Income Taxes

12 Months Ended

Jul. 03, 2020

The components of income before income taxes and income tax expense were as follows:


	Fiscal Years
	2020		2019		2018
Income before income taxes:
United States	$	93,388	$	57,281	$	43,368
Foreign	545		2,246		(795)
	$	93,933	$	59,527	$	42,573
Tax provision (benefit):
Federal:
Current	$	8,442	$	11,454	$	4,470
Deferred	(1,077)		(3,008)		(4,527)
	7,365		8,446		(57)
State:
Current	3,407		5,194		2,370
Deferred	(2,327)		(1,421)		(537)
	1,080		3,773		1,833
Foreign:
Current	475		546		186
Deferred	(699)		(13)		(272)
	(224)		533		(86)
	$	8,221	$	12,752	$	1,690

The following is the reconciliation between the statutory Federal income tax rate and the Company’s effective income tax rate:


	Fiscal Years
	2020		2019		2018
Tax provision at federal statutory rates	21.0	%	21.0	%	28.0	%
State income tax, net of federal tax benefit	6.1		5.9		5.6
Research and development tax credits	(11.9)		(4.5)		(5.1)
Provision to return	(3.1)		—		—
Excess tax benefits related to stock compensation	(7.7)		(4.5)		(18.5)
Domestic manufacturing deduction	—		—		(2.0)

Deemed repatriation of foreign earnings	—		—		1.9
Foreign income tax rate differential	0.1		0.1		0.3
Non-deductible compensation	2.6		2.0		1.7



Acquisition costs	—		0.1		1.4
Reserves for unrecognized income tax benefits	3.0		0.3		0.3
Tax rate changes	(0.5)		—		(2.3)
Impacts related to acquired tax attributes	—		—		(8.7)

Other	(0.8)		1.0		1.4
	8.8	%	21.4	%	4.0	%

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted by the U.S. government. The Tax Act impacted the U.S. corporate tax rate that the Company will use going forward, which has been reduced to 21% from 35%. As the Company has a June 30 fiscal year-end, the lower U.S. corporate tax rate was phased in, resulting in a U.S. corporate tax rate of approximately 28% for the Company's fiscal year ended June 30, 2018, and 21% for fiscal year ended June 30, 2019 and subsequent fiscal years.

The Tax Act also includes provisions that increase the Company’s tax expense including, but not limited to, the elimination of the domestic manufacturing deduction and increased limitations on deductions for executive compensation. In

addition, the effective tax rate may be materially different than the statutory Federal tax rate due to state taxes, Federal research and development tax credits, excess tax benefits related to stock compensation, reserves for unrecognized income tax benefits, and other book to tax permanent differences.

The effective tax rate for fiscal 2020 and 2019 differed from the Federal statutory rate primarily due to benefits related to research and development tax credits and excess tax benefits related to stock compensation, partially offset by additional tax expense related to state taxes and non-deductible compensation. During fiscal 2020 and 2019, the Company recognized a tax benefit of $7,259 and $2,672 related to excess tax benefits on stock compensation, respectively. The Company also recognized a tax benefit of $6,325 and a tax reserve of $2,240, related to research and development tax credits claimed on prior year federal and state tax returns and other favorable provision to return adjustments of $2,917.

The components of the Company’s net deferred tax liabilities were as follows:


	As of
	July 3, 2020		June 30, 2019
Deferred tax assets:
Inventory valuation and receivable allowances	$	12,066	$	10,313
Accrued compensation	5,941		4,644
Stock compensation	5,062		4,595
Federal and state tax credit carryforwards	11,782		15,510

Other accruals	1,086		1,128
Deferred compensation	930		1,561

Acquired net operating loss carryforward	425		721
Operating lease liabilities	20,035		—
Capital loss carryforwards	—		2,354
Other	1,876		2,258
	59,203		43,084
Valuation allowance	(11,264)		(16,666)
Total deferred tax assets	47,939		26,418
Deferred tax liabilities:
Prepaid expenses	(1,111)		(848)
Property and equipment	(10,668)		(4,927)
Intangible assets	(33,007)		(38,399)
Operating lease right-of-use assets	(16,426)		—
Other	(616)		(58)
Total deferred tax liabilities	(61,828)		(44,232)
Net deferred tax liabilities	$	(13,889)	$	(17,814)

As reported:


Deferred tax liabilities	$	(13,889)	$	(17,814)
	$	(13,889)	$	(17,814)

At July 3, 2020, the Company evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realizable, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the Company's past and recent operating performance and results, future taxable income including the reversal of existing deferred tax liabilities, and tax planning strategies. The Company continues to conclude that its deferred tax assets are more likely than not to be realized with the exception of certain state research and development tax credits, which management continues to believe that it is not more likely than not to be realized. The change in valuation allowance is primarily related to the expiration of capital loss carryforwards that had a full valuation allowance. Any future changes in the valuation allowance will impact income tax expense.

The Company has state research and development tax credit carryforwards of $14,884, which will expire starting in fiscal year 2021 through fiscal year 2034.

The Company is subject to taxation in the U.S. (Federal and state) and various foreign jurisdictions that it operates in. The Company has established reserves to provide for additional income taxes that management believes will more likely than not be due in future years as these previously filed tax returns are audited. These reserves have been established based upon management’s assessment as to the potential exposures. All tax reserves are analyzed quarterly and adjustments are made as events occur and warrant modification.

During the period ended July 3, 2020, the Company filed amended Federal and state tax returns primarily relating to the research and development tax credits. As part of the study, the Company adjusted the reserve previously recorded on the research and development tax credits claimed.

The changes in the Company’s reserves for unrecognized income tax benefits are summarized as follows:


	Fiscal Years
	2020		2019
Unrecognized tax benefits, beginning of period	$	1,273	$	998
Increases for tax positions taken related to a prior period	2,146		—
Increases for tax positions taken during the current period	854		275
Decreases for tax positions taken related to a prior period	—		—
Decreases for tax positions taken during current period	—		—
Decreases for settlements of previously recognized positions	—		—
Decreases as a result of a lapse of the applicable statute of limitations	(156)		—


Unrecognized tax benefits, end of period	$	4,117	$	1,273

The $4,117 of unrecognized tax benefits as of July 3, 2020, if released, would reduce income tax expense. The Company increased its unrecognized income tax benefits primarily due to additional research and development tax credits claimed on prior year Federal and state returns.

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. The total amount of gross interest and penalties accrued was $175 and $84 as of July 3, 2020 and June 30, 2019, respectively, and the amount of interest and penalties recognized in fiscal 2020, 2019 and 2018 was $91, $101 and $42, respectively.

The Company’s major tax jurisdiction is the U.S. (Federal and state) and the open tax years are fiscal 2016 through 2020.