Income Taxes

On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act significantly revises U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income (“GILTI”), (2) the Foreign Derived Intangible Income (“FDII”) deduction, and (3) the Base Erosion Anti-Abuse Tax (“BEAT”), and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses.

ASC 740, “Income Taxes,” requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the 2017 Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows companies to record the tax effects of the 2017 Tax Act on a provisional basis based on a reasonable estimate and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.

Section 15 of the Internal Revenue Code governs rate changes and was not amended by the 2017 Tax Act. Section 15 requires a blended tax rate for fiscal-year taxpayers for their fiscal year that includes the effective date of the rate change, which was January 1, 2018. As a result of the 2017 Tax Act, we revised our estimated annual effective rate to reflect the change in the U.S. federal statutory rate by computing a tentative tax under both rates, and then prorating the tentative tax based on the number of days with and without the rate change to arrive at a blended tax rate of 26.9%, as required by the code. This blended rate was applied for fiscal 2018 and the new U.S. federal statutory rate of 21% will apply to fiscal 2019 and beyond.

During the second quarter ended January 31, 2018, we recorded a net benefit of $8,398 to the income tax provision as a provisional estimate of the net accounting impact of the 2017 Tax Act in accordance with SAB 118. The net benefit was comprised of the following: (i) expense of $294 related to the mandatory transition tax for unrepatriated foreign income and (ii) a benefit of $8,692 related to a revaluation of our deferred tax assets and liabilities. During the third quarter ended April 30, 2018, we reduced the mandatory transition tax by $294 to $0. Furthermore, during the fourth quarter ended July 31, 2018, upon reassessment of the revaluation of our deferred tax assets and liabilities, we recorded a benefit of $8,657, as compared to the provisional estimate of $8,692, which we recorded in the second quarter ended January 31, 2018.

Given the significant complexity of the 2017 Tax Act, anticipated guidance from the U.S. Treasury concerning implementation of the 2017 Tax Act, and the potential for additional guidance from the SEC or the FASB related to the 2017 Tax Act, the provisional estimates we recorded may require adjustment during the measurement period. The provisional estimates were based on our understanding of the 2017 Tax Act and other information available at the time of the estimates, including assumptions and expectations about future events, such as projected financial performance, and are subject to further refinement as additional information becomes available, including potential new or interpretative guidance issued by the SEC, the FASB, or the Internal Revenue Service (“IRS”). We continue to analyze the calculations of earnings and profits in certain foreign subsidiaries, including whether those earnings are held in cash or other assets, as well as the state tax impact of the 2017 Tax Act. Furthermore, such analysis includes but is not limited to provisions that take effect in fiscal 2019 and not subject to SAB 118 such as GILTI and certain employee expense deductions. In the fourth quarter ended July 31, 2018 we revised our assessment of the impact of the 2017 Tax Act on our deferred tax assets and liabilities based on actual fiscal year 2018 results of operations.

The consolidated effective tax rate was 22.5%, 32.8% and 36.2% for fiscal 2018, 2017 and 2016, respectively, and reflects income tax expense for our U.S. and international operations at their respective statutory rates.

The provision for income taxes consists of the following:



	Year Ended July 31,
	2018					2017					2016
	Current		Deferred			Current		Deferred			Current		Deferred
United States:
Federal	$	24,288	$	(7,308	)	$	28,900	$	2,020		$	29,392	$	(216	)
State	5,078		491			4,352		261			4,433		(153		)
International	4,626		(703		)	1,545		(2,223		)	1,863		(1,341		)
Total	$	33,992	$	(7,520	)	$	34,797	$	58		$	35,688	$	(1,710	)

The geographic components of income (loss) before income taxes are as follows:



	Year Ended July 31,
	2018		2017			2016
United States	$	115,697	$	108,329		$	92,744
International	1,816		(2,096		)	1,187
Total	$	117,513	$	106,233		$	93,931

The consolidated effective income tax rate differed from the U.S. statutory tax rate of 26.9% in fiscal 2018 and 35.0% in fiscal 2017 and 2016 due to the following:



	Year Ended July 31,
	2018		2017		2016
Expected statutory tax⁽¹⁾	26.9	%	35.0	%	35.0	%
Differential attributable to:
Foreign operations	0.6	%	—	%	0.6	%
State and local taxes	3.7	%	3.9	%	3.2	%
Domestic production deduction	(1.8	)%	(2.7	)%	(2.3	)%
Acquisition-related items, net	—	%	0.1	%	—	%
Impact of tax legislation on deferred taxes	(7.4	)%	—	%	—	%
R&E tax credit	(0.7	)%	(1.4	)%	(1.1	)%
Change in foreign tax rates	—	%	—	%	(0.4	)%
Excess tax benefits	(1.7	)%	(2.2	)%	—	%
Valuation allowance	2.4	%	—	%	—	%
Other	0.5	%	0.1	%	1.2	%
Consolidated effective income tax rate	22.5	%	32.8	%	36.2	%

_______________________________________________


(1)	We revised our estimated annual rate to reflect a blended U.S. federal statutory rate of 26.9% as compared to 35.0%.

Tax assets and liabilities, shown before and after jurisdictional netting of deferred tax assets (liabilities), are comprised of the following:



	July 31,
	2018			2017
Deferred tax assets:
Accrued expenses	$	5,354		$	6,308
Inventories	3,165			4,655
Accounts receivable	306			729
Other long-term liabilities	103			180
Stock-based compensation	2,700			3,402
Capital investment	426			545
Foreign NOLs	8,605			6,490
Subtotal	20,659			22,309
Valuation allowance	(6,358		)	(2,984		)
	14,301			19,325
Deferred tax liabilities:
Property and equipment	(7,352		)	(9,957		)
Intangible assets	(21,300		)	(20,107		)
Goodwill	(10,362		)	(13,975		)
	(39,014		)	(44,039		)
Net deferred income taxes	$	(24,713	)	$	(24,714	)

Reported in Consolidated Balance Sheets as:
Deferred income taxes (assets)	$	2,911		$	—
Deferred income taxes (liabilities)	(27,624		)	(24,714		)
	$	(24,713	)	$	(24,714	)

For foreign tax reporting purposes, our Net Operating Losses (“NOLs”) at July 31, 2018 are $8,605 and originated primarily from foreign acquisitions. Most of these NOLs do not expire and are fully available for utilization against future profits in certain non-U.S. tax jurisdictions. However, we have recorded a valuation allowance of $6,358 for these foreign NOLs, which are primarily associated with certain early-stage foreign operations as well as $2,785 recorded in fiscal 2018 relating to pre-acquisition losses attributed to our U.K. operations. Furthermore, the accumulated loss is also related to the exit of the Jet Prep business which is more fully described in Note 8, “Intangibles and Goodwill.” We believe it is more likely than not that we will be unable to utilize these NOLs.

During fiscal 2018 and 2017, no dividends were repatriated from our foreign subsidiaries. As a result of the mandatory one-time transition tax required under the 2017 Tax Act, all of the undistributed earnings of our foreign subsidiaries are deemed repatriated and considered previously taxed income (“PTI”). Additionally, we continue to be indefinitely reinvested and continue to evaluate our assertion for certain legal entities. Accordingly, deferred taxes are not provided on undistributed earnings of foreign subsidiaries that are indefinitely reinvested. Determining the tax liability that would arise if these earnings were remitted is not practicable. At July 31, 2018, the cumulative amount of such undistributed earnings, inclusive of PTI, indefinitely reinvested outside the United States was approximately $32,774.

We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our consolidated financial statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Any adjustments upon resolution of income tax uncertainties are recognized in our results of operations. Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and administrative expense, respectively, in our consolidated financial statements. However, such amounts have been relatively insignificant due to the nominal amount of our unrecognized tax benefits relating to uncertain tax positions. We have no uncertain tax positions at July 31, 2018 and 2017.

We concluded an audit by the IRS for fiscal years 2015, 2013 and 2012. With respect to state or foreign income tax examinations, we are generally no longer subject to examinations for fiscal years ended prior to July 31, 2010.