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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.