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Income Taxes

12 Months Ended

Jun. 30, 2020

7. Income Taxes

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


	Year Ended June 30,
	2020		2019		2018
U.S.	$	160,334	$	80,209	$	63,353
Foreign		76,845		59,538		92,826
Total	$	237,179	$	139,747	$	156,179

The income tax provisions related to the above results are as follows (in thousands):


	Year Ended June 30,
	2020		2019		2018
Current tax provision (benefit):
U.S. federal	$	(3,097)	$	15,912	$	68,525
State and local		735		1,749		(762)
Foreign		519		2,224		5,785
Total current		(1,843)		19,885		73,548
Deferred tax provision (benefit):
U.S. federal		(4,197)		4,066		19,019
State and local		(104)		9,028		(1,173)
Foreign		(214)		(101)		(3,287)
Total deferred		(4,515)		12,993		14,559
(Benefit from) provision for income taxes	$	(6,358)	$	32,878	$	88,107

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,
	2020				2019				2018
Income tax at statutory rate	$	49,807	21.0	%	$	29,347	21.0	%	$	43,823	28.1	%
Lower rates on foreign operations		(16,210)	(6.8)	%		(12,738)	(9.1)	%		(21,777)	(13.9)	%
State income taxes		3,072	1.3	%		5,825	4.2	%		3,648	2.3	%
Impact of Tax Cuts and Jobs Act of 2017		—	—	%		—	—	%		103,878	66.5	%
Loss on investment in subsidiary		(25,688)	(10.8)	%		1,797	1.3	%		(48,903)	(31.3)	%
Gain on derivative		(23,252)	(9.8)	%		—	—	%		—	—	%
Permanent non-deductible items		(236)	(0.1)	%		469	0.3	%		5,976	3.8	%
Foreign tax provisions under GILTI		6,502	2.7	%		3,231	2.3	%		—	—	%
Other		(353)	(0.1)	%		4,947	3.5	%		1,462	0.9	%
(Benefit from) provision for income taxes	$	(6,358)	(2.7)	%	$	32,878	23.5	%	$	88,107	56.4	%

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):


	June 30,
	2020		2019		2018
Employee benefits	$	10,818	$	10,504	$	11,956
Stock-based compensation		6,924		6,549		7,577
Deferred rent		—		7,620		9,841
Receivable reserve		2,530		1,542		7,170
Restructuring costs		—		6,185		8,705
Depreciation		—		6		3,395
Operating lease liabilities		48,110		—		—
Other reserves		4,748		1,473		3,634
Loss and credit carryforwards, net		23,695		33,061		35,221
Less: valuation allowance		(9,937)		(9,943)		(11,496)
Gross deferred tax assets		86,888		56,997		76,003
Depreciation		(177)		—		—
Deferred taxes on unremitted foreign earnings		(525)		(3,146)		(2,346)
Amortization of intangible assets		(54,864)		(66,257)		(65,482)
Operating lease assets		(33,279)		—		—
Other accruals		(741)		(187)		—
Gross deferred tax liability		(89,586)		(69,590)		(67,828)
Net deferred tax (liability) asset	$	(2,698)	$	(12,593)	$	8,175

As of June 30, 2020, Adtalem has $0.1 million of gross U.S. federal net operating loss carryforwards, $301.5 million of gross, post apportioned state net operating loss carryforwards, and $23.6 million of foreign net operating loss carryforwards in St. Maarten and other jurisdictions.

Adtalem has the following tax net operating loss (tax effected), interest (tax effected), and credit carryforwards as of June 30, 2020 (in thousands):


	June 30,		Years of Expiration
	2020		Beginning	Ending

U.S. interest expense carryforwards	$	99	No expiration
U.S. credit carryforwards		518	2027	2029
State net operating loss carryforwards		17,623	2022	2039
Foreign net operating loss carryforwards		4,361	2021	2038
Foreign net operating loss carryforwards		1,094	No expiration
Total loss and credit carryforwards, net	$	23,695

Three of Adtalem’s operating units benefit from local tax incentives: AUC, which operates in St. Maarten, RUSM, which operates in Barbados, and RUSVM, which operates in St. Kitts. 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. RUSM has an exemption in Barbados until 2039. RUSVM has an exemption in St. Kitts until 2037.

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 $9.9 million at each of June 30, 2020 and 2019, respectively, and mainly relates to other foreign and state net operating loss carryforwards. Insufficient projected taxable income in certain jurisdictions gives rise to need of a valuation allowance.

Based on Adtalem’s expectations for future taxable income, management believes that it is more likely than not that operating income in other respective jurisdictions will be sufficient to recognize fully all deferred tax assets.

Our effective income tax rates from continuing operations in fiscal year 2020 was negative 2.7%, a decrease from positive 23.5% in fiscal year 2019. The effective tax rates in fiscal years 2020 and 2019 reflect the U.S. federal tax rate of 21%adjusted for foreign rate differences, benefits associated with local tax incentives, changes in valuation allowances and liabilities for uncertain tax positions, and tax benefits on stock-based compensation awards. Additionally, in fiscal year 2020, we did not record a tax provision on the pre-tax gain of $110.7 million on the deal-contingent foreign currency hedge agreement entered into in connection with the sale of Adtalem Brazil completed on April 24, 2020 (see Note 4 “Discontinued Operations and Assets Held for Sale” for additional information) and we recorded a $25.7 million net tax benefit related to a former subsidiary investment loss claimed for the tax year ended June 30, 2018.

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) includes significant changes to the U.S. corporate income tax system, which reduced 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 new taxes on certain foreign-sourced earnings under the Tax Act became effective for Adtalem during the year ended June 30, 2019.

Prior to enactment of 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 no longer intends to indefinitely reinvest any of its accumulated undistributed earnings and profits in foreign operations.

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 GILTI provision of the Tax Act became effective for Adtalem for the year ended June 30, 2019. We have elected to account for GILTI as a period cost.

As of June 30, 2020, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $11.5 million, which if recognized, would impact the effective tax rate. As of June 30, 2019, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of benefits, was $31.8 million, which if recognized, would impact the effective tax rate.

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 not be material. 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, 2020, 2019, and 2018 was $1.5 million, $0.8 million, and $0.7 million, respectively. Interest and penalties expense (benefit) recognized during the years ended June 30, 2020, 2019, and 2018 were $0.0 million, $0.1 million, and ($0.6) million, respectively. The changes in our unrecognized tax benefits were (in thousands):


	Year Ended June 30,
	2020		2019		2018
Balance at beginning of period	$	31,818	$	32,804	$	7,901
Increases from positions taken during prior periods		—		582		1,151
Decreases from positions taken during prior periods		(26,489)		(660)		(3,501)
Increases from positions taken during the current period		6,456		606		29,463
Reductions due to lapse of statute		(231)		(1,390)		(559)
Reductions due to settlement		(73)		(124)		(1,651)
Balance at end of period	$	11,481	$	31,818	$	32,804

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, 2016; in various states for years beginning on or after July 1, 2014; and in our significant foreign jurisdictions for years beginning on or after July 1, 2014. Adtalem is currently under audit in two state and local jurisdictions for various tax years between 2014 and 2017. The Internal Revenue Service (“IRS”) has completed its examination of the Adtalem U.S. tax returns for the tax years ended on or prior to June 30, 2016. The IRS is currently conducting an examination of the tax year ended June 30, 2018. 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.

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, temporarily increases the amount of interest expense the company is allowed to deduct on its U.S. federal tax returns for fiscal years 2019 and 2020, modifies the Tax Credit and Jobs Act of 2017 to allow immediate expensing of qualified improvement property for U.S. federal income tax purposes retroactive to fiscal year 2018, and allows net operating losses incurred in fiscal years 2018, 2019, and 2020 to be carried back five-years and offset up to 100% of U.S. federal taxable income for tax years beginning before fiscal year 2021. Management continues to evaluate the impact of the CARES Act, but at present time does not expect that the provisions of the CARES Act would result in a material tax or cash benefit.

- 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.

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