Income Taxes

12 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

7. Income Taxes

Income from continuing operations before income taxes, classified by source of income, were as follows (in thousands):

	Year Ended June 30,
	2022		2021		2020
Domestic	$	(111,001)	$	12,471	$	129,532
Foreign		65,937		70,948		75,454
Total	$	(45,064)	$	83,419	$	204,986

The components of the (benefit from) provision for income taxes were as follows (in thousands):

	Year Ended June 30,
	2022		2021		2020
Current tax provision (benefit):
U.S. federal	$	(6,465)	$	10,631	$	(9,572)
State and local		4,154		1,691		(601)
Foreign		725		547		519
Total current		(1,586)		12,869		(9,654)
Deferred tax provision (benefit):
U.S. federal		(6,425)		(2,970)		(4,114)
State and local		(6,597)		996		(271)
Foreign		(629)		2,194		(900)
Total deferred		(13,651)		220		(5,285)
(Benefit from) provision for income taxes	$	(15,237)	$	13,089	$	(14,939)

The effective tax rate differs from the statutory tax rates as follows (in thousands):

	Year Ended June 30,
	2022				2021				2020
Income tax at statutory rate	$	(9,463)	21.0	%	$	17,518	21.0	%	$	43,047	21.0	%
Lower rates on foreign operations		(14,040)	31.2	%		(12,219)	(14.6)	%		(16,182)	(7.9)	%
State income taxes		(607)	1.3	%		1,199	1.4	%		1,338	0.7	%
Loss on investment in subsidiary		(1,669)	3.7	%		—	—	%		(25,688)	(12.5)	%
Deferred tax benefit from acquisitions and divestitures		(1,153)	2.6	%		—	—	%		—	—	%
Gain on derivative		—	—	%		—	—	%		(23,252)	(11.3)	%
Permanent non-deductible items		2,788	(6.2)	%		796	1.0	%		(707)	(0.3)	%
Foreign tax provisions under GILTI		8,639	(19.2)	%		5,506	6.6	%		6,440	3.1	%
Other		268	(0.6)	%		289	0.3	%		65	—	%
(Benefit from) provision for income taxes	$	(15,237)	33.8	%	$	13,089	15.6	%	$	(14,939)	(7.3)	%

Deferred income tax assets and liabilities result primarily from temporary differences in the recognition of various expenses for tax and financial statement purposes, and from the recognition of the tax benefits of net operating loss carryforwards.

The components of the deferred income tax assets and liabilities were as follows (in thousands):

	June 30,
	2022		2021
Employee benefits	$	9,936	$	12,643
Stock-based compensation		6,675		6,895
Receivable reserve		6,919		2,598
Operating lease liabilities		44,089		50,234
Other reserves		1,865		4,117
Loss and credit carryforwards, net		21,206		15,334
Less: valuation allowance		(10,390)		(4,985)
Gross deferred tax assets		80,300		86,836
Depreciation		(5,314)		(1,696)
Deferred taxes on unremitted foreign earnings		(397)		(733)
Amortization of intangible assets		(18,975)		(22,161)
Operating lease assets		(30,075)		(35,106)
Other accruals		—		169
Gross deferred tax liability		(54,761)		(59,527)
Net deferred tax asset (liability)	$	25,539	$	27,309

As of June 30, 2022, Adtalem has $259.9 million of gross, post apportioned state net operating loss carryforwards, and $15.7 million of foreign net operating loss carryforwards in St. Maarten and other jurisdictions. As of June 30, 2021, Adtalem has $208.9 million of gross, post apportioned state net operating loss carryforwards, and $10.1 million of foreign net operating loss carryforwards in St. Maarten and other jurisdictions.

Adtalem has the following tax net operating loss (tax effected), interest (tax effected), and credit carryforwards as of June 30, 2022 (in thousands):

	June 30,		Years of Expiration
	2022		Beginning	Ending
U.S. credit carryforwards	$	672	2027	2030
State net operating loss carryforwards		16,006	2024	2042
Foreign net operating loss carryforwards		4,528	2023	2032
Total loss and credit carryforwards, net	$	21,206

Three of Adtalem’s businesses benefit from local tax incentives: AUC, which operates in St. Maarten, RUSM, which operates in Barbados, and RUSVM, which operates in St. Kitts. AUC’s effective tax rate reflects benefits derived from investment incentives. RUSM and RUSVM each have agreements with their respective domestic governments that exempt them from local income taxation. RUSM has an exemption in Barbados until 2039. RUSVM has an exemption in St. Kitts until 2037.

Adtalem does not assert that the accumulated undistributed earnings of its foreign subsidiaries are indefinitely reinvested in foreign jurisdictions. Adtalem has accrued applicable state income and foreign withholding taxes on such distributed earnings.

Valuation allowances are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The valuation allowance on our deferred tax assets was $10.4 million and $5.0 million as of June 30, 2022 and 2021, respectively, and mainly relates to other foreign and state net operating loss carryforwards. Insufficient projected taxable income in certain jurisdictions gives rise to the need for a valuation allowance.

Based on Adtalem’s expectations for future taxable income, management believes that it is more likely than not that operating income in other respective jurisdictions will be sufficient to recognize fully all deferred tax assets.

Our income tax provisions or benefits from continuing operations were $15.2 million tax benefit, $13.1 million tax provision, and $14.9 million tax benefit in fiscal year 2022, 2021, and 2020, respectively. The income tax benefits in fiscal years 2022 and 2020 and the income tax expense in fiscal year 2021 reflect the U.S. federal tax rate of 21% adjusted for taxes related to global intangible low-taxed income (“GILTI”), state and local taxes, foreign rate differences, benefits associated with local tax incentives, changes in valuation allowances and liabilities for uncertain tax positions, tax credits, and tax benefits on stock-based compensation awards. The increase in the fiscal year 2022 income tax provision benefit is the result of the loss incurred for fiscal year 2022. The effective tax rate also includes a tax benefit of $1.7 million from a loss for certain uncollectible subsidiary receivables as well as a benefit of $1.2 million to adjust deferred state tax balances for the acquisition of Walden and the sale of ACAMS, Becker, and OCL, offset by $3.0 million for limitations on deductions for executive compensation.

As of June 30, 2022 and 2021, the total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $10.7 million and $9.9 million, respectively, which if recognized, would impact the effective tax rate.

We expect that our unrecognized tax benefits will decrease during the next 12 months due to the settlement of various audits and the lapsing of statutes of limitation. We estimate this decrease to not be material. Adtalem classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amount of interest and penalties accrued as of June 30, 2022 and 2021 was $1.8 million and $1.5 million, respectively. Interest and penalties expense recognized during the years ended June 30, 2022, 2021, and 2020 were $0.3 million, $0.4 million, and a benefit of $0.1 million, respectively. The changes in our unrecognized tax benefits were (in thousands):

	Year Ended June 30,
	2022		2021		2020
Balance at beginning of period	$	9,926	$	11,001	$	31,303
Increases from positions taken during prior periods		1,074		47		—
Decreases from positions taken during prior periods		(2,815)		(904)		(26,476)
Increases from positions taken during the current period		2,845		42		6,454
Reductions due to lapse of statute		(373)		(257)		(206)
Reductions due to settlement		—		(3)		(74)
Balance at end of period	$	10,657	$	9,926	$	11,001

Adtalem files tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions based on existing tax laws and incentives. Adtalem remains generally subject to examination in the U.S. for years beginning on or after July 1, 2018; in various states for years beginning on or after July 1, 2016; and in our significant foreign jurisdictions for years beginning on or after July 1, 2016.