Annual report pursuant to Section 13 and 15(d)

Note 11 - Income Taxes

v3.19.3
Note 11 - Income Taxes
12 Months Ended
Jun. 30, 2019
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
Note
11.
Income Taxes:
 
Income before income taxes was comprised of the following (in thousands):
 
   
Year Ended June 30,
 
   
201
9
   
201
8
   
201
7
 
Domestic
  $
64,081
    $
81,557
    $
81,721
 
Foreign
   
47,934
     
44,395
     
30,240
 
Income before income taxes
  $
112,015
    $
125,952
    $
111,961
 
 
The provision for income taxes consisted of the following (in thousands):
 
   
Year Ended June 30,
 
   
201
9
   
201
8
   
201
7
 
Taxes on income consist of:
                       
Currently tax provision:
                       
Federal
  $
16,090
    $
28,416
    $
28,462
 
State
   
544
     
5,315
     
4,051
 
Foreign
   
13,329
     
11,983
     
8,212
 
Total current tax provision
   
29,963
     
45,714
     
40,725
 
Deferred tax provision:
                       
Federal
   
(6,903
)
   
(40,378
)
   
(901
)
State
   
(3,977
)
   
(1,381
)
   
(968
)
Foreign
   
(3,142
)
   
(4,154
)
   
(2,981
)
Total deferred tax provision
   
(14,021
)
   
(45,912
)
   
(4,850
)
Total income tax provision
  $
15,942
 
  $
(198
)
  $
35,875
 
 
 
The Company’s effective income tax rate for fiscal
2019
 was
14.2%
vs (
0.2%
) in the prior year. The change in the effective tax rate for fiscal
2019
and
2018
was driven by changes in net discrete tax benefits of
$12.7
million and
$34.4
million for fiscal year
2019
and
2018,
respectively.
 
The Company's discrete tax benefits in fiscal
2019
primarily related to share-based compensation excess tax benefits of
$7.2
million, 
$3.2
million related to current year acquisitions, and
$2.0
 million for tax refunds relating to certain state apportionments. The current year was benefited from acquisition payments made to employees and
third
parties, which were deductible for tax purposes. 
 
In fiscal
2018,
the Company recognized net discrete tax benefits of
$34.4
million. The primary driver in fiscal
2018
discrete tax benefits was a discrete net tax benefit of 
$33.0
 million related to the Tax Act (as described further below). This net tax benefit consisted of 
$36.5
 million due to the re-measurement of the Company’s deferred tax accounts to reflect the U.S. federal corporate tax rate reduction impact to our net deferred tax balances offset by expense for the federal transition tax of 
$3.3
 million. Also impacting the Company’s fiscal 
2018
 effective tax rate was a 
$2.2
 million tax benefit related to stock option exercises offset by a net discrete tax expense of 
$4.2
 million related to the revaluation of contingent consideration, which is 
not
 a tax deductible expens
e.
 
On
December 22, 2017,
the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which reduced the U.S. federal corporate tax rate from
35%
to
21%,
required companies to pay a
one
-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. The Tax Act added many new provisions including changes the deduction for executive compensation, a tax on global intangible low taxed income (“GILTI”), the base erosion anti abuse tax (“BEAT”) and a deduction for foreign derived intangible income (“FDII”). The SEC staff issued Staff Accounting Bulletin (“SAB
118”
) later codified as ASU
2018
-
05
 
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) 
No.
 
118,
which provides a measurement period of up to
one
year from the Tax Act’s enactment date to complete the accounting for the effects of the Tax Act.
 
The end of the measurement period allowed under ASU
2018
-
05
was
December 31, 2018.
However, the Company anticipates additional interpretations and clarifications to be issued by the U.S. Treasury Department, which
may
affect future period tax calculations. The Company made the accounting policy election to treat taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred. 
 
The following is a reconciliation of the federal tax calculated at the statutory rate of to the actual income taxes provided (in thousands):
 
   
Year Ended June 30,
 
   
201
9
   
201
8
   
201
7
 
                         
Income tax expense at federal statutory rate
   
21.0
%
   
28.1
%
   
35.0
%
State income taxes, net of federal benefit
   
0.8
%
   
2.5
%
   
1.9
%
Qualified production activity deduction
   
-
%
   
(2.4
)%
   
(3.4
)%
Research and development tax credit
   
(1.6
)%
   
(1.4
)%
   
(1.4
)%
Contingent consideration adjustment
   
(0.4
)%    
3.3
%
   
4.1
%
Foreign tax rate differences
   
0.2
%    
(3.5
)%
   
(4.6
)%
Option exercises
   
(5.8
)%    
(1.8
)%
   
-
%
Domestic tax legislation changes    
1.7
%
   
(26.2
)%
   
-
%
State apportionment changes    
(2.3
)%    
-
     
-
 
Other, net
   
0.6
%
   
1.2
%
   
0.4
%
Effective tax rate
   
14.2
%
   
(0.2
)%
   
32.0
%
  
Deferred taxes on the Consolidated Balance Sheets consisted of the following temporary differences (in thousands):
 
   
June 30
 
   
201
9
   
201
8
 
                 
Inventory
  $
7,743
    $
5,873
 
Net operating loss carryovers
   
33,294
     
15,938
 
Tax credit carryovers
   
9,640
     
7,029
 
Excess tax basis in equity investments
   
3,433
     
2,813
 
Deferred compensation
   
10,333
     
7,806
 
Derivative - cash flow hedge    
2,921
     
-
 
Other
   
5,207
     
3,864
 
Valuation allowance
   
(6,974
)
   
(2,978
)
Deferred tax assets
   
65,597
     
40,345
 
                 
Net unrealized gain on available-for-sale investments
   
(4,542
)
   
(8,384
)
Intangible asset amortization
   
(141,998
)
   
(111,247
)
Depreciation
   
(8,371
)    
(6,349
)
Other
   
(440
)    
(658
)
Deferred tax liabilities
   
(155,351
)
   
(126,638
)
Net deferred tax liabilities
  $
(89,754
)
  $
(86,293
)
 
A deferred tax valuation allowance is required when it is more likely than
not
that all or a portion of deferred tax assets will
not
be realized. The valuation allowance as of
June 30, 2019
was
$7.0
 million, an increase of
$4.0
million from the prior year. The change was driven by an increase in the valuation allowance for the Company’s net operating loss and credit carryforwards for fiscal
2019
acquisitions. 
 
As of
June 30, 2019,
the
$7.0
million valuation allowance relates to certain foreign and state tax net operating loss and state credit carryforwards that existed at the date the Company acquired Quad, Exosome, ACD, Novus, ProteinSimple and CyVek as well as immaterial amounts generated after the acquisitions. The Company believes it is more likely than
not
that these tax carryovers will
not
be realized.
 
As of
June 30, 2019,
the Company has federal operating loss carryforwards of approximately
$98.2
 million and state operating loss carryforwards of
$137.4
 million from its acquisitions of Quad, Exosome, ACD, ProteinSimple and CyVek, which are
not
limited under IRC Section
382.
 As of
June 30, 2019,
the Company has foreign net operating loss carryforwards of
$13.6
 million. The net operating loss carryforwards expire between fiscal
2020
and
2035.
The Company has a deferred tax asset of
$28.2
 million
, net of the valuation allowance discussed above, related to the net operating loss carryovers. As of
June 30, 2019,
the Company has federal and state tax credit carryforwards of
$5.2
 million and
$4.4
 million, respectively. The federal tax credit carryforwards expire between
2028
 and
2038.
The majority of the state credit carryforwards have
no
expiry date. The Company has a deferred tax asset of
$7.7
 million, net of the valuation allowance discussed above, related to the tax credit carryovers.
 
The Company has
not
recognized a deferred tax liability for unremitted foreign earnings of approximately
$160
million from its foreign operations because its subsidiaries have invested or will invest the undistributed earnings indefinitely. The transition tax included as part of the Tax Act resulted in the previously untaxed foreign earnings being included in the federal and state fiscal
2018
 taxable income.  The
one
-time transition tax was based on certain foreign earnings for which earnings have been previously indefinitely reinvested as well as the amount of earnings held in cash and other specified assets.   
No
additional income taxes have been provided for cumulative unremitted foreign earnings as at this time our intention with respect to unremitted foreign earnings is to continue to indefinitely reinvest outside the U.S. those earnings needed for working capital or additional foreign investment. If there are policy changes, we would record applicable taxes at that time.
 
We continue to analyze our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which include local country withholding tax and potential U.S. state taxation.  In addition, we anticipate that further guidance from the IRS and US Treasury related to the Tax Act could impact the amount of any related taxes.  Therefore, it is
not
practical to estimate the amount of the deferred income tax liabilities related to investments in these foreign subsidiaries.
 
The following is a reconciliation of the beginning and ending balance of unrecognized tax benefits (in thousands):
 
   
Year Ended June 30,
 
   
201
9
   
201
8
   
201
7
 
Beginning balance
  $
1,947
    $
1,747
    $
1,480
 
Additions due to acquisitions
   
900
     
 
     
628
 
Additions for tax positions of current year
   
2,185
     
35
     
13
 
Closure of tax years
   
 
     
 
     
(374
)
Tax reform
   
 
     
165
     
 
 
Ending balances
  $
5,032
    $
1,947
    $
1,747
 
 
The Company does
not
believe it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase in the next
twelve
months. The Company files income tax returns in the U.S federal and certain state tax jurisdictions, and several jurisdictions outside the U.S. The Company's federal returns are subject to tax assessment for
2016
 and subsequent years. State and foreign income tax returns are generally subject to examination for a period of
three
to
five
years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to
one
year after formal notification to the states.