Income Taxes

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code, which have affected our current results and will affect our future results.

The following are significant changes in the tax code that became effective for the Company beginning July 1, 2018:


•	eliminating the deduction for domestic production activity;


•	limiting the annual deduction for business interest;


•	taxing global intangible low-tax income;


•	allowing a deduction for domestically earned foreign intangible income; and


•	restricting further deductibility of executive performance compensation in excess of $1.0 million; and


•	establishing a new base erosion and anti-abuse tax on payments between U.S. taxpayers and foreign related parties.

We completed the accounting for the Act as of December 31, 2018 and accounted for the tax effect of the Act as follows:

Deferred Taxes Remeasurement

We remeasured our domestic deferred tax assets and liabilities based on the rates at which we expect them to reverse in the future. At June 30, 2018, we completed the remeasurement of our domestic deferred tax assets and liabilities which resulted in an income tax benefit of $0.5 million recognized in fiscal 2018.

One-time Transition Tax on Unrepatriated Earnings of Certain Foreign Subsidiaries

The Act includes a one-time transition tax based on our total post-1986 foreign earnings and profits ("E&P") which we have previously deferred from U.S. income taxes. Based on our completed calculations surrounding this tax, we incurred no additional tax related to this provision since our foreign subsidiaries have overall negative E&P.

Global Intangible Low-Tax Income (“GILTI”)

The Act creates a new requirement that certain income earned by controlled foreign corporations must be included currently in the gross income of the U.S. shareholder. Under U.S. GAAP, we have made an accounting policy election to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred instead of factoring such amounts into the measurement of our deferred taxes. For fiscal 2019, we have no U.S. taxable income inclusion related to GILTI.

Valuation Allowances on Foreign Tax Credit Carryforwards

We continue to assess our ability to utilize our foreign tax credits in light of the lower U.S. federal income tax rate. As of June 30, 2019, we had $1.5 million of foreign tax credit carryforwards, the majority of which relate to our branch operations in Canada. Future operations of our Canadian branches will impact our ability to utilize these credits. During our third fiscal quarter we concluded that we are unlikely to realize the benefit of foreign tax credits generated by our Canadian branch operations, which expire in fiscal 2021. Therefore, we recorded a valuation allowance of $0.6 million during the third fiscal quarter. In our fourth fiscal quarter, we placed an additional valuation allowance of $0.3 million on foreign tax credits expiring in fiscal 2025. The remaining credits will expire in fiscal 2023 through fiscal 2025 if not utilized.

Indefinite Reinvestment Assertion

We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30. Based on our analysis of the Act, we do not anticipate the need to provide for additional taxes for basis differences or withholding taxes on remitted foreign earnings in the immediate future.

Sources of pretax income (loss)



	Fiscal Years Ended
	June 30, 2019			June 30, 2018			June 30, 2017
	(In thousands)
Domestic	$	46,032		$	(2,656	)	$	19,763
Foreign	(7,620		)	(9,492		)	(17,317		)
Total	$	38,412		$	(12,148	)	$	2,446

Components of the provision for income tax expense (benefit)



	Fiscal Years Ended
	June 30, 2019			June 30, 2018			June 30, 2017
	(In thousands)
Current:
Federal	$	6,085		$	(121	)	$	6,522
State	2,390			135			(185		)
Foreign	(97		)	504			(1,509		)
	8,378			518			4,828
Deferred:
Federal	(528		)	1,093			618
State	451			(590		)	101
Foreign	2,129			(1,689		)	(3,239		)
	2,052			(1,186		)	(2,520		)
	$	10,430		$	(668	)	$	2,308

Reconciliation between the expected income tax provision applying the domestic federal statutory tax rate and the reported income tax provision



	Fiscal Years Ended
	June 30, 2019			June 30, 2018			June 30, 2017
	(In thousands)
Expected provision (benefit) for federal income taxes at the statutory rate	$	8,067		$	(3,408	)	$	857
State income taxes, net of federal benefit	2,288			247			808
Impairment of non-deductible goodwill⁽¹⁾	—			2,342			—
Charges without tax benefit	1,233			1,100			1,741
Change in valuation allowance⁽²⁾	4,512			1,173			1,295
Reversal of branch liability⁽²⁾	(3,546		)	—			—
Excess tax expense (benefit) on stock-based compensation⁽³⁾	(296		)	511			(496		)
Remeasurement of deferred taxes⁽⁴⁾	—			(455		)	—
IRC S199 deduction	—			—			(749		)
Research and development and other tax credits	(1,972		)	(1,665		)	(1,626		)
Foreign tax differential	(248		)	(10		)	1,496
Noncontrolling interest	—			—			(112		)
Change in uncertain tax positions	22			(7		)	(22		)
Other	370			(496		)	(884		)
Provision (benefit) for federal, state and foreign income taxes	$	10,430		$	(668	)	$	2,308


(1)	Relates to a $17.3 million impairment of goodwill, which included $8.3 million of non-deductible goodwill. See Note 4 - Goodwill and Other Intangible Assets for more information about the impairment.

(2)

In fiscal 2019, the Company placed $4.5 million of valuation allowances on net operating loss carryforwards and foreign tax credits generated by its branch operations in Canada, which will likely not be utilized prior to their expiration. These valuation allowances were largely offset by the reversal $3.5 million of branch liabilities associated with the Canadian net operating loss carryforwards and foreign tax credits.


(3)	This represents the amount recognized for excess tax benefits upon the vesting or exercise of nonvested deferred share awards and stock options, respectively, for which the Company expects to receive an income tax deduction. The Company adopted ASU 2016-09 in fiscal 2017, which required that excess tax benefits and tax deficiencies be recognized as part of the provision for income taxes.


(4)	This represents the remeasurement of deferred taxes in connection with Tax Cuts and Jobs Act - see Deferred Taxes Remeasurement paragraph above.

Significant components of the Company’s deferred tax assets and liabilities



	June 30, 2019			June 30, 2018
	(In thousands)
Deferred tax assets:
Warranty reserve	$	206		$	206
Bad debt reserve	238			1,629
Paid-time-off accrual	616			575
Insurance reserve	1,577			1,608
Legal reserve	1			27
Net operating loss benefit and credit carryforwards	10,054			10,169
Valuation allowance	(4,959		)	(1,638		)
Accrued compensation and pension	1,115			758
Stock compensation expense on nonvested deferred shares	3,679			2,733
Accrued losses	194			171
Foreign currency translation and other	833			1,066
Total deferred tax assets	13,554			17,304
Deferred tax liabilities:
Tax over book depreciation	9,349			8,137
Tax over book amortization	1,770			702
Branch future liability	34			3,018
Receivable holdbacks and other	16			1,028
Total deferred tax liabilities	11,169			12,885
Net deferred tax asset	$	2,385		$	4,419

As reported in the Consolidated Balance Sheets:



	June 30, 2019			June 30, 2018
	(In thousands)
Deferred income tax assets	2,683			4,848
Deferred income tax liabilities	(298		)	(429		)
Net deferred tax asset	$	2,385		$	4,419

Operating loss and tax credit carryforwards

The Company has state net operating loss carryforwards, state tax credit carryforwards, federal foreign tax credit carryforwards, foreign net operating loss carryforwards and foreign tax credit carryforwards. The valuation allowance at June 30, 2019 and June 30, 2018 reduces the recognized tax benefit of these carryforwards to an amount that is more likely than not to be realized. These carryforwards will generally expire as shown below:



Operating Loss Carryforwards	Expiration Period	Amount (in thousands)
State net operating losses	June 2024 to June 2039	$	18,638
Foreign net operating losses	June 2029 to June 2039	$	23,749



Tax Credit Carryforwards	Expiration Period	Amount (in thousands)
State tax credits	June 2032 to June 2034	$	834
Federal foreign tax credits	June 2020 to June 2025	$	1,302
Foreign tax credits	June 2035 to June 2039	$	660

Other

The Company files tax returns in multiple domestic and foreign taxing jurisdictions. With a few exceptions, the Company is no longer subject to examination by taxing authorities through fiscal 2014. At June 30, 2019, the Company updated its evaluation of its open tax years in all known jurisdictions. We have recorded a $0.5 million liability as of June 30, 2019 for unrecognized tax positions and the payment of related interest and penalties. We treat the related interest and penalties as income tax expense. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority will occur.