Note 11 - Income Taxes

We reorganized the Company in Bermuda in 1994 and many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent. As such, a large portion of our foreign income is not subject to U.S. taxation on a permanent basis under current law. Additionally, our intellectual property is largely owned by foreign subsidiaries, resulting in proportionally higher earnings in jurisdictions with lower statutory tax rates, which decreases our overall effective tax rate. The taxable income earned in each jurisdiction, whether U.S. or foreign, is determined by the subsidiary's operating results, and transfer pricing and tax regulations in the related jurisdictions. We have indefinitely reinvested $62.1 million of undistributed earnings of our foreign operations outside of our U.S. tax jurisdiction as of February 28, 2017.  No deferred tax liability has been recognized for the remittance of such earnings to the U.S. since it is our intention to utilize these earnings in our foreign operations.

 

Our components of income before income tax expense are as follows:

 

COMPONENTS OF INCOME BEFORE TAXES

Our components of income tax expense (benefit) are as follows:

 

COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)

 

Our total income tax expense differs from the amounts computed by applying the U.S. statutory tax rate to income before income taxes. A summary of these differences are as follows:

 

INCOME TAX RATE RECONCILIATION

 

 

Our Macau subsidiary generates income from the sale of the goods that it has sourced and procured. This subsidiary is responsible for the sourcing and procurement of a large portion of the products that we sell. We have an indefinite tax holiday in Macau conditioned on the subsidiary meeting certain employment and investment thresholds.  We have not experienced any issues in meeting the required thresholds, and are unaware of any regulatory changes or impending circumstances that would restrict our right to continue to benefit from the tax holiday. Because our Macau subsidiary is not directly or indirectly owned by a U.S. parent, there is no U.S. tax liability associated with the income generated in Macau.

 

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 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 2017 and 2016 are as follows:

 

COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES

 

 

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. We consider the scheduled reversal of deferred tax liabilities, expected future taxable income and tax planning strategies in assessing the ultimate realization of 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 be recoverable. In fiscal 2017, the $1.4 million net increase in our valuation allowance was principally due to changes in estimates regarding the value of operating loss carryforwards to be used in the future.

 

As of February 28, 2017 and February 29, 2016, we had remaining tax-deductible goodwill of $113.0 million and $133.1 million, respectively, resulting from acquisitions. The amortization of this goodwill is deductible over various periods ranging up to 12 years. The tax deduction for goodwill in fiscal 2018 is expected to be approximately $20.2 million.

The composition of our operating loss carryforwards at the end of fiscal 2017 is as follows:

 

SUMMARY OF OPERATING LOSS CARRYFORWARDS

 

Any future amount of deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during any carryforward periods are reduced.

 

During fiscal 2017 and 2016, changes in the total amount of unrecognized tax benefits were as follows:

 

UNRECOGNIZED TAX BENEFITS

 

Included in the balance of unrecognized tax benefits at the end of fiscal 2017 were $6.6 million of tax benefits, which, if recognized, would affect our effective tax rate. We do not expect any significant changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities.

 

We classify interest and penalties on uncertain tax positions as income tax expense. At the end of February 2017 and 2016, the liability for tax-related interest and penalties included in unrecognized tax benefits was $1.7 million and $2.3 million, respectively. Additionally, during fiscal 2017,  2016 and 2015 we recognized expense (benefit) of ($0.6),  $0.5 and $0.2 million, respectively, in the consolidated statements of income.

 

We file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. We do not expect that any proposed adjustments from these tax jurisdictions will have a material impact on our consolidated financial statements.

 

As of February 28, 2017, tax years under examination or still subject to examination by material tax jurisdictions are as follows:

 

 

*  Kaz, Inc. and its U.S. subsidiaries are under examination for the 2003, 2007 and 2008 tax years. In February 2016, the examination of Helen of Troy Texas Corporation and its subsidiaries for the 2011 and 2012 tax years was completed with no impact to tax expense.

During fiscal 2017 we received an initial notice from a state tax authority which questioned our determination of taxable income applicable to the particular state resulting from interpretations of certain state income tax provisions applicable to our legal structure. We believe we have accurately reported our taxable income and will be pursuing the matter through routine administrative processes with the state. We believe it is unlikely that the outcome of these matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.