13. 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	2012			2011

Current deferred income tax assets (liabilities):
Bad debt allowance	$	6,542		$	6,605
Returns allowance		14,835			15,364
Inventory		10,019			11,656
Warranty reserve		2,403			2,078
Compensation		(2,872	)		7,707
Accrued liabilities		2,600			5,951
Returns cost of sales		(6,005	)		(6,613	)
Deferred rent		804			1,560
Loss carry-forwards		1,735			881
Other		6,016			1,312

Total current deferred tax assets		36,077			46,501
Valuation allowance		(1,843	)		(698	)

Net current deferred income tax assets	$	34,234		$	45,803

Total current deferred income tax assets	$	34,238		$	45,803
Total current deferred income tax liabilities		(4	)		0

Net current deferred income tax assets	$	34,234		$	45,803

Long-term deferred income tax (liabilities) assets:
Unrealized exchange losses	$	1,098		$	2,858
State income tax and interest on tax contingencies		24			0
Fixed assets		(45,237	)		(35,413	)
Trade names and customer lists		(7,139	)		(7,144	)
Compensation		12,010			3,522
Deferred rent		7,732			6,693
Loss carry-forwards		3,357			2,275
Undistributed earnings of certain foreign subsidiaries		(51,578	)		(57,324	)
Tax deductible foreign reserves		335			1,460
Other		10,098			4,115

Total deferred income tax liabilities		(69,300	)		(78,958	)
Valuation allowance		(3,920	)		(2,495	)

Net long-term deferred income tax liabilities	$	(73,220	)	$	(81,453	)

Total long-term deferred income tax assets	$	6,536		$	4,875
Total long-term deferred income tax liabilities		(79,756	)		(86,328	)

Net long-term deferred income tax liabilities	$	(73,220	)	$	(81,453	)

Net deferred income tax liability	$	(38,986	)	$	(35,650	)

Operating Loss Carry-Forwards. The deferred income tax asset for loss carry-forwards includes $19.4 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 the loss carry-forwards are (in thousands):


Expires 2013 through 2017	$	2,365
Expires 2018 through 2022		4,297
Expires 2023 through 2027		2,354
Indefinite		10,402

Total loss carry-forwards	$	19,418

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	2012		2011		2010

U.S.	$	193,985	$	173,861	$	154,318
Non-U.S.		298,237		277,698		229,892

Total	$	492,222	$	451,559	$	384,210

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

Fiscal Year	2012			2011			2010

Current provision:
U.S. federal	$	64,552		$	59,854		$	54,820
Non-U.S.		60,239			55,407			44,613
State and local		6,314			7,416			4,535

Total current		131,105			122,677			103,968
Deferred provision
U.S. federal		9,485			25,116			19,112
Non-U.S.		(2,426	)		(4,680	)		(3,188	)
State and local		(201	)		1,044			(572	)

Total deferred		6,858			21,480			15,352
Provision for income taxes	$	137,963		$	144,157		$	119,320

The expected cash payments for current U.S. income tax expense for fiscal years 2012, 2011 and 2010 were reduced by approximately $15.1 million, $11.2 million and $12.5 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 for fiscal years 2012, 2011 and 2010 were reduced by $0.5 million, $1.7 million, and $1.7 million, respectively, 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 in the Company's consolidated balance sheets. Total deferred income tax expense of $6.9 million, $21.5 million and $15.4 million for fiscal years 2012, 2011 and 2010, respectively, are included in deferred income taxes on the Company's 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 $1.2 million, $0.9 million and $0.2 million in fiscal years 2012, 2011 and 2010, 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

Tax at statutory rate	35.0	%	35.0	%	35.0	%
State, net of federal tax benefit	1.0		1.2		0.9
Foreign rate differential	(10.0	)	(12.0	)	(11.1	)
U.S. tax on foreign income	3.1		6.7		9.8
Income tax contingencies	(1.7	)	0.7		(3.7	)
Other	0.6		0.3		0.2

Provision for income taxes	28.0	%	31.9	%	31.1	%

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 $557 million at December 29, 2012. 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 $10.7 million for fiscal year 2012, $12.7 million for fiscal year 2011, and $8.1 million for fiscal year 2010. In the fourth quarter of fiscal 2012, the IRS Office of Appeals and the Company executed a Closing Agreement to settle issues under protest after the close of the income tax audit for the 2005-2006 tax years. As a result, the Company reduced the amount of unrecognized tax benefits by $6.0 million. 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 2005-2011 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 29, 2012. As of December 29, 2012, the Company had recorded $7.9 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 Company's consolidated balance sheets was $2.2 million and $2.5 million at December 29, 2012 and December 31, 2011, respectively. The total amount of accrued income tax-related penalties in the Company's consolidated balance sheets was $0.3 million at December 29, 2012. There were no accrued income tax-related penalties at December 31, 2011. The Company accrued income tax-related interest expense of ($1.0) million, $1.2 million and $0.8 million in fiscal years 2012, 2011 and 2010, respectively.

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

Fiscal Year	2012			2011			2010

Balance at beginning of year	$	17,974		$	10,945		$	35,426
Gross increases tax positions in prior years		1,245			5,963			2,680
Gross decreases tax positions in prior years		(2,580	)		0			(27,799	)
Gross increases—current year tax positions		2,486			1,192			842
Settlements		(3,582	)		(119	)		(204	)
Lapse in statute of limitations		0			0			0
Increase due to currency revaluation		6			(7	)		0

Balance at end of year	$	15,549		$	17,974		$	10,945