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Income Taxes

12 Months Ended

Jun. 30, 2021

7. Income Taxes

Income from continuing operations before income taxes, classified by source of income, were as follows (in thousands):


	Year Ended June 30,
	2021		2020		2019
Domestic	$	62,397	$	160,334	$	80,209
Foreign		64,453		76,845		59,538
Total	$	126,850	$	237,179	$	139,747

The components of the provision for (benefit from) income taxes were as follows (in thousands):


	Year Ended June 30,
	2021		2020		2019
Current tax provision (benefit):
U.S. federal	$	17,516	$	(3,097)	$	15,912
State and local		4,389		735		1,749
Foreign		1,856		519		2,224
Total current		23,761		(1,843)		19,885
Deferred tax provision (benefit):
U.S. federal		(2,097)		(4,197)		4,066
State and local		1,641		(104)		9,028
Foreign		1,943		(214)		(101)
Total deferred		1,487		(4,515)		12,993
Provision for (benefit from) income taxes	$	25,248	$	(6,358)	$	32,878

The effective tax rate differs from the statutory tax rates as follows (in thousands):


	Year Ended June 30,
	2021				2020				2019
Income tax at statutory rate	$	26,639	21.0	%	$	49,807	21.0	%	$	29,347	21.0	%
Lower rates on foreign operations		(12,171)	(9.6)	%		(16,210)	(6.8)	%		(12,738)	(9.1)	%
State income taxes		4,390	3.5	%		3,072	1.3	%		5,825	4.2	%
Loss on investment in subsidiary		(374)	(0.3)	%		(25,688)	(10.8)	%		1,797	1.3	%
Gain on derivative		—	—	%		(23,252)	(9.8)	%		—	—	%
Permanent non-deductible items		1,086	0.9	%		(236)	(0.1)	%		469	0.3	%
Foreign tax provisions under GILTI		6,084	4.8	%		6,502	2.7	%		3,231	2.3	%
Other		(406)	(0.3)	%		(353)	(0.1)	%		4,947	3.5	%
Provision for (benefit from) income taxes	$	25,248	19.9	%	$	(6,358)	(2.7)	%	$	32,878	23.5	%

Deferred income tax assets and 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.

The components of the deferred income tax assets and liabilities were as follows (in thousands):


	June 30,
	2021		2020
Employee benefits	$	13,434	$	10,818
Stock-based compensation		6,895		6,924
Receivable reserve		2,920		2,530
Operating lease liabilities		50,808		48,110
Other reserves		4,116		4,748
Loss and credit carryforwards, net		18,756		23,695
Less: valuation allowance		(8,000)		(9,937)
Gross deferred tax assets		88,929		86,888
Depreciation		(2,916)		(177)
Deferred taxes on unremitted foreign earnings		(733)		(525)
Amortization of intangible assets		(53,465)		(54,864)
Operating lease assets		(35,513)		(33,279)
Other accruals		(814)		(741)
Gross deferred tax liability		(93,441)		(89,586)
Net deferred tax asset (liability)	$	(4,512)	$	(2,698)

As of June 30, 2021, Adtalem has $270.0 million of gross, post apportioned state net operating loss carryforwards, and $16.7 million of foreign net operating loss carryforwards in St. Maarten and other jurisdictions. 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, 2021 (in thousands):


	June 30,		Years of Expiration
	2021		Beginning	Ending

U.S. interest expense carryforwards	$	112	no expiration
U.S. credit carryforwards		672	2027	2030
State net operating loss carryforwards		14,398	2023	2040
Foreign net operating loss carryforwards		2,483	2022	2041
Foreign net operating loss carryforwards		1,091	no expiration
Total loss and credit carryforwards, net	$	18,756

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 $8.0 million and $9.9 million as of June 30, 2021 and 2020, 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 was positive 19.9%, negative 2.7%, and positive 23.5% in fiscal year 2021, 2020, and 2019, respectively. The effective tax rates in fiscal years 2021, 2020, and 2019 reflect the U.S. federal tax rate of 21% adjusted for state and local taxes, 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 arrangement entered into in connection with the sale of Adtalem Brazil sale 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 and shifted to a modified territorial tax regime, which created new taxes on certain foreign-sourced earnings. More specifically, 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.

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.

As of June 30, 2021 and 2020, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $10.4 million and $11.5 million, respectively, 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, 2021 and 2020 was $1.9 million and $1.5 million, respectively. Interest and penalties expense recognized during the years ended June 30, 2021, 2020, and 2019 were $0.4 million, $0.0 million, and $0.1 million, respectively. The changes in our unrecognized tax benefits were (in thousands):


	Year Ended June 30,
	2021		2020		2019
Balance at beginning of period	$	11,481	$	31,818	$	32,804
Increases from positions taken during prior periods		47		—		582
Decreases from positions taken during prior periods		(906)		(26,489)		(660)
Increases from positions taken during the current period		43		6,456		606
Reductions due to lapse of statute		(264)		(231)		(1,390)
Reductions due to settlement		(3)		(73)		(124)
Balance at end of period	$	10,398	$	11,481	$	31,818

Adtalem files tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions based on existing tax laws and incentives. 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, 2015; and in our significant foreign jurisdictions for years beginning on or after July 1, 2015. Adtalem is currently under audit in one state and local jurisdiction for tax years 2017 through 2019. The Internal Revenue Service (“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 does not expect that the provisions of the CARES Act would result in a material tax or cash benefit.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “Appropriations Act”) was enacted in response to the COVID-19 pandemic. The Appropriations Act, among other things, temporarily extends through December 31, 2025, certain expiring tax provisions, including look-through treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations. Additionally, the Appropriations Act enacts new provisions and extends certain provisions originated within the CARES Act, enacted on March 27, 2020, including an extension of time for repayment of the deferred portion of employees’ payroll tax through December 31, 2021, and a temporary allowance for full deduction of certain business meals. Adtalem has elected not to defer the employees’ portion of payroll tax. Management does not expect that the other provisions of the Appropriations Act would result in a material tax or cash benefit.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “Rescue Act”) was enacted in response to the COVID-19 pandemic. The Rescue Act, among other things, expands the number of employees subject to the tax deductibility limitation of employee compensation in excess of $1 million for tax years beginning after December 31, 2026 and repeals the election for U.S. affiliated groups to allocate interest expense on a worldwide basis. Management does not expect that the other provisions of the Rescue Act would result in a material tax or cash detriment.

- 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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