(11) Income Taxes
The components of income (loss) before income taxes, by tax jurisdiction, are as follows for the fiscal years ended July 31:
| 2013 | 2012 | 2011 | ||||||||||
|
United States |
$ | (152,337 | ) | $ | (65,182 | ) | $ | 42,269 | ||||
|
Foreign |
(23,852 | ) | (19,431 | ) | (12,599 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | (176,189 | ) | $ | (84,613 | ) | $ | 29,670 | ||||
|
|
|
|
|
|
|
|||||||
Income tax expense consisted of the following for the fiscal years ended July 31:
| Year Ended July 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
|
Current |
||||||||||||
|
Federal |
$ | (1,379 | ) | $ | (2,388 | ) | $ | 7,250 | ||||
|
State |
(4 | ) | 813 | 785 | ||||||||
|
Foreign |
(162 | ) | (5,363 | ) | 5,600 | |||||||
|
|
|
|
|
|
|
|||||||
|
Total current |
(1,545 | ) | (6,938 | ) | 13,635 | |||||||
|
|
|
|
|
|
|
|||||||
|
Deferred |
||||||||||||
|
Federal |
(9,231 | ) | (768 | ) | (3,389 | ) | ||||||
|
State |
(740 | ) | 13,624 | (2,719 | ) | |||||||
|
Foreign |
(1,441 | ) | (4,195 | ) | (4,424 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total deferred |
(11,412 | ) | 8,661 | (10,532 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Total tax provision |
$ | (12,957 | ) | $ | 1,723 | $ | 3,103 | |||||
|
|
|
|
|
|
|
|||||||
A reconciliation of the statutory federal income tax rate of 35% to Diamond’s effective income tax rate is as follows for the fiscal years ended July 31:
| 2013 | 2012 | 2011 | ||||||||||
|
Federal tax at statutory rate |
$ | (61,666 | ) | $ | (29,615 | ) | $ | 10,385 | ||||
|
State tax, net of federal benefit |
(530 | ) | 9,580 | (255 | ) | |||||||
|
Net tax benefit of earnings at lower rates |
(9,106 | ) | (9,727 | ) | (10,489 | ) | ||||||
|
Accrual for uncertain tax positions |
(1,458 | ) | (6,382 | ) | 7,507 | |||||||
|
Compensation |
(428 | ) | 258 | 897 | ||||||||
|
Financing related |
7,610 | 7,582 | — | |||||||||
|
Domestic production activities deduction |
— | — | (600 | ) | ||||||||
|
Impact of tax law changes |
— | (2,453 | ) | (3,972 | ) | |||||||
|
Impact of valuation allowance |
52,124 | 31,937 | — | |||||||||
|
Changes in estimates |
191 | 315 | 300 | |||||||||
|
Other |
306 | 228 | (670 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Income taxes (benefit) |
$ | (12,957 | ) | $ | 1,723 | $ | 3,103 | |||||
|
|
|
|
|
|
|
|||||||
Applicable U.S. income taxes have not been provided on approximately $61.1 million of undistributed earnings of certain foreign subsidiaries at July 31, 2013, because these earnings are considered indefinitely reinvested. The net federal income tax liability that would arise if these earnings were not indefinitely reinvested is approximately $21.4 million. Applicable U.S. income taxes are provided on these earnings in the periods in which they are no longer considered indefinitely reinvested.
With respect to the Company’s stock option plans, realized tax benefits in excess of tax benefits recognized in net earnings are recorded as increases to additional paid-in capital. Excess tax benefits realized and recorded to additional paid-in capital were nil for fiscal 2013 and 2012 and $1.4 million for fiscal 2011. The Company had unrecorded excess stock option tax benefits of $1.5 million as of July 31, 2013, which will be credited to additional paid-in-capital when such amounts reduce cash taxes payable.
The tax effect of temporary differences and net operating losses which give rise to deferred tax assets and liabilities consist of the following as of July 31:
| Year Ended July 31, | ||||||||
| 2013 | 2012 | |||||||
|
Deferred tax assets: |
||||||||
|
Current: |
||||||||
|
Inventories |
$ | 536 | $ | 1,528 | ||||
|
Receivables |
131 | 149 | ||||||
|
Accruals |
1,952 | 4,208 | ||||||
|
Compensation |
2,085 | 2,583 | ||||||
|
State tax |
113 | 99 | ||||||
|
Litigation Settlement |
4,194 | — | ||||||
|
Other |
87 | (11 | ) | |||||
|
|
|
|
|
|||||
|
Subtotal |
9,098 | 8,556 | ||||||
|
Valuation Allowance |
(8,416 | ) | (4,900 | ) | ||||
|
|
|
|
|
|||||
|
Total current |
$ | 682 | $ | 3,656 | ||||
|
|
|
|
|
|||||
|
Non-current: |
||||||||
|
Litigation Settlement |
32,460 | — | ||||||
|
State tax credits |
8,346 | 7,883 | ||||||
|
Retirement benefits |
2,224 | 4,092 | ||||||
|
Other comprehensive income |
572 | 2,866 | ||||||
|
Net Operating Loss |
75,880 | 38,191 | ||||||
|
Employee stock compensation benefits |
5,253 | 5,790 | ||||||
|
Other |
1,071 | 1,953 | ||||||
|
|
|
|
|
|||||
|
Subtotal |
125,806 | 60,775 | ||||||
|
Valuation Allowance |
(90,890 | ) | (39,732 | ) | ||||
|
|
|
|
|
|||||
|
Total non-current |
$ | 34,916 | $ | 21,043 | ||||
|
|
|
|
|
|||||
|
Deferred tax liabilities: |
||||||||
|
Current |
||||||||
|
Litigation Settlement |
$ | 3,813 | $ | — | ||||
|
|
|
|
|
|||||
|
Total Current |
$ | 3,813 | $ | — | ||||
|
|
|
|
|
|||||
|
Non-current: |
||||||||
|
Property, plant and equipment |
12,365 | 10,783 | ||||||
|
Intangibles |
114,968 | 127,104 | ||||||
|
Unremitted Earnings |
7,602 | 7,883 | ||||||
|
Other |
6,748 | 1,150 | ||||||
|
|
|
|
|
|||||
|
Total non-current |
141,683 | 146,920 | ||||||
|
|
|
|
|
|||||
|
Total deferred taxes, net |
$ | (109,898 | ) | $ | (122,221 | ) | ||
|
|
|
|
|
|||||
|
Composed of: |
||||||||
|
Net current deferred taxes |
$ | (3,131 | ) | $ | 3,656 | |||
|
Net non-current deferred taxes |
(106,767 | ) | (125,877 | ) | ||||
|
|
|
|
|
|||||
|
Total deferred taxes, net |
$ | (109,898 | ) | $ | (122,221 | ) | ||
|
|
|
|
|
|||||
Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. The Company’s valuation allowance was $99.3 million as of July 31, 2013 and $44.6 million as of July 31, 2012. In the three months ended April 30, 2012 as a result of cumulative losses, the Company concluded that a valuation allowance was required on certain US and state deferred tax assets (principally NOL’s and California EZ credits) because it was management’s assessment that it was no longer more likely than not that those assets could be realized. The valuation allowances may be reversed in a future period when facts and circumstances indicate that it is more likely than not that the particular deferred tax asset can be realized.
As of July 31, 2013, the Company had $185.0 million of cumulative federal tax loss carryforwards and $162.6 million of cumulative state tax loss carryforwards. The federal loss carry forward will expire in fiscal 2032 if not used prior to that time. The state tax loss carryforwards will expire beginning fiscal 2017 through fiscal 2032. As a result of certain realization requirements of ASC 718, the table of deferred tax asset and deferred tax liabilities shown above does not include certain deferred tax assets as of July 31, 2013 and 2012 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by $1.5 million if and when such deferred tax assets are ultimately realized. The Company uses tax ordering rules for purposes of determining when excess tax benefits have been realized.
The state tax credits of $14.0 million are California Enterprise Zone Credits which begin to expire in fiscal 2023, and $0.2 million of California Research and Development Credits, which have no expiration date.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
| 2013 | 2012 | 2011 | ||||||||||
|
Balance, beginning of year |
$ | 3,927 | $ | 14,260 | $ | 5,454 | ||||||
|
Tax position related to current year: |
||||||||||||
|
Additions |
884 | 359 | 7,977 | |||||||||
|
Tax positions related to prior years: |
||||||||||||
|
Additions |
1,125 | 518 | 840 | |||||||||
|
Reductions |
(2,392 | ) | (11,210 | ) | (11 | ) | ||||||
|
Settlements |
— | — | — | |||||||||
|
Statute of limitations closures |
— | — | ||||||||||
|
|
|
|
|
|
|
|||||||
|
Balance, end of year |
$ | 3,544 | $ | 3,927 | $ | 14,260 | ||||||
|
|
|
|
|
|
|
|||||||
Included in the balance of unrecognized tax benefits at July 31, 2013, July 31, 2012 and July 31, 2011, respectively, are potential benefits of $0.7 million, $0.6 million, and $9.1 million respectively, which if recognized, would affect the effective tax rate on earnings.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company accrued $0.1 million, $0.2 million and $0.1 million, net of federal benefit, in interest and $0 million, $0 million, and $0.1 million in penalties associated with uncertain tax positions for each fiscal 2013, 2012 and 2011.
In the twelve months following July 31, 2013, audit resolutions, lapse of statute of limitations, and filing the amended returns could potentially reduce total unrecognized tax benefits by up to $1.4 million.
The Company files income tax returns in the U.S. federal and various states, local and foreign jurisdictions, primarily in the United Kingdom. The Company’s U.S. federal and state income tax returns for fiscal 2006 through fiscal 2012 and the Company’s United Kingdom tax returns for fiscal 2011 and 2012 remain open to examination.