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Income Taxes

12 Months Ended

Jun. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

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

​

​	​	​	​	​	​	​	​	​	​
​	​	Year Ended June 30,
​	​	2023		​	2022		​	2021
Domestic	​	$	51,422	​	$	(112,151)	​	$	12,471
Foreign	​		60,613	​		60,657	​		63,295
Total	​	$	112,035	​	$	(51,494)	​	$	75,766

​

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

​

​	​	​	​	​	​	​	​	​	​
​	​	Year Ended June 30,
​		2023		​	2022		​	2021
Current tax provision (benefit):		​	​	​	​	​	​	​	​
U.S. federal	​	$	13,761	​	$	(6,767)	​	$	9,860
State and local	​		824	​		4,154	​		1,691
Foreign	​		614	​		725	​		547
Total current	​		15,199	​		(1,888)	​		12,098
Deferred tax provision (benefit):	​	​	​	​	​	​	​	​	​
U.S. federal	​		(1,099)	​		(6,425)	​		(2,970)
State and local	​		(4,347)	​		(6,597)	​		996
Foreign	​		530	​		(629)	​		2,194
Total deferred	​		(4,916)	​		(13,651)	​		220
Provision for (benefit from) income taxes	​	$	10,283	​	$	(15,539)	​	$	12,318

​

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Year Ended June 30,
​	​	2023				​	​	2022				​	​	2021
Income tax at statutory rate	​	$	23,527	​	21.0	%	​	$	(10,814)	​	21.0	%	​	$	15,911	​	21.0	%
Lower rates on foreign operations	​		(11,668)		(10.4)	%	​		(12,879)		25.0	%	​		(10,664)		(14.1)	%
State income taxes	​		2,719		2.4	%	​		(661)		1.3	%	​		1,199		1.6	%
Loss on investment in subsidiary	​		—		—	%	​		(1,669)		3.2	%	​		—		—	%
Deferred tax benefit from acquisitions and divestitures	​		—		—	%	​		(1,153)		2.2	%	​		—		—	%
Research and development tax credits	​	​	(1,862)	​	(1.7)	%	​	​	—		—	%	​	​	—		—	%
Change in valuation allowance	​	​	(9,769)	​	(8.7)	%	​	​	5,406		(10.5)	%	​	​	(162)		(0.2)	%
Reduction in state loss carryforwards	​	​	2,340	​	2.1	%	​	​	(5,882)		11.4	%	​	​	—		—	%
Permanent non-deductible items	​		1,630		1.5	%	​		2,788		(5.4)	%	​		796		1.1	%
Foreign tax provisions under GILTI	​	​	3,569	​	3.2	%	​		8,581	​	(16.7)	%	​		4,787	​	6.3	%
Other	​		(203)		(0.2)	%	​		744		(1.4)	%	​		451		0.6	%
Provision for (benefit from) income taxes	​	$	10,283		9.2	%	​	$	(15,539)		30.2	%	​	$	12,318		16.3	%

​

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,
​	​	2023		​	2022
Employee benefits	​	$	11,719	​	$	9,936
Stock-based compensation	​		7,310	​		6,675
Receivable reserve	​		6,246	​		6,919
Capitalized research and experimental costs	​		8,075	​		—
Operating lease liabilities	​	​	41,235	​	​	44,089
Other reserves	​		6,246	​		1,865
Loss and credit carryforwards, net	​		19,259	​		21,206
Less: valuation allowance	​		(621)	​		(10,390)
Gross deferred tax assets	​		99,469	​		80,300
Depreciation	​		(5,643)	​		(5,314)
Deferred taxes on unremitted foreign earnings	​	​	(428)	​	​	(397)
Amortization of intangible assets	​		(31,294)	​		(18,975)
Operating lease assets	​	​	(31,478)	​	​	(30,075)
Gross deferred tax liability	​		(68,843)	​		(54,761)
Net deferred tax asset	​	$	30,626	​	$	25,539

​

As of June 30, 2023, Adtalem has $190.8 million of gross, post apportioned state net operating loss carryforwards, and $17.3 million of foreign net operating loss carryforwards in St. Maarten and other jurisdictions. As of June 30, 2022, Adtalem had $259.9 million of gross, post apportioned state net operating loss carryforwards, and $15.7 million of foreign net operating loss carryforwards in St. Maarten and other jurisdictions.

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) requires taxpayers to capitalize and subsequently amortize research and experimental (“R&E”) expenditures that fall within the scope of Internal Revenue Code Section 174 for tax years starting after December 31, 2021. This rule became effective for Adtalem during fiscal year 2023 and resulted in the deferred tax asset for capitalization of R&E costs of $8.1 million, based on interpretation of the law as currently enacted. Adtalem will capitalize and amortize these costs for tax purposes over 5 years for R&E performed in the U.S. and over 15 years for R&E performed outside of the U.S.

Adtalem has the following tax net operating loss (tax effected), interest (tax effected), and credit carryforwards as of June 30, 2023 (in thousands):

​

​	​	​	​	​	​	​	​
​	​	June 30,		​	Years of Expiration
​	​	2023		​	Beginning	​	Ending
U.S. interest expense carryforwards	​	$	1,861		no expiration
U.S. credit carryforwards	​	​	672	​	2027	​	2030
State net operating loss carryforwards	​		10,388		2024		2042
State interest expense carryforwards	​	​	862	​	no expiration
Foreign net operating loss carryforwards	​		5,476		2024		2033
Total loss and credit carryforwards, net	​	$	19,259		​	​	​

​

Three of Adtalem’s businesses 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.

Adtalem does not assert that the accumulated undistributed earnings of its foreign subsidiaries are indefinitely reinvested in foreign jurisdictions. Adtalem has accrued applicable state income and foreign withholding taxes on such distributed earnings.

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 $0.6 million as of June 30, 2023 and mainly relates to foreign net operating loss carryforwards. The valuation allowance on our deferred tax assets was $10.4 million as of June 30, 2022 and relates to foreign and state net operating loss carryforwards. The valuation allowance decreased by $9.8 million in fiscal year 2023 compared to fiscal year 2022 and increased by $5.4 million in fiscal year 2022 compared to fiscal year 2021. Insufficient projected taxable income in certain jurisdictions gives rise to the need for 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 income tax provisions or benefits from continuing operations were $10.3 million tax provision, $15.5 million tax benefit, and $12.3 million tax provision in fiscal year 2023, 2022, and 2021, respectively. Fiscal year 2023 resulted in an income tax provision compared to an income tax benefit in fiscal year 2022 primarily due to the impacts recognized in fiscal year 2022 related to the Walden acquisition. In addition, in fiscal year 2023, we recorded a net tax benefit of $6.4 million for the release of a valuation allowance on certain deferred tax assets based on our reassessment of the amount of state net operating loss carryforwards that are more likely than not to be realized. The net benefit is comprised of the release of a valuation allowance of $9.3 million offset by a reduction in state net operating loss carryforwards of $2.3 million and a revaluation of deferred tax assets due to a tax rate change of $0.6 million. The income tax benefits in fiscal year 2022 and the income tax expense in fiscal years 2023 and 2021 reflect the U.S. federal tax rate of 21% adjusted for taxes related to global intangible low-taxed income (“GILTI”), state and local taxes, benefits of the foreign rate differences, tax credits related to research and development expenditures, a net tax benefit for the release of a valuation allowance on state net operating loss carryforwards, and benefits associated with local tax incentives.

As of June 30, 2023 and 2022, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $13.1 million and $11.6 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 be immaterial. 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, 2023 and 2022 was $1.6 million and $0.9 million, respectively. Interest and penalties expense recognized during the years ended June 30, 2023, 2022, and 2021 were a net increase of $0.7 million, $0.3 million, and $0.2 million, respectively. The changes in our unrecognized tax benefits were (in thousands):

​

​	​	​	​	​	​	​	​	​	​
​	​	Year Ended June 30,
​	​	2023		​	2022		​	2021
Balance at beginning of period	​	$	11,645	​	$	9,836	​	$	10,473
Increases from positions taken during prior periods	​		1,299	​		1,074	​		—
Decreases from positions taken during prior periods	​		—	​		(1,737)	​		(419)
Increases from positions taken during the current period	​		665	​		2,845	​		42
Reductions due to lapse of statute	​		(481)	​		(373)	​		(257)
Reductions due to settlement	​		—	​		—	​		(3)
Balance at end of period	​	$	13,128	​	$	11,645	​	$	9,836

​

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, 2019; in various states for years beginning on or after July 1, 2017; and in our significant foreign jurisdictions for years beginning on or after July 1, 2017.

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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.

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