Diamond Foods Inc | 2013 | FY | 3


(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.


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