Quarterly report pursuant to Section 13 or 15(d)

Note 10 - Income Taxes

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Note 10 - Income Taxes
6 Months Ended
Dec. 31, 2017
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
Note
10.
Income Taxes:
 
The
Company’s effective income tax rate was (
124.7
) % and
50.8%
for the
second
quarter of fiscal
2018
and fiscal
2017,
respectively and (
44.8
) % and
38.8%
for the
first
six
months of fiscal
2018
and fiscal
2017,
respectively. The changes in the company’s tax rate for the
second
quarter and
first
six
months of fiscal
2018
compared to
second
quarter and
first
six
months of fiscal
2017
are due primarily to recording the items attributable to the new tax legislation in the U.S. as described below. Also included in the
2018
effective tax rate is
discrete tax benefit of
$0.3
million and
$0.7
million for the
second
quarter and
first
six
months of fiscal year
2018
for the tax benefit of stock option exercises offset by a net discrete tax expense of
$2.9
million and
$3.8
million for the
second
quarter and
first
six
months of fiscal
2018
related to the revaluation of contingent consideration, which is
not
tax deductible. Discrete tax expense for the
second
quarter and
first
six
months of fiscal
2017
included
$4.6
million of expense related to the revaluation of contingent consideration.
 
On
December 22, 2017,
the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code which will impact our fiscal year ended
June30,
2018
including, but
not
limited to (
1
) reducing the U.S. federal corporate tax rate, (
2
) requiring a
one
-time transition tax on certain unrepatriated earnings of foreign subsidiaries that
may
electively be paid over
eight
years, and (
3
) accelerated
first
year expensing of certain capital expenditures. The Tax Act reduces the federal corporate tax rate from 
35
percent to 
21
percent effective
January 1, 2018.
Internal Revenue Code Section
15
provides that our fiscal year ended
June 30, 2018.
We calculated a blended corporate tax rate of 
28.1
percent for fiscal year
2018,
which is based on a proration of the applicable tax rates before and after effective date of the Tax Act. The statutory tax rate of 
21
percent will apply for fiscal
2019
and beyond.
 
The Tax Act also puts in place new tax laws that will impact our taxable income beginning in fiscal
2019,
which include, but are
not
limited to (
1
) creating a Base Erosion Anti-abuse Tax (BEAT), which is a new minimum tax, (
2
) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (
3
) a new provision designed to tax currently global intangible low-taxed income (GILTI), which allows for the possibility of utilizing foreign tax credits and a deduction equal to
 
50
percent to offset the income tax liability (subject to some limitations), (
4
) a provision that could limit the amount of deductible interest expense, (
5
) the repeal of the domestic production activity deduction, (
6
) limitations on the deductibility of certain executive compensation, and (
7
) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.
 
Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin
No.
118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB
118
) which provides guidance on accounting for the Tax Act
’s impact. SAB
118
provides a measurement period, which in
no
case should extend beyond
one
year from the Tax Act enactment date, during which a company acting in good faith
may
complete the accounting for the impacts of the Tax Act under ASC Topic
740.
In accordance with SAB
118,
the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic
740
is complete.
 
To the extent that a company
’s accounting for certain income tax effects of the Tax Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the
first
reporting period in which a reasonable estimate can be determined. If a Company cannot determine a provisional estimate to be included in the financial statements, the Company should continue to apply ASC
740
based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a Company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the
first
reporting period in which a reasonable estimate can be determined.
 
We have recorded a provisional
net tax benefit of 
$33.5
million related to the Tax Act in the period ending
December 31, 2017.
This provisional net benefit primarily consists of a net benefit of 
$37.0
million due to the remeasurement of our deferred tax accounts to reflect the corporate rate reduction impact to our net deferred tax balances and a net expense for the transition tax of 
$3.5
million.
 
Reduction in U.S. Corporate Rate: The Act reduces the U.S. federal statutory corporate tax rate to
 a blended
28.1
percent in fiscal year ending
June 30, 2018
and 
21
percent for fiscal year ending
June 30, 2019
and beyond. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, we are continuing to analyze the temporary differences that existed on the date of enactment, the temporary differences originating in the current fiscal year prior to
December 22, 2017,
and the temporary differences we expect will reverse prior to
June 30, 2018.
 
Transition Tax: The tra
nsition tax is a tax on the previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries as of
December 22, 2017. 
In order to determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-
1986
E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings.  E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules.  We are able to make a reasonable estimate of the transition tax and recorded a provisional transition tax obligation of 
$3.5
million which the
 
Company expects to elect to pay, net of certain tax credit carryforwards, over
eight
years beginning in fiscal year
2019.
$0.3
million of this liability is recorded as current with the remaining
$3.2
million classified as a long-term liability within our
December 31, 2017
balance sheet. However, we are awaiting further interpretative guidance including information regarding state income tax implications and continuing to gather additional information to more precisely compute the amount of the transition tax. We expect that our estimate will be finalized in advance of the filing of our
June 30, 2018
Form
10
-K.
 
Global intangible low-taxed income (GILTI): The Tax Act includes a provision designed to currently tax global intangible low-taxed income starting in fiscal
2019.
Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act, the application of ASC
740,
and are considering available accounting policy alternatives to adopt to either record the U.S. income tax effect of future GILTI inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions.
  In addition, we are awaiting further interpretive guidance in connection with the computation of the GILTI tax. For these reasons, we are
not
yet able to reasonably estimate the effect of this provision of the Tax Act.
 
As of
June 30, 2017,
our practice and intention was to reinvest the earnings in our subsidiaries outside of the U.S., and
no
U.S. deferred income taxes or foreign withholding taxes were recorded. As of
December 31, 2017
we continue to assert that we plan to reinvest these earnings. The transition tax noted above will result in the previously untaxed foreign earnings being included in the federal and state fiscal
2018
taxable income. We are currently analyzing 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. Therefore, we are
not
yet able to reasonably estimate the effect of this provision of the Tax Act and have
not
recorded any withholding or state tax liabilities.
 
We are also currently analyzing other provisions of the Tax Act that come into effect for tax years starting
July 1, 2018
to determine if these items would impact the effective tax rate. These provisions include BEAT, eliminating U.S. federal income taxes on dividends from foreign subsidiaries, the new provision that could limit the amount of deductible interest expense, the limitations on the deductibility of certain executive compensation, and state tax implications of this federal tax legislation.