12. Taxes

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 the consolidated deferred tax assets and liabilities were (in thousands):


Fiscal Year	2011			2010
Current deferred income tax assets (liabilities):
Bad debt allowance	$	6,605		$	7,028
Returns allowance		15,364			15,468
Inventory		11,656			10,144
Warranty reserve		2,078			1,054
Compensation		7,707			2,894
Accrued liabilities		5,951			3,536
Returns cost of sales		(6,613	)		(6,024	)
Deferred rent		1,560			789
Loss carry-forwards		881			1,596
Other		1,312			6,837

Total current deferred tax assets		46,501			43,322
Valuation allowance		(698	)		(1,486	)

Net current deferred income tax assets	$	45,803		$	41,836


Long-term deferred income tax (liabilities) assets:
Unrealized exchange losses		2,858			2,520
State income tax and interest on tax contingencies		0			925
Fixed assets		(35,413	)		(8,847	)
Trade names and customer lists		(7,144	)		(7,168	)
Compensation		3,522			5,972
Deferred rent		6,693			3,264
Loss carry-forwards		2,275			2,375
Undistributed earnings of certain foreign subsidiaries		(57,324	)		(44,122	)
Tax deductible foreign reserves		1,460			(1,229	)
Other		4,115			2,038

Total deferred income tax liabilities		(78,958	)		(44,272	)
Valuation allowance		(2,495	)		(2,695	)

Net long-term deferred income tax liabilities	$	(81,453	)	$	(46,967	)


Total long-term deferred income tax assets		4,875			926
Total deferred income tax liabilities		(86,328	)		(47,893	)

Net long-term deferred income tax liabilities	$	(81,453	)	$	(46,967	)

The deferred income tax asset for loss carry-forwards includes $11.6 million of net operating losses of foreign subsidiaries. Valuation allowances have been recorded to reflect the estimated amount of deferred tax assets that may not be realized on these losses. The amounts and the fiscal year of expiration of our loss carry-forwards are (in thousands):

Operating loss carry-forwards


Expires 2012 through 2016	$	947
Expires 2017 through 2021		1,004
Expires 2022 through 2026		1,496
Indefinite		8,186

Total loss carry-forwards	$	11,633

The following table identifies earnings before income taxes for the Company's U.S. and non-U.S. based operations for the fiscal years indicated (in thousands):


Fiscal Year	2011		2010		2009
U.S.	$	173,861	$	154,318	$	94,543
Non-U.S.		277,698		229,892		125,355

Total	$	451,559	$	384,210	$	219,898

The Company's provision for income taxes consisted of the following for the fiscal years indicated (in thousands):


Fiscal Year	2011			2010			2009
Current provision:
U.S. federal	$	59,854		$	54,820		$	46,350
Non-U.S.		55,407			44,613			22,629
State and local		7,416			4,535			3,284

Total current		122,677			103,968			72,263
Deferred provision:
U.S. federal		25,116			19,112			3,320
Non-U.S.		(4,680	)		(3,188	)		(39	)
State and local		1,044			(572	)		60

Total deferred		21,480			15,352			3,341

Provision for income taxes	$	144,157		$	119,320		$	75,604

The expected cash payments for current U.S. income tax expense for fiscal years 2011, 2010 and 2009 were reduced by approximately $11.2 million, $12.5 million and $2.1 million, respectively, as a result of tax deductions related to the exercise of non-qualified stock options and stock appreciation rights and the vesting of restricted stock and restricted stock units. The expected cash payments for current foreign tax expense were reduced by $1.7 million in fiscal 2011 and $1.7 million in fiscal 2010 as a result of tax deductions related to the exercise of stock options and the vesting of restricted stock granted to foreign employees. The income tax benefits resulting from these stock-based compensation plans have been recorded to additional paid-in capital. Total deferred income tax expense of $21.5 million, $15.4 million and $3.3 million for fiscal years 2011, 2010 and 2009, respectively, are included in deferred income taxes on the consolidated statements of cash flows.

The Company was granted a 100% tax holiday for its watch assembly activities in Switzerland for tax years 2003 through 2007 and a 60% tax holiday for tax years 2008 through 2012. After 2012, the Company will pay the full Swiss tax rate on its watch assembly activities. This tax holiday reduced current foreign income taxes by approximately $0.9 million, $0.2 million and $0.1 million in fiscal years 2011, 2010 and 2009, respectively.

A reconciliation of income tax computed at the U.S. federal statutory income tax rate of 35% to the provision for income taxes is as follows:


Fiscal Year	2011			2010			2009
Tax at statutory rate		35.0	%		35.0	%		35.0	%
State, net of federal tax benefit		1.2			0.9			0.8
Foreign rate differential		(12.0	)		(11.1	)		(9.2	)
U.S. tax on foreign income		6.7			9.8			8.7
Income tax contingencies		0.7			(3.7	)		(0.4	)
Other		0.3			0.2			(0.5	)

Provision for income taxes		31.9	%		31.1	%		34.4	%

Deferred U.S. federal income taxes and foreign withholding taxes are not recorded on undistributed earnings of certain foreign subsidiaries where management plans to continue reinvesting these earnings outside the U.S. The amount of undistributed earnings that would be subject to tax if distributed was approximately $371.8 million at December 31, 2011. Determining tax amounts that would be payable if these earnings were distributed to the U.S. parent company is not practicable.

The total amount of unrecognized tax benefits under ASC 740, excluding interest and penalties that would favorably impact the effective tax rate in future periods if recognized, was $12.7 million for fiscal year 2011, $8.1 million for fiscal year 2010, and $7.8 million for fiscal year 2009. During the second quarter of fiscal 2010, the examination phase of the Internal Revenue Service ("IRS") audit for tax years 2005 and 2006 was completed. The IRS proposed certain adjustments to the Company's tax returns and the Company filed a protest. The protest is under review by the IRS Office of Appeals and will be resolved within the next twelve months. The examination of the 2007-2009 federal income tax returns by the IRS began in January 2012. The Company is also subject to examinations in various state and foreign jurisdictions for the 2005-2010 tax years, none of which the Company believes are individually significant. Audit outcomes and timing of audit settlements are subject to significant uncertainty.

The Company has classified uncertain tax positions as long-term income taxes payable unless such amounts are expected to be paid within twelve months from December 31, 2011. As of December 31, 2011, the Company had recorded $2.7 million of unrecognized tax benefits, excluding interest and penalties, for positions that could be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable, respectively. The total amount of accrued income tax-related interest in the consolidated balance sheets was $2.5 million and $1.3 million at December 31, 2011 and January 1, 2011, respectively. There were no penalties in the consolidated balance sheets at December 31, 2011 or January 1, 2011. The Company accrued interest expense of $1.2 million, $0.8 million and $1.8 million in each of fiscal years 2011, 2010 and 2009.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the fiscal years indicated (in thousands):


Fiscal Year	2011			2010			2009
Balance at beginning of year	$	10,945		$	35,426		$	33,855
Gross increases tax positions in prior years		5,963			2,680			4,676
Gross decreases tax positions in prior years		0			(27,799	)		(641	)
Gross increases-current year tax positions		1,192			842			2,428
Settlements		(119	)		(204	)		0
Lapse in statute of limitations		0			0			(4,902	)
Increase due to currency revaluation		(7	)		0			10

Balance at end of year	$	17,974		$	10,945		$	35,426