Income Taxes

6 Months Ended

Dec. 31, 2020

INCOME TAXES

Income tax benefit consists of the following:


	Transition Period Ended December 31,		Years Ended June 30,
(in millions)	2020		2020		2019		2018
Current:
Federal	$	(75.8)	$	26.6	$	(24.2)	$	7.7
State	(0.6)		4.9		(0.1)		2.2
Foreign	0.2		0.5		0.2		—
Total current	(76.2)		32.0		(24.1)		9.9
Deferred:
Federal	39.1		(51.5)		17.8		(22.7)
State	(3.4)		(4.1)		1.7		0.7
Foreign	(0.5)		(3.6)		0.4		(1.4)
Change in valuation allowance	—		3.5		(0.2)		0.5
Total deferred	35.2		(55.7)		19.7		(22.9)
Total income tax benefit	$	(41.0)	$	(23.7)	$	(4.4)	$	(13.0)

Income (loss) before income taxes consists of the following:


	Transition Period Ended December 31,		Years Ended June 30,
(in millions)	2020		2020		2019		2018
United States	$	(101.8)	$	(240.9)	$	(0.6)	$	122.3
Foreign	7.7		17.6		0.6		(2.2)
Total	$	(94.1)	$	(223.3)	$	—	$	120.1

The differences between income taxes at the statutory federal income tax rate and income taxes reported in the consolidated statements of operations were as follows:


	Transition Period Ended December 31,				Years Ended June 30,
(in millions)	2020				2020				2019				2018
Federal income tax expense at the statutory rate	$	(19.8)	21.0	%	$	(46.9)	21.0	%	$	—	21.0	%	$	33.7	28.1	%
State income taxes, net of federal benefit	(1.2)		1.3	%	(0.2)		0.1	%	2.0		6,422.1	%	2.9		2.4	%
Research and development credits, net of the federal tax on state credits	(1.3)		1.4	%	(2.8)		1.3	%	(3.7)		(11,880.9)	%	(2.1)		(1.7)	%
Uncertain tax positions, net of federal benefit	1.3		(1.4)	%	1.9		(0.9)	%	2.9		9,312.1	%	2.5		2.1	%
Uncertain tax benefits statute expired, net of federal benefit	(0.7)		0.7	%	(0.4)		0.2	%	(7.1)		(22,798.5)	%	—		—	%
Incentive stock option and employee stock purchase plan expense	2.5		(2.7)	%	(0.2)		0.1	%	(3.1)		(9,954.3)	%	(1.7)		(1.4)	%
Foreign rate differential	(2.1)		2.2	%	0.7		(0.3)	%	0.8		2,568.8	%	(0.8)		(0.7)	%
Change in valuation allowance	(0.3)		0.3	%	3.5		(1.7)	%	(0.2)		(642.2)	%	0.6		0.5	%
Tax Cut and Jobs Act impact	—		—	%	—		—	%	—		—	%	(32.0)		(26.6)	%
CARES Act	(20.7)		22.0	%	—		—	%	—		—	%	—		—	%
Fair value adjustments related to acquisition contingent consideration	—		—	%	—		—	%	0.8		2,568.8	%	(17.0)		(14.2)	%
Non-deductible contingent purchase price and transaction costs	0.7		(0.7)	%	(0.3)		0.1	%	—		—	%	—		—	%
Non-deductible meals and entertainment	0.5		(0.5)	%	1.8		(0.8)	%	1.3		4,174.4	%	0.4		0.3	%
Non-deductible officer compensation	0.1		(0.1)	%	1.6		(0.7)	%	0.6		1,926.6	%	—		—	%
Asset impairment	—		—	%	12.6		(5.6)	%	—		—	%	—		—	%
Expired tax attributes	—		—	%	4.2		(1.9)	%	—		—	%	—		—	%
Non-deductible legal settlement	—		—	%	—		—	%	1.9		6,101.0	%	—		—	%
Foreign disregarded election	—		—	%	—		—	%	6.4		20,550.8	%	—		—	%
Changes in revenue recognition/method	—		—	%	—		—	%	(7.3)		(23,440.8)	%	—		—	%
Other, net	—		—	%	0.8		(0.3)	%	0.3		963.4	%	0.5		0.5	%
Total income tax benefit	$	(41.0)	43.5	%	$	(23.7)	10.6	%	$	(4.4)	-14,107.7	%	$	(13.0)	-10.7	%

The significant components of the Company’s deferred tax assets and liabilities were comprised of the following:


	December 31,		June 30,
(in millions)	2020		2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	72.2	$	73.1	$	85.7
Property, plant and equipment	—		37.2		—
Accrued vacation	1.6		1.5		1.2
AR allowance	1.6		1.2		3.3
Stock compensation expense	11.5		13.8		16.0
Research and development credits	24.9		27.6		25.4
Lease right-of-use asset	15.2		16.3		—
Uncertain state tax positions	1.1		1.6		1.3
Other, net	16.9		9.6		9.0
Total gross deferred tax assets	145.0		181.9		141.9
Less valuation allowance	(42.0)		(42.4)		(38.9)
Total deferred tax assets	103.0		139.5		103.0
Deferred tax liabilities:
Intangible assets	144.0		150.3		175.4
Lease liability	14.6		15.8		—
Property, plant and equipment	15.7		—		2.5
Deferred revenue	—		—		7.7
Total deferred tax liabilities	174.3		166.1		185.6
Net deferred tax liability	$	(71.3)	$	(26.6)	$	(82.6)

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to COVID-19 pandemic. The CARES Act made various tax law changes, including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii), enacted technical corrections so that qualified improvement property can be immediately expensed under IRC Section 168(k) and net operating losses arising in fiscal tax years beginning before January 1, 2018 and ending after December 31, 2017 can be carried back two years and carried forward twenty years without a taxable income limitation as opposed to carried forward indefinitely, and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years. As a result of the provision provided under the CARES Act, the Company was able to carry-back federal net operating losses to previous periods, resulting in a $20.7 million tax benefit in the transition period ended December 31, 2020.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that are affecting our fiscal year ending June 30, 2018, and all following fiscal years. The Company’s final analysis of the impact of the Tax Cuts and Jobs Act resulted in a net income tax benefit during the fiscal year ended June 30, 2018 of approximately $32.0 million ($0.44 earnings per share increase). This amount primarily consisted of a net benefit for the corporate rate reduction due to the revaluing of net deferred tax liabilities as a result of the reduction in the federal corporate tax rates.

The Company determined that the provisions of the Tax Act affecting foreign earnings had no material effect or were not applicable to the Company’s fiscal years ended June 30, 2018, 2019, 2020, or to the transition period ended December 31, 2020. This was primarily due to the Company's election made during the fiscal year ended June 30, 2019 to treat its foreign subsidiaries as disregarded entities.

As a result of the economic impact of COVID-19, the Company has incurred a cumulative three-year loss. Pursuant to Accounting Standards Codification Topic 740, the negative evidence of a cumulative loss may be difficult to overcome. However, the Company will have significant future taxable income resulting from the reversal of taxable temporary differences. Primarily due to the availability of such expected future taxable income, the Company concluded that it is more likely than not that the benefits of the majority of its deferred income tax assets will be realized. However, for certain deferred tax assets a valuation allowance has been established, primarily due to limitations imposed by I.R.C. Section 382 and certain jurisdictional limitations. For the transition period ended December 31, 2020, the Company's valuation allowance increased by $0.3 million. For the fiscal years ended June 30, 2020, 2019 and 2018, the Company’s valuation allowance increased by $3.5 million, $1.1 million, and $0.6 million, respectively. The Company will continue to evaluate the impact that the COVID-19 pandemic may have on its results of operations and its ability to realize its deferred tax assets.

The Company acquired Counsyl, Inc. on July 31, 2018 (see Note 17). As part of the purchase accounting for the acquisition, a net deferred tax liability of approximately $67.6 million was recorded, consisting primarily of intangible assets for which the book basis exceeds the tax basis. A corresponding deferred tax asset of $60.7 million was recorded, consisting primarily of net operating loss and research credit carryforwards.

At December 31, 2020, the Company had the following net operating loss and research credit carryforwards (tax effected), with their respective expiration periods. Certain carryforwards are subject to the limitations of Section 382 and 383 of the Internal Revenue Code as indicated (in millions):


Carryforwards	Amount		Subject to sections 382, 383	Expires beginning in year	Through
Federal net operating loss	$	45.0	Yes	2031	2038
Utah net operating loss	2.7		No	2021	Indefinite
California net operating loss	3.7		No	2027	2042
Other state net operating loss	11.5		Yes	2027	2040
Foreign net operating losses (various jurisdictions)	9.4		No	Various	Various
Federal research credit	9.4		Yes	2027	2040
Utah research credit	11.7		No	2021	2034
California research credit	3.6		No	2027	Indefinite
Texas research credit	0.1		No	2039	2040

Consistent with the indefinite reversal criteria of ASC 740-30-25-17, the Company intends to continue to invest undistributed earnings of its foreign subsidiaries indefinitely. However, due to the cumulative losses that have been incurred to date in such foreign operations, the changes of the Tax Act and the aforementioned election to treat its foreign subsidiaries as disregarded entities, no deferred taxes related to the Company’s foreign operations have been recorded. For those foreign entities for which an election has been made to be treated as disregarded for U.S. tax purposes, the appropriate U.S. jurisdiction deferred tax assets and liabilities have been recorded.

The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement criteria as set forth in ASC 740. As of December 31, 2020 and June 30, 2020, the Company had net unrecognized tax benefits of $30.5 million and $23.5 million, respectively. The Company’s gross unrecognized tax benefits as of the transition period ended December 31, 2020 and the fiscal years ended June 30, 2020, 2019 and 2018, and the changes in those balances are as follows:


	Transition Period Ended December 31,		Years Ended June 30,
(in millions)	2020		2020		2019		2018
Unrecognized tax benefits at the beginning of period	$	23.5	$	21.7	$	24.9	$	25.2
Gross increases - current year tax positions	13.9		1.6		2.2		0.6
Gross increases - prior year tax positions	1.0		0.7		0.5		2.4
Gross increases - acquisitions	—		—		2.3		—
Gross decreases - prior year tax positions	(0.1)		—		(0.1)		(3.3)
Gross decreases - settlements	—		—		(2.7)		—
Gross decreases - statute lapse	(0.7)		(0.5)		(5.4)		—
Unrecognized tax benefits at end of year	$	37.6	$	23.5	$	21.7	$	24.9
Interest and penalties in year-end balance	$	2.2	$	1.4	$	0.8	$	1.5

Interest and penalties related to uncertain tax positions are included as a component of income tax expense and all other interest and penalties are included as a component of other income (expense).

The Company files U.S. federal, foreign and state income tax returns in jurisdictions with various statutes of limitations and is subject to examination for the open tax years in the U.S. federal and state jurisdictions of 2015 through 2020 and in the foreign jurisdictions of 2013 through 2020. The Company is currently under audit by the State of New Jersey for the fiscal years June 30, 2013 through 2017; the city of New York for the fiscal years June 30, 2016 through 2018; Germany for the fiscal years June 30, 2013 through 2015; and Switzerland for the fiscal years June 30, 2015 through 2016. Annual tax provisions include amounts considered necessary to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues may differ materially from the amount accrued.

- 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.

+ References + Details