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INCOME TAXES | 12 Months Ended
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Jun. 30, 2018
Income Tax Disclosure [Abstract] |
INCOME TAXES | NOTE 12: INCOME TAXES The components of income from continuing operations before income taxes are as follows (in thousands):
|  | Year Ended June 30, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
U.S. |  | $ | 63,353 |  |  | $ | (13,553 | ) |  | $ | 36,505 |
Foreign |  |  | 135,330 |  |  |  | 144,812 |  |  |  | 114,317 |
Total |  | $ | 198,683 |  |  | $ | 131,259 |  |  | $ | 150,822 |
The income tax provisions related to the above results are as follows (in thousands):
|  | Year Ended June 30, |
Income Tax Provision (Benefit): |  | 2018 |  |  | 2017 |  |  | 2016 |
Current Tax Provision |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  | $ | 69,986 |  |  | $ | 1,162 |  |  | $ | 37,239 |
State and Local |  |  | (599 | ) |  |  | (3,834 | ) |  |  | (6,256 | )
Foreign |  |  | 7,831 |  |  |  | 3,777 |  |  |  | 2,685 |
Total Current |  |  | 77,218 |  |  |  | 1,105 |  |  |  | 33,668 |
Deferred Tax Provision (Benefit): |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  |  | 19,020 |  |  |  | (2,745 | ) |  |  | (20,044 | )
State and Local |  |  | (1,173 | ) |  |  | 6,155 |  |  |  | 7,552 |
Foreign |  |  | (10,963 | ) |  |  | 5,079 |  |  |  | 4,150 |
Total Deferred |  |  | 6,884 |  |  |  | 8,489 |  |  |  | (8,342 | )
Income Tax Provision |  | $ | 84,102 |  |  | $ | 9,594 |  |  | $ | 25,326 |
The income tax provisions differ from those that would be computed using the statutory U.S. federal rate as a result of the following items (in thousands):
|  | Year Ended June 30, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Income Tax at Statutory Rate |  | $ | 55,750 |  |  |  | 28.1 | % |  | $ | 45,941 |  |  |  | 35.0 | % |  | $ | 52,788 |  |  |  | 35.0 | %
Lower Rates on Foreign Operations |  |  | (30,749 | ) |  |  | (15.5 | )% |  |  | (42,911 | ) |  |  | (32.7 | )% |  |  | (33,271 | ) |  |  | (22.1 | )%
State Income Taxes |  |  | 3,648 |  |  |  | 1.8 | % |  |  | 1,348 |  |  |  | 1.0 | % |  |  | 3,240 |  |  |  | 2.1 | %
Impact of Tax Cuts and Jobs Act |  |  | 103,878 |  |  |  | 52.3 | % |  |  | - |  |  |  | 0.0 | % |  |  | - |  |  |  | 0.0 | %
Loss on Investment in Subsidiary |  |  | (48,903 | ) |  |  | (24.6 | %) |  |  | - |  |  |  | 0.0 | % |  |  | - |  |  |  | 0.0 | %
Benefit on Foreign Intangibles |  |  | (8,813 | ) |  |  | (4.5 | %) |  |  | - |  |  |  | 0.0 | % |  |  | - |  |  |  | 0.0 | %
Permanent Non-Deductible/(Taxable) Items |  |  | 7,715 |  |  |  | 3.9 | % |  |  | 2,720 |  |  |  | 2.1 | % |  |  | 1,931 |  |  |  | 1.3 | %
Other |  |  | 1,576 |  |  |  | 0.8 | % |  |  | 2,496 |  |  |  | 1.9 | % |  |  | 638 |  |  |  | 0.5 | %
Income Tax Provision |  | $ | 84,102 |  |  |  | 42.3 | % |  | $ | 9,594 |  |  |  | 7.3 | % |  | $ | 25,326 |  |  |  | 16.8 | %
Deferred income tax assets (liabilities) result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss carryforwards. These assets and liabilities are composed of the following (in thousands):
|  | Year Ended June 30, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Employee Benefits |  | $ | 11,957 |  |  | $ | 18,648 |  |  | $ | 16,712 |
Stock-Based Compensation |  |  | 7,577 |  |  |  | 18,130 |  |  |  | 21,239 |
Deferred Rent |  |  | 9,841 |  |  |  | 17,588 |  |  |  | 22,135 |
Receivable Reserve |  |  | 7,953 |  |  |  | 11,308 |  |  |  | 18,476 |
Restructuring Costs |  |  | 8,704 |  |  |  | 17,148 |  |  |  | 18,820 |
Depreciation |  |  | 3,380 |  |  |  | - |  |  |  | - |
Other Reserves |  |  | 2,420 |  |  |  | 6,701 |  |  |  | 3,978 |
Loss and Credit Carryforwards, Net |  |  | 37,340 |  |  |  | 37,569 |  |  |  | 24,213 |
Less: Valuation Allowance |  |  | (11,496 | ) |  |  | (9,456 | ) |  |  | (8,624 | )
Gross Deferred Tax Assets |  |  | 77,676 |  |  |  | 117,636 |  |  |  | 116,949 |
Depreciation |  |  | - |  |  |  | (10,641 | ) |  |  | (21,700 | )
Amortization of Intangible Assets |  |  | (68,011 | ) |  |  | (106,952 | ) |  |  | (73,397 | )
Gross Deferred Tax Liability |  |  | (68,011 | ) |  |  | (117,593 | ) |  |  | (95,097 | )
Net Deferred Taxes |  | $ | 9,665 |  |  | $ | 43 |  |  | $ | 21,852 |
As of June 30, 2018, Adtalem has $314.0 million of gross, post apportioned state net operating loss carryforwards, and $58.1 million of foreign net operating loss carryforwards in Brazil, St. Maarten and other jurisdictions. Adtalem has the following tax net operating loss (tax effected) and credit carryforwards as of June 30, 2018 (in thousands):
|  | June 30, |  |  | Years of Expiration |
|  | 2018 |  |  | Beginning |  |  | Ending |
U.S. Credit Carryforwards |  | $ | 271 |  |  |  | 2027 |  |  |  | 2027 |
State Net Operating Loss Carryforwards |  |  | 17,440 |  |  |  | 2019 |  |  |  | 2039 |
State Credit Carryforwards |  |  | 8,425 |  |  |  | 2019 |  |  |  | 2028 |
Foreign Net Operating Loss Carryforwards |  |  | 8,082 |  |  |  | 2021 |  |  |  | 2038 |
Foreign Net Operating Loss Carryforwards |  |  | 3,122 |  |  |  | No Expiration |
Gross Deferred Tax Assets |  | $ | 37,340 |  |  |  |  |  |  |  |  |
Four of Adtalem’s operating units, AUC, which operates in St. Maarten, RUSM, which operates in Dominica, RUSVM, which operates in St. Kitts, and Adtalem Brazil, which operates in Brazil, all benefit from local tax incentives. AUC’s effective tax rate reflects benefits derived from investment incentives. RUSM and RUSVM each have agreements with their respective domestic governments that exempt them from local income taxation. Both of these agreements have been extended to provide, in the case of RUSM, an indefinite period of exemption and, in the case of RUSVM, exemption until 2037. See “Note 18: Subsequent Event” for information related to the planned relocation of RUSM to Barbados from Dominica. Adtalem Brazil’s effective tax rate reflects benefits derived from its participation in PROUNI, a Brazilian program for providing scholarships to a portion of its undergraduate students. Valuation allowances are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The valuation allowance on our deferred tax assets was $11.5 million and $9.5 million as of June 30, 2018 and 2017, respectively, for other foreign and state net operating loss and state tax credit carryforwards. Based on Adtalem’s expectations for future taxable income, management believes that it is more likely than not that operating income in respective jurisdictions will be sufficient to recognize fully all deferred tax assets, except as explained above. Prior to enactment of the Tax Cuts and Jobs Act of 2017, (the “Tax Act”), Adtalem did not record a U.S. federal or state tax provision for the undistributed earnings of its international subsidiaries. As a result of the Tax Act, Adtalem has revised its prior intent to indefinitely reinvest accumulated undistributed earnings and profits in foreign operations, and now only intends to maintain this assertion with respect to accumulated and future earnings in Brazil. As of June 30, 2018, the cumulative undistributed earnings attributable to operations in Brazil was approximately $74.5 million. We estimate the unrecognized deferred tax liability to be immaterial. The effective tax rate on income from continuing operations was 42.3% for fiscal year 2018 compared to 7.3% for the prior year. A tax expense special item of $103.9 million was recorded in fiscal year 2018 related to the impact of the Tax Act, which was enacted into law on December 22, 2017. Also during fiscal year 2018, a net tax benefit special item of $48.9 million was recorded for Adtalem’s investment in Carrington and a net tax benefit special item of $ 8.8 million was recorded on foreign intangible assets following a restructuring in Brazil. A tax benefit special item of $19.7 million was recorded in fiscal year 2017 for settlement costs of various regulatory authority litigation. The effective tax rates on income from continuing operations excluding special items were 19.1% and 16.0% for fiscal years 2018 and 2017, respectively. This increase reflects an increase in the percentage of earnings from domestic operations that are taxed at higher rates than foreign earnings, partially offset by the lower U.S. tax rate resulting from the Tax Act. The Tax Act includes significant changes to the U.S. corporate income tax system, which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime, which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings. The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 28.1% for the fiscal year ended June 30, 2018. The new taxes on certain foreign-sourced earnings under the Tax Act are effective for Adtalem after the fiscal year ended June 30, 2018. The tax expense recorded in fiscal year 2018 upon enactment of the Tax Act included $96.3 million for the one-time transition tax on the deemed repatriation of foreign earnings, payable over eight years; $4.9 million to record the impact of the reduction in tax rates on our net deferred tax asset position; and $2.7 million for state income and foreign withholding taxes on undistributed foreign earnings that are no longer intended to be indefinitely reinvested in foreign operations. The Internal Revenue Service (“IRS”) issued proposed Treasury Regulations covering the Tax Act on August 1, 2018. After these regulations are published in the Federal Register, the proposed regulations are subject to a 60-day comment period. Final regulations are expected to be issued after comments have been properly considered. We are reviewing these proposed regulations and monitoring U.S. federal and state legislative developments for further interpretative guidance. We intend to continue to gather additional information, including an updated evaluation of our accumulated earnings and profits from foreign jurisdictions and the calculation of related foreign tax credits, to refine provisional estimates during the measurement period provided under Staff Accounting Bulletin 118. Any adjustments needed to account for the impact of the Tax Act will be completed during the measurement period, which is not expected to be more than a year from the date of enactment. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Tax Act includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes are imposed on foreign income in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed in general at a 10.5% tax rate. The Tax Act also includes a based erosion anti-abuse tax provision (“BEAT”), which taxes certain payments from a U.S. corporation to its foreign subsidiaries. Both the GILTI and BEAT provisions of the Tax Act become effective for Adtalem after the fiscal year ended June 30, 2018. Adtalem has not completed its analysis on the potential impact to its deferred tax assets and liabilities, or whether to (i) account for GILTI as a component of tax expense in the period in which Adtalem is subject to the rules (the “period cost method”), or (ii) account for GILTI in Adtalem’s measurement of deferred taxes (the “deferred method”). As of June 30, 2018 the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $34.4 million. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $34.4 million as of June 30, 2018. As of June 30, 2017, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of benefits, was $7.9 million. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $6.7 million as of June 30, 2017. We expect that our unrecognized tax benefits will decrease during the next 12 months due to the settlement of various audits and the lapsing of statutes of limitation. We estimate this decrease to be approximately $ 0.6 million. Adtalem classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amount of interest and penalties accrued as of June 30, 2018, 2017, and 2016 was $2.6 million, $2.0 million and $1.6 million, respectively. Interest and penalties recognized during the years ended June 30, 2018, 2017, and 2016 were $0.6 million, $0.4 million and $0.2 million, respectively. The changes in our unrecognized tax benefits were (in thousands):
|  | Year Ended June 30, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Beginning Balance, July 1 |  | $ | 7,901 |  |  | $ | 7,497 |  |  | $ | 8,475 |
Increases from Positions Taken During Prior Periods |  |  | 1,151 |  |  |  | 1,397 |  |  |  | 346 |
Decreases from Positions Taken During Prior Periods |  |  | (5,711 | ) |  |  | (1,445 | ) |  |  | (1,716 | )
Increases from Positions Taken During the Current Period |  |  | 31,063 |  |  |  | 452 |  |  |  | 392 |
Ending Balance, June 30 |  | $ | 34,404 |  |  | $ | 7,901 |  |  | $ | 7,497 |
Adtalem files tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. Adtalem remains generally subject to examination in the U.S. for years beginning on or after July 1, 2017; in various states for years beginning on or after July 1, 2013; and in our significant foreign jurisdictions for years beginning on or after July 1, 2013. Adtalem is currently under audit by the State of South Carolina and the City of New York for various tax years between 2011 and 2015. The IRS has completed its examination of the Adtalem U.S. tax returns for the years ending June 30, 2014, 2015 and 2016. Although we have recorded tax reserves for potential adjustments to tax liabilities for prior years, we cannot provide assurance that a material adjustment, either positive or negative, will not result when the audits are concluded.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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