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INCOME TAXES | 12 Months Ended
--- | ---
Jun. 30, 2011
INCOME TAXES |
INCOME TAXES |
13. INCOME TAXES The components of (loss) income before income taxes are as follows:
|  | 2011 |  | 2010 |  | 2009 |
--- | --- | --- | --- | --- | --- | --- | ---
|  | (Dollars in thousands) |
(Loss) income before income taxes: |  |  |  |  |  |  |  |  |  |
| U.S. |  | $ | (31,963 | ) | $ | 35,289 |  | $ | 112,524 |
| International |  |  | 6,334 |  |  | 17,925 |  |  | (33,758 | )
|  | $ | (25,629 | ) | $ | 53,214 |  | $ | 78,766 |
The (benefit) provision for income taxes consists of:
|  | 2011 |  | 2010 |  | 2009 |
--- | --- | --- | --- | --- | --- | --- | ---
|  | (Dollars in thousands) |
Current: |  |  |  |  |  |  |  |  |  |
| U.S. |  | $ | 3,658 |  | $ | 5,580 |  | $ | 48,935 |
| International |  |  | 1,557 |  |  | 14,882 |  |  | (3,142 | )
Deferred: |  |  |  |  |  |  |  |  |  |
| U.S. |  |  | (17,882 | ) |  | 4,007 |  |  | 568 |
| International |  |  | 3,171 |  |  | 1,108 |  |  | (4,411 | )
|  | $ | (9,496 | ) | $ | 25,577 |  | $ | 41,950 |
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to (loss) earnings before income taxes, as a result of the following:
|  | 2011 |  | 2010 |  | 2009 |
--- | --- | --- | --- | --- | --- | --- | ---
U.S. statutory rate |  |  | (35.0 | )% |  | 35.0 | % |  | 35.0 | %
State income taxes, net of federal income tax benefit |  |  | (0.1 | ) |  | 3.4 |  |  | 3.4 |
Tax effect of goodwill impairment |  |  | 10.8 |  |  | 11.4 |  |  | 14.5 |
Foreign income taxes at other than U.S. rates |  |  | 7.9 |  |  | (0.8 | ) |  | (1.6 | )
Work Opportunity and Welfare-to-Work Tax Credits |  |  | (15.3 | ) |  | (6.4 | ) |  | (4.9 | )
Adjustment of prior year income tax balances |  |  | — |  |  | 3.9 |  |  | 4.8 |
Other, net |  |  | (5.4 | ) |  | 1.6 |  |  | 2.1 |
|  |  | (37.1 | )% |  | 48.1 | % |  | 53.3 | %
For fiscal year 2011, the Company reported a $25.6 million loss from continuing operations before income taxes as compared to income from continuing operations before income taxes of $53.2 and $78.8 million in fiscal years 2010 and 2009, respectively. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 as the magnitude of the loss from continuing operations before income taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annual effective tax rate was favorably impacted by the employment credits related to the Small Business and Work Opportunity Tax Act of 2007. Based upon current legislation, these credits are scheduled to expire on December 31, 2011. Partially offsetting the favorable impact of the employment credits was the adverse impact of the pre-tax non-cash goodwill impairment charge of $74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items. The (5.4) percent of other, net in fiscal year 2011 includes the rate impact of meals and entertainment, donated inventory, unrecognized tax benefits, and miscellaneous items of 2.8, (3.0), (3.7), and (1.5) percent, respectively. During the fiscal year 2010, the Company recorded adjustments to correct its income tax balances. The adjustments increased the Company's fiscal year 2010 income tax provision by $2.1 million and increased its effective income tax rate by 3.9 percent. Included in the income tax provision are U.S. and international income tax adjustments resulting in a shift of the income tax provision between jurisdictions. On a world-wide basis the adjustments are immaterial. The Company does not believe the adjustments are material to its fiscal 2010 results of operations or its financial position or results of operations of any prior periods. During the fourth quarter of fiscal year 2009, the Company recorded an adjustment to correct its prior year deferred income tax balances. The adjustment increased the Company's fiscal year 2009 income tax provision by $3.8 million and increased its effective income tax rate by 4.8 percent. The Company does not believe the adjustment is material to its fiscal 2009 results of operations or its financial position or results of operations of any prior periods. The components of the net deferred tax assets and liabilities are as follows:
|  | 2011 |  | 2010 |
--- | --- | --- | --- | --- | ---
|  | (Dollars in thousands) |
Deferred tax assets: |  |  |  |  |  |  |
Deferred rent |  | $ | 15,233 |  | $ | 15,677 |
Payroll and payroll related costs |  |  | 37,852 |  |  | 34,294 |
Net operating loss carryforwards |  |  | 1,210 |  |  | 2,106 |
Salon asset impairment |  |  | 5,176 |  |  | 4,154 |
Inventories |  |  | 2,968 |  |  | 3,136 |
Derivatives |  |  | 229 |  |  | 311 |
Deferred gift card revenue |  |  | 1,536 |  |  | 1,581 |
Federal and state benefit on uncertain tax positions |  |  | 8,549 |  |  | 10,178 |
Allowance for doubtful accounts/notes |  |  | 9,855 |  |  | 575 |
Insurance |  |  | 5,669 |  |  | 6,301 |
Other |  |  | 6,167 |  |  | 5,481 |
Total deferred tax assets |  | $ | 94,444 |  | $ | 83,794 |
Deferred tax liabilities: |  |  |  |  |  |  |
Depreciation |  | $ | (29,348 | ) | $ | (17,603 | )
Amortization of intangibles |  |  | (94,257 | ) |  | (107,392 | )
Accrued property taxes |  |  | (1,942 | ) |  | (2,029 | )
Deferred debt issuance costs |  |  | (6,215 | ) |  | (7,937 | )
Other |  |  | (3 | ) |  | — |
Total deferred tax liabilities |  | $ | (131,765 | ) | $ | (134,961 | )
Net deferred tax liabilities |  | $ | (37,321 | ) | $ | (51,167 | )
At June 30, 2011, the Company had state and foreign operating loss carryforwards of approximately $18.6 million and $8.4 million, respectively. These losses relate to various states, the U.K., Netherlands, and Luxembourg. The Company has recorded a valuation allowance of $7.5 million relating to losses in the Netherlands and Luxembourg. The Company expects to fully utilize all of the loss carryforwards for which a valuation allowance has not been established. At June 30, 2010, the Company had set up a valuation allowance of $1.0 million relating to the Netherlands tax losses. The valuation allowance increase of $6.5 million is due to additional tax losses in the Netherlands and Luxemborg. As of June 30, 2011, undistributed earnings of international subsidiaries of approximately $42.3 million were considered to have been reinvested indefinitely and, accordingly, the Company has not provided for U.S. income taxes on such earnings. The Company files tax returns and pays tax primarily in the U.S, Canada, the U.K., Luxembourg and the Netherlands as well as states, cities, and provinces within these jurisdictions. In the U.S, fiscal years 2007 and after remain open for federal tax audit. The Company's U.S. federal income tax returns for the years 2007 through 2009 are currently under audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2007. However, the company is under audit in a number of states in which the statute of limitations has been extended for fiscal years 2000 and forward. Internationally (including Canada), the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years. A rollforward of the unrecognized tax benefits is as follows:
|  | 2011 |  | 2010 |  | 2009 |
--- | --- | --- | --- | --- | --- | --- | ---
Balance at beginning of period |  | $ | 16,856 |  | $ | 14,787 |  | $ | 20,400 |
Additions based on tax positions related to the current year |  |  | 796 |  |  | 5,549 |  |  | 2,765 |
(Reductions) additions based on tax positions of prior years |  |  | (759 | ) |  | (185 | ) |  | 121 |
Reductions on tax positions related to the expiration of the statue of limitations |  |  | (2,718 | ) |  | (2,993 | ) |  | (8,167 | )
Settlements |  |  | (682 | ) |  | (302 | ) |  | (332 | )
Balance at end of period |  | $ | 13,493 |  | $ | 16,856 |  | $ | 14,787 |
If the Company were to prevail on all unrecognized tax benefits recorded, approximately $6.0 million of the $13.5 million reserve would benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the years ended June 30, 2011, 2010 and 2009 we recorded income tax (benefit) expense of approximately $(0.6), $(1.1), and $2.1 million, respectively, for the accrual of interest and penalties. As of June 30, 2011, the Company had accrued interest and penalties related to unrecognized tax benefits of $2.7 million. This amount is not included in the gross unrecognized tax benefits noted above. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next twelve months. However, we do not expect the change to have a significant effect on our results of operations or our financial position.

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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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