Income Taxes

12 Months Ended

Jul. 31, 2014

Income Tax Disclosure [Abstract]

Income Taxes

Note 12—Income Taxes

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

Year ended July 31 (in thousands)	2014		2013			2012
Domestic	$	21,624	$	44,355		$	9,573
Foreign		3,368		(10,405	)		(21,421	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	$	24,992	$	33,950		$	(11,848	)

Significant components of the Company’s deferred income tax assets consist of the following:

July 31 (in thousands)	2014			2013
Deferred income tax assets:
Bad debt reserve	$	2,188		$	2,812
Accrued expenses		2,937			7,096
Stock options and restricted stock		2,131			2,786
Charitable contributions		1,230			2,415
Impairment		25,745			25,566
Depreciation		7,566			989
Unrealized gain		163			507
Net operating loss		126,093			144,001
Credits		3,123			2,845
Total deferred income tax assets		171,176			189,017
Valuation allowance		(151,975	)		(167,328	)
DEFERRED INCOME TAX ASSETS, NET	$	19,201		$	21,689

The (provision for) benefit from income taxes consists of the following:

Year ended July 31 (in thousands)	2014			2013			2012
Current:
Federal	$	(279	)	$	671		$	1,652
State and local		—			148			2,503
Foreign		(1,177	)		(1,431	)		1,741
		(1,456	)		(612	)		5,896
Deferred:
Federal		(6,461	)		(14,181	)		36,166
State and local		(175	)		(1,079	)		764
Foreign		4,110			—			(44	)
		(2,526	)		(15,260	)		36,886
(PROVISION FOR) BENEFIT FROM INCOME TAXES	$	(3,982	)	$	(15,872	)	$	42,782

The benefit from income taxes in fiscal 2012 was primarily due to the $36.9 million reversal of a portion of the Company’s valuation allowance in the United States. In fiscal 2012, the Company determined that it was more likely than not that a portion of its deferred income tax assets would be realized, therefore the valuation allowance related to those assets was reversed. The Company based its determination on a projection of future U.S. income and took into consideration the historical U.S. performance and decided a partial release of the U.S. valuation that relates to the core businesses was warranted in that period. Assumptions regarding future taxable income require significant analysis and judgment. This analysis included financial forecasts based on historical performance of the core business and continuance of doing business in a jurisdiction in which losses were incurred. Based on its projections, the Company expected that it would generate future taxable income over the next five years in the U.S. jurisdiction and will begin utilizing its net operating loss carryover through this period. Accordingly, the Company concluded that a portion of its U.S. jurisdiction core business assets did not require a full valuation allowance. In fiscal 2013 and fiscal 2014, the Company updated the analysis and concluded that the valuation allowance related to its core U.S. business should be maintained at the current level and will be reevaluated as warranted. In addition, in fiscal 2014, the Company determined that its valuation allowance on the losses of IDT Global, a U.K. subsidiary, were no longer required due to an internal reorganization that generated income and a projection that the income would continue. The Company recorded a benefit from income taxes of $4.1 million from the full recognition of the IDT Global deferred tax assets.

The Company did not release any of the valuation allowances that related to its former Straight Path Spectrum business since it was not part of the main tax consolidated group and the portion of the Net2Phone acquired net operating loss that is subject to Internal Revenue Code Section 382 limitations (see below). The Company did not release any of the valuation allowances related to its foreign operations in fiscal 2013 or fiscal 2012 as it was not more likely than not that the assets will be utilized based upon the earnings history and the profitability projections. Both the loss and valuation allowance that were part of the Straight Path Spin-Off are reflected as reductions in the total amounts in the deferred income tax assets, net table above.

The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:

Year ended July 31 (in thousands)	2014			2013			2012
U.S. federal income tax at statutory rate	$	(8,747	)	$	(11,883	)	$	4,147
Valuation allowance		4,110			—			41,961
Foreign tax rate differential		961			(5,073	)		(5,800	)
Nondeductible expenses		761			714			(26	)
Other		7			50			—
Prior year tax (expense) benefit		(960	)		921			2,500
State and local income tax, net of federal benefit		(114	)		(601	)		—
(PROVISION FOR) BENEFIT FROM INCOME TAXES	$	(3,982	)	$	(15,872	)	$	42,782

At July 31, 2014, the Company had federal and state net operating loss carryforwards of approximately $168 million. This carry-forward loss is available to offset future U.S. federal and state taxable income. The net operating loss carryforwards will start to expire in fiscal 2014, with fiscal 2009’s loss expiring in fiscal 2030. The Company has foreign net operating losses of approximately $200 million, of which approximately $143 million does not expire and approximately $57 million expires in two to ten years. These foreign net operating losses are available to offset future taxable income in the countries in which the losses were incurred. The Company’s subsidiary, Net2Phone, which provides voice over Internet protocol communications services, has additional federal net operating losses of approximately $84 million, which will expire through fiscal 2027. With the reacquisition of Net2Phone by the Company in March 2006, its losses were limited under Internal Revenue Code Section 382 to approximately $7 million per year. The net operating losses do not include any excess benefits related to stock options or restricted stock.

The Company has not recorded U.S. income tax expense for foreign earnings, as such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets, and consisted of approximately $270 million at July 31, 2014. Upon distribution of these foreign earnings to the Company’s domestic entities, the Company may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.

The change in the valuation allowance is as follows:

Year ended July 31 (in thousands)	Balance at beginning of year		Additions charged to costs and expenses		Deductions			Balance at end of year
2014
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	167,328	$	—	$	(15,353	)	$	151,975
2013
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	204,977	$	462	$	(38,111	)	$	167,328
2012
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	206,669	$	41,925	$	(43,617	)	$	204,977

The table below summarizes the change in the balance of unrecognized income tax benefits:

Year ended July 31 (in thousands)	2014			2013		2012
Balance at beginning of year	$	356		$	—	$	3,754
Additions based on tax positions related to the current year		—			—		—
Additions for tax positions of prior years		—			356		—
Reductions for tax positions of prior years		—			—		—
Settlements		(356	)		—		(3,754	)
Lapses of statutes of limitations		—			—		—
Balance at end of year	$	—		$	356	$	—

Settlements of $3.8 million in fiscal 2012 were primarily due to an agreement on certain state tax positions and the related payment of the taxes due, as well as the settlement of a foreign audit.

In fiscal 2014, fiscal 2013 and fiscal 2012, the Company did not record any interest and penalties on income taxes. As of July 31, 2014 and 2013, there was no accrued interest included in current income taxes payable.

The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2011 to fiscal 2014, state and local tax returns generally for fiscal 2010 to fiscal 2014 and foreign tax returns generally for fiscal 2010 to fiscal 2014.