Income Taxes

12 Months Ended

Jun. 30, 2019

10. Income Taxes

In December 2017, the United States government enacted comprehensive income tax legislation (the “Tax Act”). The Tax Act makes broad and complex changes to United States income tax law and includes numerous elements that affect the Company, including a reduced federal corporate income tax rate from 35% to 21%, creating a territorial tax system that includes a one-time mandatory transition tax on previously deferred foreign earnings and changes to business-related exclusions, deductions and credits. Our provision for income taxes reflects a statutory 21.0% and 28.1% weighted-average federal income tax rate for our fiscal years ending June 30, 2019 and 2018, respectively. The Tax Act also has consequences related to our international operations.

We have elected to record Global Intangible Low-Taxed Income (GILTI) aspects of comprehensive U.S. income tax legislation as a period expense. The provision for income taxes for the year ended June 30, 2019, included $537 of federal tax expense from the effects of GILTI.

During the year ended June 30, 2019, we completed our accounting for the Tax Act and recorded a benefit in the provision for income taxes of $360 related to the previously recorded one-time mandatory toll charge on deemed repatriation of undistributed earnings of foreign subsidiaries. We also recorded a benefit in the provision of income taxes of $1,032 as a result of retroactive elections made on certain of our foreign tax credits.

Our consolidated financial statements as of June 30, 2018, reflected the provisional effects of the Tax Act, including:

• a $2,289 provision for income taxes and reduction in deferred tax assets for the remeasurement of deferred tax assets and liabilities to reflect the reduced income tax rate

• $403 provision for income taxes and increase in current liabilities to reflect the one-time mandatory toll charge on the deemed repatriation of undistributed earnings of foreign subsidiaries.

Income before income taxes was:

For the Year Ended June 30	2019			2018			2017
Domestic		$	2,331		$	19,819		$	18,015
Foreign			69,174			68,251			62,528
Income before income taxes		$	71,505		$	88,070		$	80,543

Components of the provision for income taxes were:

For the Year Ended June 30	2019			2018			2017
Current provision (benefit):
Federal		$	(459)		$	81		$	383
State and local			102			1,744			724
Foreign			16,603			15,268			14,839
Total current provision			16,246			17,093			15,946
Deferred provision (benefit):
Federal			858			2,746			4,675
State and local			432			2,156			251
Foreign			(691)			769			(833)
Change in valuation allowance–foreign			(53)			423			(4,111)
Total deferred provision (benefit)			546			6,094			(18)
Provision for income taxes		$	16,792		$	23,187		$	15,928

During 2017, based on continued profitability, we concluded that it was more likely than not that the value of certain foreign deferred tax assets would be realized, and it was no longer necessary to maintain a related valuation allowance. Accordingly, we released the valuation allowance related to these foreign deferred tax assets. We review the realizability of our deferred tax assets when circumstances so indicate.

Reconciliation of the federal statutory rate to the Company’s effective tax rate were:

For the Year Ended June 30	2019		2018		2017
Federal income tax rate		21.0%		28.1%		35.0%
State and local taxes, net of federal benefit		0.6		1.5		0.9
Foreign income tax rates		6.9		(1.5)		(6.8)
Foreign incentive tax rates		(2.8)		(3.3)		(3.1)
Domestic tax on foreign income		—		—		2.7
Changes in uncertain tax positions		(1.0)		1.1		1.6
Permanent items		0.6		0.5		(0.9)
Exercise of employee stock options		(0.4)		(4.3)		(3.8)
Global Intangible Low-Taxed Income		0.8		—		—
Mandatory toll charge from Tax Act		(0.5)		0.5		—
Reduction of domestic deferred tax assets		—		2.6		—
Reduction of foreign deferred tax assets		—		1.3		—
Recognition of federal tax credits		(1.1)		—		—
Recognition of foreign tax credits		(1.4)		(0.7)		—
Reclassification from accumulated other comprehensive income		—		0.6		—
Release of foreign valuation allowance		—		—		(5.1)
Other		(0.8)		(0.1)		(0.7)
Effective tax rate		23.5%		26.3%		19.8%

The undistributed earnings of foreign subsidiaries were subject to the U.S. one-time mandatory toll charge and are eligible to be repatriated to the U.S. without additional U.S. tax under the Tax Act. If amounts are repatriated from certain of our foreign subsidiaries, we could be subject to additional non-U.S. income and withholding taxes. We consider undistributed earnings of such foreign subsidiaries to be indefinitely reinvested. We do not provide income taxes for foreign currency translation adjustments relating to investments in international subsidiaries that will be held indefinitely.

The tax effects of significant temporary differences that comprise deferred tax assets and liabilities were:

As of June 30	2019			2018
Deferred tax assets:
Employee related accruals		$	5,735		$	4,952
Inventory			4,766			3,953
Environmental remediation			1,128			1,341
Net operating loss carry forwards–domestic			902			1,577
Net operating loss carry forwards–foreign			3,703			3,243
Other			6,302			9,986
			22,536			25,052
Valuation allowance			(808)			(861)
			21,728			24,191
Deferred tax liabilities:
Property, plant and equipment and intangible assets			(6,071)			(8,957)
Other			(772)			(1,906)
			(6,843)			(10,863)
Net deferred tax asset		$	14,885		$	13,328

Deferred taxes are included in the consolidated balance sheets as follows:

As of June 30	2019			2018
Other assets		$	16,770		$	15,424
Other liabilities			(1,885)			(2,096)
		$	14,885		$	13,328

The valuation allowance for deferred tax assets were:

As of June 30	2019			2018			2017
Balance at beginning of period		$	861		$	438		$	4,614
Provision for income taxes			(53)			423			(4,111)
Net operating loss utilization			—			—			(65)
Balance at end of period		$	808		$	861		$	438

The valuation allowances for deferred tax assets as of June 30, 2019, 2018 and 2017 were solely related to foreign jurisdictions.

We have $15,067 of state net operating loss carry forwards that will expire in 2018 through 2037. In addition, we have $13,754 of foreign net operating loss carry forwards, most of which are in jurisdictions that have no expiration.

As tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon examination. Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. Substantially all of these unrecognized tax benefits, if recognized, would benefit our effective income tax rate.

The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:

As of June 30	2019			2018			2017
Unrecognized tax benefits–beginning of period		$	7,000		$	6,553		$	4,946
Tax position changes–current period			528			1,749			1,490
Tax position changes–prior periods, net of settlements with tax authorities			(317)			(994)			—
Lapse of statute of limitations			(1,053)			—			(391)
Translation			185			(308)			508
Unrecognized tax benefits–end of period			6,343			7,000			6,553
Interest and penalties–end of period			750			633			449
Total liabilities related to uncertain tax positions		$	7,093		$	7,633		$	7,002

We recognize interest and penalties associated with uncertain tax positions as a component of the provision for income taxes. We recognized interest and penalties expense of $94, $203 and $116 for 2019, 2018 and 2017, respectively.

During 2020, we potentially will reverse $1,868 of uncertain tax positions as a result of the lapse of the statute of limitations, with a corresponding benefit to the provision for income taxes.

Income tax returns for the following periods are no longer subject to examination by the relevant tax authorities:

• U.S. federal and significant states, through June 30, 2007;

• Brazil, through December 31, 2013;

• Israel, through June 30, 2014 for certain subsidiaries and through June 30, 2015 for certain subsidiaries.