Income Taxes
The provision for income taxes is comprised of:
|
| | | | | | | | | | | |
| Year Ended June 30, |
| 2017 | | 2016 | | 2015 |
| | | (in thousands) | | |
U.S. federal taxes: | | | | |
Current | $ | 1,043 |
| | $ | 152 |
| | $ | 66 |
|
Deferred | (325 | ) | | 650 |
| | 852 |
|
Non-U.S. taxes: | | | | |
Current | (4,615 | ) | | 3,382 |
| | 3,059 |
|
Deferred | 7,548 |
| | (169 | ) | | (15 | ) |
State taxes, net of federal benefit: | | | | |
Current | 1 |
| | 6 |
| | (65 | ) |
| | | | | |
Total provision for income taxes | $ | 3,652 |
| | $ | 4,021 |
| | $ | 3,897 |
|
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows (in percentage):
|
| | | | | | | | |
| Year Ended June 30, |
| 2017 | | 2016 | | 2015 |
United States statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State taxes, net of federal benefit | — |
| | 0.4 |
| | 1.2 |
|
Stock based compensation | (0.4 | ) | | (0.4 | ) | | 0.4 |
|
Foreign taxes, net | (0.7 | ) | | 440.3 |
| | (145.7 | ) |
Research and development credit | (4.9 | ) | | (69.3 | ) | | 10 |
|
Non-deductible expenses | 0.2 |
| | 1.7 |
| | (0.7 | ) |
Other | 0.1 |
| | (0.1 | ) | | — |
|
| 28.3 | % | | 406.6 | % | | (100.8 | )% |
The domestic and foreign components of income (loss) before taxes are:
|
| | | | | | | | | | | |
| Year Ended June 30, |
| 2017 | | 2016 | | 2015 |
| | | (in thousands) |
| | |
U.S. operations | $ | 4,016 |
| | $ | 4,259 |
| | $ | 4,614 |
|
Non-U.S. operations | 8,896 |
| | (3,270 | ) | | (8,480 | ) |
Income (loss) before income taxes | $ | 12,912 |
| | $ | 989 |
| | $ | (3,866 | ) |
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, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Accrued compensation | $ | 2,322 |
| | $ | 2,267 |
|
Net operating loss carryforwards | 1,509 |
| | 67 |
|
Depreciation | 4,533 |
| | 10,345 |
|
Tax credits | 6,309 |
| | 6,069 |
|
Capitalized Costs | 412 |
| | — |
|
Accruals and reserves | 1,038 |
| | 934 |
|
Total deferred tax assets | 16,123 |
| | 19,682 |
|
Valuation allowance | (6,178 | ) | | (2,894 | ) |
Total deferred tax assets, net of valuation allowance | 9,945 |
| | 16,788 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (7,979 | ) | | (7,388 | ) |
Accruals and reserves | (31 | ) | | (241 | ) |
Total deferred tax liabilities | (8,010 | ) | | (7,629 | ) |
Net deferred tax assets | $ | 1,935 |
| | $ | 9,159 |
|
The breakdown between current and non-current deferred tax assets and liabilities is as follows:
|
| | | | | | | |
| June 30, |
| 2017 | | 2016 |
| (in thousands) |
Long-term deferred tax assets | $ | 4,594 |
| | $ | 12,132 |
|
Long-term deferred tax liabilities | (2,659 | ) | | (2,973 | ) |
| | | |
Net deferred tax assets | $ | 1,935 |
| | $ | 9,159 |
|
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. As of June 30, 2017, the prepaid tax asset was amortized down to $5.5 million, of which $1.1 million and $4.4 million were included in prepaid and other current assets and other long-term assets on the Company’s balance sheet, respectively.
At June 30, 2017 and 2016, the Company provided a valuation allowance for its state research and development credit carryforward deferred tax assets of $3.3 million and $2.8 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. Furthermore, the Company provided a valuation allowance mainly for the net operating loss, fixed asset and intangible asset related deferred tax assets of the JV Company totaling $2.9 million and $0.1 million as of June 30, 2017 and 2016, 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, 2017, the Company had federal tax credit carryforwards of approximately $2.8 million. The federal tax credits begin to expire in 2031, if not utilized. At June 30, 2017, the Company had no state net operating loss carryforwards and had tax credit carryforwards of approximately $5.2 million. Approximately $0.4 million of the state tax credits begin to expire in 2018, if not utilized. The remaining $4.8 million of the state tax credits carryforward indefinitely. At June 30, 2017, the JV Company had $10.1 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, 2017, the cumulative amount of undistributed earnings of its foreign entities considered permanently reinvested is $91.9 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.
At June 30, 2017, the Company had approximately $6.6 million in total unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits from July 1, 2014 to June 30, 2017 is as follows:
|
| | | | | | | | | | | |
| Year Ended June 30, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Balance at beginning of year | $ | 6,743 |
| | $ | 6,412 |
| | $ | 6,760 |
|
Additions based on tax positions related to the current year | 401 |
| | 388 |
| | 297 |
|
Additions (reductions) based on tax positions related to prior years | (4 | ) | | — |
| | 4 |
|
Reductions due to lapse of applicable statute of limitations | (551 | ) | | (57 | ) | | (649 | ) |
| | | | | |
Balance at end of year | $ | 6,589 |
| | $ | 6,743 |
| | $ | 6,412 |
|
At June 30, 2017, the total unrecognized tax benefits of $6.6 million included $5.8 million of unrecognized tax benefits that have been netted against the related deferred tax assets. The remaining $0.8 million of unrecognized tax benefits was recorded within long-term income tax payable on the Company's consolidated balance sheet as of June 30, 2017.
The total unrecognized tax benefits of $6.6 million at June 30, 2017 included $4.0 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.
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, 2017 was $0.1 million, of which $(0.1) million was recognized in the year ended June 30, 2017. The amount of interest and penalties accrued at June 30, 2016 was $0.3 million, of which $0.3 million was recognized in the year ended June 30, 2016.
The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2017 remain open to examination by U.S. federal and state tax authorities. The tax years 2010 to 2017 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 share-based compensation expense in an intercompany cost-sharing arrangement. A final decision has yet to be issued by the Tax Court due to other outstanding issues related to the case. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include share-based compensation from its regulations. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any benefit as of June 30, 2017. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.