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INCOME TAXES | 12 Months Ended
--- | ---
Feb. 29, 2012
INCOME TAXES |
INCOME TAXES |
NOTE 10 - INCOME TAXES Our components of income before income tax expense are as follows: COMPONENTS OF INCOME BEFORE TAXES (in thousands)
|  | Fiscal Years Ended the Last Day of February, |
|  | (in thousands) |
|  | 2012 |  | 2011 |  | 2010 |
U.S. |  | $ | 26,445 |  | $ | 17,189 |  | $ | 14,529 |
Non-U.S. |  | 99,647 |  | 85,439 |  | 65,576 |
Total |  | $ | 126,092 |  | $ | 102,628 |  | $ | 80,105 |
Our components of income tax expense (benefit) are as follows: COMPONENTS OF INCOME TAX EXPENSE (BENEFIT) (in thousands)
|  | Fiscal Years Ended the Last Day of February, |
|  | (in thousands) |
|  | 2012 |  | 2011 |  | 2010 |
U.S. |  |  |  |  |  |  |
Current |  | $ | 5,342 |  | $ | 5,373 |  | $ | 3,924 |
Deferred |  | 4,630 |  | 2,381 |  | 2,637 |
|  | 9,972 |  | 7,754 |  | 6,561 |
Non-U.S. |  |  |  |  |  |  |
Current |  | 5,204 |  | 1,609 |  | 963 |
Deferred |  | 542 |  | (40 | ) | 764 |
|  | 5,746 |  | 1,569 |  | 1,727 |
Total |  | $ | 15,718 |  | $ | 9,323 |  | $ | 8,288 |
Our total income tax expense differs from the amounts computed by applying the statutory tax rate to income before income taxes. A summary of these differences are as follows: INCOME TAX RATE RECONCILIATION (in thousands)
|  | Fiscal Years Ended the Last Day of February, |
|  | 2012 |  | 2011 |  | 2010 |
Expected effective income tax rate at the U.S. statutory rate of 35 percent |  | 35.0 | % | 35.0 | % | 35.0 | %
Impact of U.S. state income taxes |  | 1.5 | % | 1.7 | % | 1.8 | %
Decrease in income taxes resulting from income from non-U.S. operations subject to varying income tax rates |  | -13.6 | % | -17.4 | % | -9.8 | %
Effect of zero tax rate in Macau |  | -9.5 | % | -10.2 | % | -17.1 | %
Decrease in income taxes resulting from tax audit settlements |  | -0.9 | % | 0.0 | % | 0.0 | %
Effect of asset impairment charges, most of which are non-deductible |  | 0.0 | % | 0.0 | % | 0.4 | %
Effective income tax rate |  | 12.5 | % | 9.1 | % | 10.3 | %
Each year there are significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions or events, the trend in our effective tax rates would follow a more normalized pattern. The acquisitions of Kaz and PUR are increasing the proportion of U.S. taxable income relative to total taxable income, which is resulting in higher effective income tax rates. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of the last day of February 2012 and 2011 are as follows: COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES (in thousands)
|  |  | Last Day of February, |
|  |  | (in thousands) |
|  |  | 2012 |  | 2011 |
Deferred tax assets, gross: |  |  |  |  |  |
Operating loss carryforwards |  |  | $ | 26,876 |  | $ | 30,881 |
Accounts receivable |  |  | 3,632 |  | 720 |
Inventories |  |  | 8,256 |  | 7,760 |
Accrued expenses and other |  |  | 11,534 |  | 14,099 |
Foreign currency contracts, interest rate swaps, and deferred exchange gains |  |  | 2,656 |  | 3,314 |
Total gross deferred tax assets |  |  | 52,954 |  | 56,774 |
Valuation allowance |  |  | (24,644 | ) | (26,346 | )
Deferred tax liabilities: |  |  |  |  |  |
Depreciation and amortization |  |  | (73,250 | ) | (34,801 | )
Total deferred tax assets (liabilities), net |  |  | $ | (44,940 | ) | $ | (4,373 | )
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that, some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in making this assessment. In fiscal 2012, the net decrease in our valuation allowance was $1.70 million, principally due to utilization of operating loss carryforwards previously reserved with a valuation allowance and changes in estimates regarding the value of operating loss carryforwards to be used in the future. The schedule below shows the composition of our net operating loss carryforwards and the approximate future taxable income we will need to generate in order to utilize all carryforwards prior to their expiration. SUMMARY OF OPERATING LOSS CARRYFORWARDS (in thousands)
|  | At February 29, 2012 |
|  | (in thousands) |
|  | Expiration |  | Gross |  | Required |
|  | Date Range |  | Deferred Tax |  | Future Taxable |
|  | (Where Applicable) |  | Assets |  | Income |
U.S. operating loss carryforwards |  | 2015 - 2031 |  | $ | 4,621 |  | $ | 47,952 |
Non-U.S. operating loss carryforwards with definite |  |  |  |  |  |  |
carryover periods |  | 2012 - 2027 |  | 12,037 |  | 67,629 |
Non-U.S. operating loss carryforwards with indefinite |  |  |  |  |  |  |
carryover periods |  | Indefinite |  | 10,218 |  | 33,233 |
Subtotals |  |  |  | 26,876 |  | 148,814 |
Less portion of valuation allowance established for |  |  |  |  |  |  |
operating loss carryforwards |  |  |  | (24,092 | ) | (133,632 | )
Total |  |  |  | $ | 2,784 |  | $ | 15,182 |
As of February 29, 2012, subject to the valuation allowances provided, we believe it is more likely than not that we will realize the net benefits of these deductible differences. Any future amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced. United States Income Taxes - In April 2010, the IRS concluded its audits of the 2007 and 2008 consolidated U.S. federal tax returns for Helen of Troy Texas Corporation. No adjustments were made to either year’s tax returns. The U.S. federal income tax returns of Kaz, Inc. and its subsidiaries for tax years 2003, 2004, 2006, 2007, and 2008 were under examination as of February 29, 2012. In February 2012, the Company and the IRS reached a tentative settlement agreement with respect to tax years 2004 and 2006 that was finalized in March 2012, resulting in a decrease to tax expense of $1.13 million. During fiscal 2012, the Company received notices of proposed adjustments related to Kaz’s 2007 and 2008 tax years. The Company is protesting the adjustments, and does not expect them to have a material impact on our results of operations or financial position. The IRS has not proposed any other adjustments for the other tax years under examination. Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable. Uncertainty in Income Taxes – The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. When there is uncertainty in a tax position taken or expected to be taken in a tax return, a liability is recorded for the amount of the position that could be challenged and overturned through any combination of audit, appeals or litigation processes. This amount is determined through criteria and a methodology prescribed by GAAP and is referred to as an “unrecognized tax benefit.” In the period these liabilities are established, we record an associated charge to our provision for taxes. If based on new information in a later period, we determine that payment of these amounts are not probable, or that the recorded tax liability differs from what we expect the ultimate assessment to be, we adjust the liability accordingly and recognize a related tax benefit or expense. During fiscal 2012 and 2011, changes in the total amount of unrecognized tax benefits were as follows: UNRECOGNIZED TAX BENEFITS (in thousands)
|  | Fiscal Years Ended |
|  | 2012 |  | 2011 |
Unrecognized tax benefits, beginning balance |  | $ | 2,481 |  | $ | 2,562 |
Tax positions taken during the current period |  | 486 |  | - |
Changes in tax positions taken during a prior period |  | 2,750 |  | 94 |
Changes due to lapse in statute of limitations |  | (585 | ) | (912 | )
Impact of foreign currency remeasurement on unrecognized tax benefits in the current period |  | (7 | ) | 35 |
Additions due to acquisitions |  | 8,088 |  | 1,453 |
Changes resulting from settlements with taxing authorities |  | - |  | (751 | )
Unrecognized tax benefits, ending balance |  | $ | 13,213 |  | $ | 2,481 |
During fiscal 2012, in connection with its ongoing evaluation of its tax positions, the company recorded increases in unrecognized tax benefits totaling $8.09 million, the majority of which were recorded as an adjustment to goodwill as they related to certain Kaz pre-acquisition tax positions. We do not expect any material changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities. The Company classifies all interest and penalties on uncertain tax positions as income tax expense. As of February 29, 2012 and February 28, 2011, the liability for tax-related interest expense and penalties included in unrecognized tax benefits was $1.95 and $0.19 million for interest expense and $0.90 and $0.26 million for penalties, respectively. Additionally, the 2012, 2011 and 2010 provisions for income tax include combined tax-related interest and penalties expense of $1.25, $0.10 and $0.18 million, respectively. We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. As of February 29, 2012, tax years under examination or still subject to examination by major tax jurisdictions that are material are as follows:
Jurisdiction |  | Examinations in Process |  | Open Years
Mexico |  | - None - |  | 2006 - 2011
United Kingdom |  | - None - |  | 2010 - 2012
United States * |  | 2003, 2004, 2006 - 2008 |  | 2003, 2004, 2006 - 2012
Switzerland |  | - None - |  | 2007 - 2012
Hong Kong |  | - None - |  | 2006 - 2012
France |  | 2007 - 2010 |  | 2007 - 2012
Hungary |  | 2005 - 2010 |  | 2005 - 2012
* Kaz, Inc. and its subsidiaries are currently under examination.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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