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 revised 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 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. As a result, we provided a provisional estimate of the effect of the 2017 Tax Act for the fiscal year ended July 31, 2018, and recorded a net benefit of $8,657 due to the impact on our deferred taxes on the basis of the actual fiscal 2018 results of operations. The measurement period provided by SAB 118 concluded during the second quarter of fiscal 2019, and no material adjustments were made to the provisional estimates recorded.

As part of U.S. tax reform, the 2017 Tax Act imposed a one-time transition tax on certain accumulated positive foreign earnings (net of foreign deficits) across all non-U.S. subsidiaries, as computed under U.S. tax principles. As of December 31, 2017, our non-U.S. subsidiaries were in a net foreign deficit position in the aggregate, and therefore no accrual for the transition tax was made.

Section 15 of the Internal Revenue Code (the “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 (beginning with the second quarter) and the new U.S. federal statutory rate of 21% applies to fiscal 2019 and beyond.

As noted above, the 2017 Tax Act also establishes new tax laws that will affect the fiscal year ending July 31, 2019, which include the GILTI provision, the FDII deduction, a new minimum tax related to payments to foreign subsidiaries and affiliates known as BEAT and certain employee expense deductions. 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 Internal Revenue Service (“IRS”).

The consolidated effective tax rate was 26.9%, 22.5% and 32.8% for fiscal 2019, 2018 and 2017, 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,
	2019					2018					2017
	Current		Deferred			Current		Deferred			Current		Deferred
United States:
Federal	$	13,494	$	683		$	24,288	$	(7,308	)	$	28,900	$	2,020
State	3,976		(15		)	5,078		491			4,352		261
International	4,869		(2,730		)	4,626		(703		)	1,545		(2,223		)
Total	$	22,339	$	(2,062	)	$	33,992	$	(7,520	)	$	34,797	$	58

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



	Year Ended July 31,
	2019		2018		2017
United States	$	68,342	$	115,697	$	108,329
International	6,977		1,816		(2,096		)
Total	$	75,319	$	117,513	$	106,233

The consolidated effective income tax rate differed from the U.S. statutory tax rate of 21.0% in fiscal 2019, 26.9% in fiscal 2018 and 35.0% in 2017 due to the following:



	Year Ended July 31,
	2019		2018		2017
Expected statutory tax⁽¹⁾	21.0	%	26.9	%	35.0	%
Differential attributable to:
Foreign operations	0.8	%	0.6	%	—	%
State and local taxes	4.8	%	3.7	%	3.9	%
Domestic production deduction	—	%	(1.8	)%	(2.7	)%
Acquisition-related items, net	0.1	%	—	%	0.1	%
Impact of tax legislation on deferred taxes	(0.1	)%	(7.4	)%	—	%
R&E tax credit	(1.0	)%	(0.7	)%	(1.4	)%
Executive compensation	1.4	%	0.2	%	0.3	%
Excess tax benefits	(0.7	)%	(1.7	)%	(2.2	)%
Valuation allowance	0.1	%	2.4	%	—	%
Other	0.5	%	0.3	%	(0.2	)%
Consolidated effective income tax rate	26.9	%	22.5	%	32.8	%

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(1)	During fiscal 2018, 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,
	2019			2018
Deferred tax assets:
Accrued expenses	$	4,175		$	5,354
Inventories	5,408			3,165
Accounts receivable	593			306
Other long-term liabilities	211			103
Stock-based compensation	3,586			2,700
Capital investment	426			426
Domestic NOLs	137			—
Foreign NOLs	10,284			8,605
Subtotal	24,820			20,659
Valuation allowance	(5,701		)	(6,358		)
	19,119			14,301
Deferred tax liabilities:
Property and equipment	(11,342		)	(7,352		)
Intangible assets	(21,156		)	(21,300		)
Goodwill	(11,618		)	(10,362		)
	(44,116		)	(39,014		)
Net deferred income taxes	$	(24,997	)	$	(24,713	)

Reported in Consolidated Balance Sheets as:
Deferred income taxes (assets)	$	4,281		$	2,911
Deferred income taxes (liabilities)	(29,278		)	(27,624		)
	$	(24,997	)	$	(24,713	)

For foreign tax reporting purposes, our Net Operating Losses (“NOLs”) are $10,421 and $8,605 as of July 31, 2019 and 2018, respectively, which originated primarily from our foreign acquisitions and operations. 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 $5,701 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 9, “Intangibles and Goodwill.” We believe it is more likely than not that we will be unable to utilize these NOLs.

During fiscal 2019 and 2018, 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. As of July 31, 2019, the cumulative amount of such undistributed earnings, inclusive of PTI, indefinitely reinvested outside the U.S. was approximately $45,566.

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 income tax expense 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 uncertain tax positions of $432, primarily related to acquisitions, as of July 31, 2019 and $0 as of July 31, 2018.

Although we remain subject to audit by the IRS for fiscal years ended July 31, 2016 and forward, we are currently under IRS audit only for fiscal year 2017. 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, 2013.