits (6.6) (2.7) —
Benefit of federal income tax credits (34.0) (30.3) (18.1)
Other, net (6.4) (6.9) (3.5)
Effective income tax rate (12.0)% (4.9)% 13.4%
As of May 31, 2015, we had estimated current prepaid state income
taxes of $18.9 million which is included on our accompanying consolidated
balance sheets as prepaid income taxes, and estimated current federal income
taxes payable of $12.6 million, which is included on our accompanying
consolidated balance sheets as accrued income taxes.
As of May 31, 2015, we had unrecognized tax benefits of $13.7 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.
In the fourth quarter of 2015, we reached a settlement with the IRS
Appeals Division on a previous claim reported on either originally filed or
amended tax returns for the 2009 through 2012 fiscal tax years. As a result
of this settlement, we recognized a favorable tax benefit of $9.9 million and
a reduction in our unrecognized tax benefit of $29.7 million.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits follows:
(in millions)
Balances at May 25, 2014 $ 38.1
Additions related to current-year tax positions 4.1
Additions related to prior-year tax positions 10.2
Reductions due to settlements with taxing authorities (37.2)
Reductions to tax positions due to statute expiration (1.5)
Balances at May 31, 2015 $ 13.7
We recognize accrued interest related to unrecognized tax benefits in
income tax expense. Penalties, when incurred, are recognized in general and
administrative expense. Interest expense associated with unrecognized tax
benefits, excluding the release of accrued interest related to prior year matters
due to settlement or the lapse of the statute of limitations was as follows:
Fiscal Year
(in millions) 2015 2014 2013
Interest expense on unrecognized
tax benefits $1.1 $0.4 $0.5
At May 31, 2015, we had $0.7 million accrued for the payment of interest
associated with unrecognized tax benefits.
For U.S. federal income tax purposes, we participate in the Internal
Revenue Service’s (IRS) 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
2014, and state and local, or non-U.S. income tax examinations by tax
authorities for years before fiscal 2011.
Included in the balance of unrecognized tax benefits at May 31, 2015
is $0.7 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 $0.7 million relates to items that would impact
our effective income tax rate.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
May 31, May 25,
(in millions)
2015 2014
Accrued liabilities $ 104.9 $ 111.0
Compensation and employee benefits 186.6 216.3
Deferred rent and interest income 88.9 102.2
Net operating loss, credit and charitable
contribution carryforwards 50.1 57.3
Other 6.5 7.9
Gross deferred tax assets $ 437.0 $ 494.7
Valuation allowance (13.5) (16.5)
Deferred tax assets, net of valuation allowance $ 423.5 $ 478.2
Trademarks and other acquisition
related intangibles (220.6) (209.4)
Buildings and equipment (337.1) (396.1)
Capitalized software and other assets (28.1) (26.6)
Other (22.1) (8.2)
Gross deferred tax liabilities $(607.9) $(640.3)
Net deferred tax liabilities $(184.4) $(162.1)
Net operating loss, credit and charitable contribution carryforwards have
the potential to expire. 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 31, 2015.