INCOME TAXES

12 Months Ended

Jun. 30, 2012

INCOME TAXES

INCOME TAXES

12. INCOME TAXES

        The components of (loss) income before income taxes are as follows:

	2012			2011			2010
	(Dollars in thousands)
(Loss) income before income taxes:
U.S.	$	(100,792	)	$	(31,963	)	$	35,289
International		10,364			6,334			17,925
	$	(90,428	)	$	(25,629	)	$	53,214

        The (benefit) provision for income taxes consists of:

	2012			2011			2010
	(Dollars in thousands)
Current:
U.S.	$	6,493		$	3,658		$	5,580
International		2,399			1,557			14,882
Deferred:
U.S.		(13,984	)		(17,882	)		4,007
International		(187	)		3,171			1,108
	$	(5,279	)	$	(9,496	)	$	25,577

        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:

	2012			2011			2010
U.S. statutory rate (benefit)		(35.0	)%		(35.0	)%		35.0	%
State income taxes, net of federal income tax benefit		0.8			0.7			5.9
Tax effect of goodwill impairment		37.9			10.4			12.1
Foreign income taxes at other than U.S. rates		(0.2	)		7.9			(0.8	)
Work Opportunity and Welfare-to-Work Tax Credits		(5.4	)		(15.7	)		(7.0	)
Adjustment of prior year income tax balances		—			—			3.9
Other, net		(3.9	)		(5.4	)		(1.0	)
		(5.8	)%		(37.1	)%		48.1	%

        During the twelve months ended June 30, 2012, the Company recognized a tax benefit of $5.3 million with a corresponding effective tax rate of 5.8 percent. The effective income tax rate for the twelve months ended June 30, 2012 was negatively impacted by the goodwill impairment charges totaling $146.1 million which are primarily non-deductible for tax purposes. This resulted in the Company recording less of a tax benefit on the pre-tax loss than what would normally be expected utilizing the Company's historical range of tax rates.

        The (3.9) percent of other, net in fiscal year 2012 includes the rate impact of unrecognized tax benefits and miscellaneous items of (2.8) and (1.1) percent, respectively.

        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 million in fiscal year 2010. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 because 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 employment credits in both years. 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 expense disallowance, donated inventory, unrecognized tax benefits, and miscellaneous items of 2.7, (2.9), (3.7), and (1.5) percent, respectively.

        The components of the net deferred tax assets and liabilities are as follows:

	2012			2011
	(Dollars in thousands)
Deferred tax assets:
Deferred rent	$	15,226		$	15,233
Payroll and payroll related costs		44,454			37,852
Net operating loss carryforwards		797			1,210
Salon asset impairment		5,038			5,176
Inventories		3,027			2,968
Deferred gift card revenue		745			1,536
Federal and state benefit on uncertain tax positions		2,113			8,549
Allowance for doubtful accounts/notes		5,180			9,855
Insurance		6,439			5,669
Other		6,963			6,396
Total deferred tax assets	$	89,982		$	94,444
Deferred tax liabilities:
Depreciation	$	(17,984	)	$	(29,348	)
Amortization of intangibles		(86,431	)		(94,257	)
Accrued property taxes		(2,079	)		(1,942	)
Deferred debt issuance costs		(4,336	)		(6,215	)
Other		(23	)		(3	)
Total deferred tax liabilities	$	(110,853	)	$	(131,765	)
Net deferred tax liabilities	$	(20,871	)	$	(37,321	)

        At June 30, 2012, the Company had state and foreign operating loss carryforwards of approximately $14.8 million and $3.7 million, respectively. These losses related to various states, the U.K. and Luxembourg. The Company had recorded a valuation allowance related to losses in various states and Luxembourg of $2.6 million and $3.1 million, respectively. The Company expects to fully utilize all of the loss carryforwards for which a valuation allowance has not been established.

        As of June 30, 2012, undistributed earnings of international subsidiaries of approximately $60.4 million were considered to have been reinvested indefinitely and, accordingly, the Company has not provided for U.S. income taxes on such earnings. It is not practicable for the Company to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Deferred taxes would be recorded for earnings of our foreign operations if we determine that such earnings are no longer indefinitely reinvested and cannot be remitted in a tax-neutral transaction.

        The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K., and Luxembourg as well as states, cities, and provinces within these jurisdictions. In the U.S., fiscal years 2009 and after remain open for federal tax 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 2008. However, the Company is under audit in a number of states in which the statute of limitations has been extended for fiscal years 2006 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:

	2012			2011			2010
Balance at beginning of period	$	13,493		$	16,856		$	14,787
Additions based on tax positions related to the current year		482			796			5,549
(Reductions)/additions based on tax positions of prior years		(7	)		(759	)		(185	)
Reductions on tax positions related to the expiration of the statute of limitations		(1,571	)		(2,718	)		(2,993	)
Settlements		(8,016	)		(682	)		(302	)
Balance at end of period	$	4,381		$	13,493		$	16,856

        If the Company were to prevail on all unrecognized tax benefits recorded, a benefit of approximately $2.8 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the years ended June 30, 2012, 2011, and 2010 we recorded income tax (benefit)/expense of approximately $(1.2), $(0.6), and $(1.1) million, respectively, for the reversal of previously accrued interest and penalties net of the respective fiscal years additions to the accrual. As of June 30, 2012, the Company had accrued interest and penalties related to unrecognized tax benefits of $1.5 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.