INCOME TAXES

12 Months Ended

Jun. 30, 2018

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.