Income Taxes

The provision for income taxes is comprised of:



	Year Ended June 30,
	2019			2018			2017
				(in thousands)
U.S. federal taxes:
Current	$	(57	)	$	55		$	1,043
Deferred	(510		)	(1,943		)	(325		)
Non-U.S. taxes:
Current	1,765			2,898			(4,615		)
Deferred	55			(298		)	7,548
State taxes, net of federal benefit:
Current	3			(4		)	1
Total provision for income taxes	$	1,256		$	708		$	3,652

The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows (in percentage):



	Year Ended June 30,
	2019		2018		2017
United States statutory rate	21.0	%	28.1	%	34.0	%
Stock-based compensation	0.1		(1.4	)	(0.4	)
Foreign taxes, net	(40.9	)	39.5		(0.7	)
Research and development credit	11.7		(17.1	)	(4.9	)
Non-deductible expenses	(2.7	)	7.0		0.2
U.S. Tax Act deferred tax re-measurement	—		(44	)	—
Other	1.4		0.4		0.1
	(9.4	)%	12.5	%	28.3	%

The domestic and foreign components of income before taxes are:



	Year Ended June 30,
	2019			2018		2017
				(in thousands)
U.S. operations	$	4,100		$	4,219	$	4,016
Non-U.S. operations	(17,482		)	1,437		8,896
Income before income taxes	$	(13,382	)	$	5,656	$	12,912

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:



	June 30,
	2019			2018
	(in thousands)
Deferred tax assets:
Accrued compensation	$	1,428		$	2,121
Net operating loss carryforwards	16,782			7,213
Depreciation	10,036			10,968
Tax credits	10,882			8,380
Capitalized intangible assets	11,981			12,942
Capitalized Costs	—			2,292
Accruals and reserves	1,000			1,197
Total deferred tax assets	52,109			45,113
Valuation allowance	(35,420		)	(30,105		)
Total deferred tax assets, net of valuation allowance	16,689			15,008
Deferred tax liabilities:
Depreciation and amortization	(12,243		)	(10,819		)
Accruals and reserves	(90		)	(10		)
Total deferred tax liabilities	(12,333		)	(10,829		)
Net deferred tax assets	$	4,356		$	4,179

The breakdown between deferred tax assets and liabilities is as follows:



	June 30,
	2019			2018
	(in thousands)
Long-term deferred tax assets	$	4,822		$	4,892
Long-term deferred tax liabilities	(466		)	(713		)
Net deferred tax assets	$	4,356		$	4,179

The Company’s valuation allowance related to deferred income taxes as reflected in the consolidated balance sheets was $35.4 million and $30.1 million as of June 30, 2019 and 2018, respectively. The change in valuation allowance for June 30, 2019 and 2018 was an increase of $5.3 million and $23.9 million, as revised for the correction of the immaterial items described below, respectively.

In fiscal 2019, the Company corrected the prior year balance of deferred tax assets relating to capitalized intangible assets as well as the valuation allowance related to those assets by an equal and offsetting amount. The capitalized intangible assets and valuation allowance as of June 30, 2018 have both been increased in the table above by $12.9 million relating to certain patent rights and related intellectual property (“IP”) (see below). The Company carries a full valuation allowance against the JV Company deferred tax assets, therefore these immaterial adjustments to the disclosure had no effect on the consolidated balance sheet as of June 30, 2018 and consolidated statements of operations and cash flows for the year then ended.

During the quarter ended September 30, 2016, the Company fulfilled its obligations to contribute certain packaging equipment as required by the JV Agreement by transferring the legal titles of such equipment to the JV Company. As a result of the transfer, the Company reduced its deferred tax assets by $6.6 million and recorded a $6.6 million in prepaid tax asset, which is amortized to tax expense over the useful life of the assets. On July 1, 2017, we adopted ASU 2016-16, Intra-Entity Transfers of Assets other than Inventory, which resulted in a de-recognition of a prepaid tax asset of $5.5 million related to the prior period intra-entity asset transfer with the JV Company, with an offsetting reduction to retained earnings. In July 2017, the Company contributed to the JV Company certain China patent rights and certain manufacturing related IP, which per ASU 2016-16, resulted in a deferred tax asset of $12.9 million on the difference between the tax basis and the consolidated U.S. GAAP book value of $0. Because the JV Company provided a full valuation allowance, there was no change to our net deferred tax assets for the initial adoption of ASU 2016-16.

At June 30, 2019 and 2018, the Company provided a valuation allowance for its state research and development credit carryforward deferred tax assets of $5.1 million and $4.4 million, respectively, as it generated more state tax credits each year than it can utilize. The Company intends to maintain a partial valuation allowance equal to the state research and development credit carryforwards in excess of the state net deferred tax liabilities on all other state book/tax differences and net operating loss carryforward. Furthermore, the Company provided a valuation allowance mainly for the net operating loss, fixed asset and intangible asset related to deferred tax assets of the JV Company totaling $30.3 million and $25.7 million as of June 30, 2019 and 2018, respectively. The Company intends to maintain a valuation allowance equal to the JV Company’s net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

At June 30, 2019, the Company had federal net operating loss and research and development tax credit carryforwards of approximately $24.3 million and $5.6 million, respectively. The federal net operating losses begin to expire in 2038 and the tax credits begin to expire in 2032, if not utilized. At June 30, 2019, the Company had $0.6 million of state net operating loss carryforwards and had tax credit carryforwards of approximately $6.7 million. Approximately $0.8 million of the state tax credits begin to expire in 2020, if not utilized. The remaining $5.9 million of the state tax credits carryforward indefinitely. At June 30, 2019, the JV Company had $77.5 million of net operating loss carryforwards which begin to expire in 2021, if not utilized.

The Company has not provided for withholding taxes on the undistributed earnings of its foreign subsidiaries because it intends to reinvest such earnings indefinitely. As of June 30, 2019, the cumulative amount of undistributed earnings of its foreign entities considered permanently reinvested is $140.6 million. The determination of the unrecognized deferred tax liability on these earnings is not practicable. Should the Company decide to remit this income to its Bermuda parent company in a future period, its provision for income taxes may increase materially in that period.

A reconciliation of the beginning and ending amount of unrecognized tax benefits from July 1, 2016 to June 30, 2019 is as follows:



	Year Ended June 30,
	2019			2018			2017
	(in thousands)
Balance at beginning of year	$	7,143		$	6,589		$	6,743
Additions based on tax positions related to the current year	417			721			401
Reductions based on tax positions related to prior years	(271		)	(11		)	(4		)
Reductions due to lapse of applicable statute of limitations	(139		)	(156		)	(551		)

Balance at end of year	$	7,150		$	7,143		$	6,589

At June 30, 2019, the total unrecognized tax benefits of $7.2 million included $6.3 million of unrecognized tax benefits that have been netted against the related deferred tax assets. The remaining $0.9 million of unrecognized tax benefits was recorded within long-term income tax payable on the Company's consolidated balance sheet as of June 30, 2019. The Company cannot reasonably estimate the timing and amount of potential cash settlements on the unrecognized tax benefits.

The total unrecognized tax benefits of $7.2 million at June 30, 2019 included $4.2 million that, if recognized, would reduce the effective income tax rate in future periods. It is reasonably possible that the Company will recognize approximately $0.2 million reduction to its uncertain tax positions during the next twelve months, related to potential expiration of the relevant statute of limitations.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. The amount of interest and penalties accrued at June 30, 2019 was $0.2 million, of which $0.03 million was recognized in the year ended June 30, 2019. The amount of interest and penalties accrued at June 30, 2018 was $0.1 million, of which $(0.01) million was recognized in the year ended June 30, 2018.

The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2019 remain open to examination by U.S. federal and state tax authorities. The tax years 2012 to 2019 remain open to examination by foreign tax authorities.

The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. If the Company's estimate of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. In the July 2015 ruling, the Tax Court concluded that the sharing of the cost of employee stock compensation in a company’s cost-sharing arrangement was invalid under the U.S. Administrative Procedures Act. In June 2019, a panel of the Ninth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned U.S. Court of Appeals for the Ninth Circuit to hold an en banc rehearing of the case. Due to the uncertainty surrounding the status of the current regulations and questions related to the scope of potential benefits, the Company has not recorded any benefit as of June 30, 2019. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.