LOGITECH INTERNATIONAL SA - Shareholder.com

Table of Contents
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would
result in an increase in the Company’s effective tax rate.
Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect the exercises in fiscal year 2007.
Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (“windfalls”).
Although these additional tax benefits are reflected in net operating loss carryforwards, pursuant to SFAS 123(R), the additional tax benefit
associated with the windfall is not recognized until the deduction reduces cash taxes payable. When the tax benefit reduces cash taxes payable,
the Company will credit equity. During fiscal year 2007, the Company recorded a credit to equity of $14.7 million. As of March 31, 2007, the
net operating loss and tax credit carryforwards related to unrecognized tax benefits of $47.2 million are not reflected in the Company’s deferred
tax assets. Substantially all of the Company’s foreign net operating loss and tax credit carryforwards for income tax purposes of $100.6 million
and $8.3 million are related to stock options. If not utilized, the net operating loss carryforwards will expire in fiscal years 2019 to 2026, and
the tax credit carryforwards will expire in fiscal years 2008 to 2027.
The expected tax provision at the weighted average rate is generally calculated using pre-tax accounting income or loss in each country
multiplied by that country’s applicable statutory tax rates. The difference between the provision for income taxes and the expected tax
provision at the weighted average tax rate is reconciled below (in thousands):
Year ended March 31,
2007 2006 2005
Expected tax provision at weighted average rate $ 34,393 $ 36,251 $ 29,087
Foreign income taxes at different rates (2,477 ) (5,543 ) (2,580 )
Research and development tax credits (1,868 ) (140 ) (304 )
Other (4,339 ) (1,819 ) 137
Total provision for income taxes $ 25,709 $ 28,749 $ 26,340
The Company has negotiated a tax holiday on certain earnings in China which is effective from January 2006 through December 2010.
The tax holiday represents a tax exemption aimed to attract foreign technological investment in China. The impact of the tax holiday decreased
income tax expense by approximately $2.5 million for fiscal year 2007. The benefit of the tax holiday on net income per share (diluted) was
approximately $0.01 in fiscal year 2007.
Note 15 — Derivative Financial Instruments – Foreign Exchange Hedging
The Company enters into foreign exchange forward contracts (accounted for as cash flow hedges) to hedge against exposure to changes
in foreign currency exchange rates related to forecasted inventory purchases by subsidiaries. Hedging contracts generally mature within three
months. Gains and losses in the fair value of the effective portion of the contracts are deferred as a component of accumulated other
comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. If the
underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the foreign currency
exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in
other income. The Company did not record any gains or losses due to hedge ineffectiveness during fiscal years 2007, 2006 and 2005. The
notional amounts of foreign exchange forward contracts outstanding at March 31, 2007 and 2006 were $38.5 million and $13.6 million. The
notional amount represents the future cash flows under contracts to purchase foreign currencies. Deferred realized gains totaled $0.3 million at
March 31, 2007 and are expected to be reclassified to cost of
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