Income Taxes

12 Months Ended

Jun. 30, 2014

12.

Income Taxes

Income (loss) before income taxes was:

For the Years Ended June 30
Domestic	$	(26,226	)	$	(6,581	)	$	(10,002	)
Foreign		32,534			24,429			23,116
Income (loss) before income taxes	$	6,308		$	17,848		$	13,114

Components of the provision for income taxes were:

For the Years Ended June 30
Current provision (benefit):
Federal	$	(673	)	$	—		$	66
State and local		(268	)		391			219
Foreign		9,087			4,487			7,555
Total current provision		8,146			4,878			7,840
Deferred provision (benefit):
Federal		(1,632	)		(12,160	)		(6,282	)
State and local		(1,877	)		(616	)		(1,275	)
Foreign		966			(1,204	)		(290	)
Change in valuation allowance−domestic		3,509			1,704			7,557
Change in valuation allowance−foreign		323			355			(1,412	)
Total deferred provision		1,289			(11,921	)		(1,702	)
Provision (benefit) for income taxes	$	9,435		$	(7,043	)	$	6,138

Reconciliations of the Federal statutory rate to the Company’s effective tax rate were:

For the Years Ended June 30
Federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal income tax effect	(0.9	)	1.4		1.1
Foreign tax rate differential, and change in foreign valuation allowance	(91.0	)	(31.4	)	(33.0	)
Foreign withholding tax	36.5		1.4		2.0
Change in federal valuation allowance	43.6		7.8		47.9
OGR acquisition adjustment	—		(50.7	)	—
Change in unrecognized tax benefits	(34.9	)	5.4		8.3
Taxable income not recorded on books	—		0.6		2.4
Repatriation of foreign earnings	138.7		—		—
Permanent items	26.1		(7.9	)	(16.1	)
Other	(3.5	)	(1.1	)	(0.8	)
Effective tax rate	149.6	%	(39.5	)%	46.8	%

We have not provided for United States or additional foreign taxes on approximately $93,622 of undistributed earnings of foreign subsidiaries, which earnings have been or are intended to be reinvested. It is not practicable at this time to determine the amount of income tax liability that would result should such earnings be repatriated. Taxes are not provided for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.

We assert our intention to indefinitely reinvest foreign earnings outside of the United States. During 2014, we reviewed the ongoing cash needs of our foreign subsidiaries and determined $25,000 was not needed for reinvestment in our Israel subsidiary. Based on this review, we changed the indefinite reinvestment assertion solely with respect to those earnings, and recorded $3,160 of foreign withholding taxes in the provision for income taxes. Our Israel subsidiary paid a $25,000 dividend to Phibro in 2014.

The tax effects of significant temporary differences that comprise deferred tax assets and liabilities were:

As of June 30
Deferred tax assets:
Employee related accruals	$	12,417		$	10,709
Environmental remediation		2,306			2,348
Net operating loss carry forwards−domestic		19,183			18,790
Net operating loss carry forwards−foreign		8,729			9,860
Other		9,540			8,413
		52,175			50,120
Valuation allowance		(32,892	)		(27,753	)
		19,283			22,367
Deferred tax liabilities:
Property, plant and equipment and intangible assets		(13,428	)		(14,645	)
Unrealized foreign exchange gains		(4,680	)		(4,827	)
Other		(131	)		(573	)
		(18,239	)		(20,045	)
Net deferred tax asset (liability)	$	1,044		$	2,322

Deferred taxes are included in the consolidated balance sheets as follows:

As of June 30
Prepaid expenses and other current assets	$	3,242		$	2,294
Accrued expenses and other current liabilities		(1,626	)		(1,732	)
Other assets		3,486			4,755
Other liabilities		(4,058	)		(2,995	)
	$	1,044		$	2,322

The authoritative guidance for accounting for income taxes requires that a valuation allowance be established when it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. All available positive and negative evidence are required to be considered, including a company’s performance, the market environment in which the company operates, the utilization of past tax credits, and length of carryback and carryforward periods. The authoritative guidance further states that where there is negative evidence such as cumulative losses in recent years, concluding that a valuation allowance is not required is problematic. Therefore, cumulative losses weigh heavily in the overall assessment.

Management has determined that it is not more likely than not that the Company would be able to utilize certain deferred tax assets. This conclusion was reached due to cumulative losses recognized by the Company and certain subsidiaries in preceding years. Management intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

The valuation allowance for deferred tax assets was:

As of June 30
Balance at beginning of period	$	27,753	$	36,763		$	30,618
Change in valuation allowance		5,139		2,059			6,145
Permanent adjustment for Other Comprehensive Income		—		(2,016	)		—
OGR acquisition adjustments		—		(9,053	)		—
Balance at end of period	$	32,892	$	27,753		$	36,763

The valuation allowance for deferred tax assets as of June 30, 2014, includes $27,355 related to domestic jurisdictions and $5,537 related to foreign jurisdictions.

The change in valuation allowance for the year ended June 30, 2013, included a reversal of $9,053 of valuation allowance previously established against the Company’s deferred tax assets in the United States. The reversal was required to offset deferred tax liabilities established as part of the OGR acquisition related to acquired amortizable intangible assets.

The Company has domestic federal net operating loss carry forwards of approximately $43,872 that expire in 2027 through 2034, state net operating loss carry forwards of approximately $73,939 that expire over various periods beginning in 2014 and foreign net operating loss carry forwards of approximately $26,456 that expire over various periods beginning in 2014.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTB”) is as follows:

As of June 30
Unrecognized tax benefits at beginning of period	$	12,261		$	6,565	$	6,180
Additions based on tax positions related to prior periods		1,276			4,996		216
Additions based on tax positions related to the current period		1,036			404		646
Reductions related to settlements with tax authorities		(2,215	)		—		—
Reductions due to lapse of statute of limitations		(5,157	)		—		—
Exchange effect		219			296		(477	)
Unrecognized tax benefits at end of period	$	7,420		$	12,261	$	6,565

The entire liability for UTB relates to unrecognized tax positions that, if recognized, would affect the annual effective tax rate. The entire amount of the liability for UTB is classified as a long-term liability, except for $1,218 that is classified as a current liability at June 30, 2014. We believe it is reasonably possible that a portion of the UTB may be recognized during 2015 as a result of the lapse of the statute of limitations.

We recognize interest and penalties associated with uncertain tax positions as a component of the provision for income taxes. We recognized interest and penalties in the consolidated statements of operations of $(661), $441 and $307 for 2014, 2013 and 2012, respectively. Accrued interest and penalties included in the consolidated balance sheets were $1,344 and $1,952 at June 30, 2014 and June 30, 2013, respectively.

Our Israel subsidiaries have been under examination for fiscal years 2009 through 2012. In April 2014, certain of these subsidiaries reached a settlement to pay additional income taxes totaling $2,614. As a result of the settlement, we recorded a reduction to our income tax provision of $572 and a reduction in previously unrecognized tax benefits of $2,215. We expect the remaining open examinations to conclude within the next twelve months, the effect of which is not expected to be significant to our consolidated financial statements. We have no open examinations that we believe would result in a material change to our liability for uncertain tax positions.

We file income tax returns in the U.S. federal and various U.S. state and international jurisdictions. Our U.S. federal and material U.S. state income tax returns have been closed for periods through June 30, 2006. Income tax returns for our significant foreign subsidiaries are closed through the following periods:

•

In Brazil, through December 31, 2008

•

In Israel, through June 30, 2009 or June 30, 2012

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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