Income Taxes

12 Months Ended

Jul. 31, 2020

Income before income taxes and losses of unconsolidated affiliate consists of the following:


	Years Ended July 31,
	2020		2019		2018
United States	$	69,433	$	55,077	$	48,903
Other Nations	71,503		109,567		103,112
Total	$	140,936	$	164,644	$	152,015

Income tax expense consists of the following:


	Years Ended July 31,
	2020		2019		2018
Current income tax expense:
United States	$	3,031	$	2,232	$	2,830
Other Nations	25,133		22,445		26,593
States (U.S.)	1,160		913		910
	$	29,324	$	25,590	$	30,333
Deferred income tax expense (benefit):
United States	$	1,072	$	8,451	$	30,267
Other Nations	(2,065)		(667)		(1,462)
States (U.S.)	(10)		12		1,817
	$	(1,003)	$	7,796	$	30,622
Total income tax expense	$	28,321	$	33,386	$	60,955

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Reform Act reduced the U.S. federal corporate income tax rate from 35.0% to 21.0%, imposed a one-time tax on deemed repatriated income of foreign subsidiaries, eliminated the domestic manufacturing deduction and moved to a partial territorial system by providing a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries.

The tax effects of temporary differences are as follows as of July 31, 2020 and 2019:


	July 31, 2020
	Assets		Liabilities		Total
Inventories	$	4,385	$	(58)	$	4,327
Prepaid catalog costs	—		(15)		(15)
Employee compensation and benefits	3,339		(72)		3,267
Accounts receivable	1,518		—		1,518
Fixed assets	3,663		(7,285)		(3,622)
Intangible assets	1,026		(31,488)		(30,462)
Deferred and equity-based compensation	7,851		—		7,851
Postretirement benefits	3,002		(31)		2,971
Tax credit and net operating loss carry-forwards	56,447		—		56,447
Valuation allowances	(58,809)		—		(58,809)
Other, net	11,786		(4,700)		7,086
Total	$	34,208	$	(43,649)	$	(9,441)


	July 31, 2019
	Assets		Liabilities		Total
Inventories	$	3,856	$	(1)	$	3,855
Prepaid catalog costs	—		(631)		(631)
Employee compensation and benefits	7,021		(89)		6,932
Accounts receivable	943		(233)		710
Fixed assets	3,125		(6,869)		(3,744)
Intangible assets	1,432		(31,415)		(29,983)
Deferred and equity-based compensation	7,352		—		7,352
Postretirement benefits	2,659		(71)		2,588
Tax credit and net operating loss carry-forwards	62,966		—		62,966
Valuation allowances	(60,073)		—		(60,073)
Other, net	7,406		(7,961)		(555)
Total	$	36,687	$	(47,270)	$	(10,583)

Tax credit carry-forwards as of July 31, 2020 consist of the following:

•Foreign net operating loss carry-forwards of $96,104, of which $86,063 have no expiration date and the remainder of which expire within the next 17 years.

•State net operating loss carry-forwards of $29,109, which expire from 2025 to 2040.

•Foreign tax credit carry-forwards of $24,633, which expire from 2021 to 2029.

•State R&D credit carry-forwards of $12,714, which expire from 2021 to 2035.

Rate Reconciliation

A reconciliation of the income tax rate computed by applying the statutory U.S. federal income tax rate to income before income taxes and losses of unconsolidated affiliate to the total income tax expense is as follows:


	Years Ended July 31,
	2020		2019		2018
Tax at statutory rate	21.0	%	21.0	%	26.9	%
State income taxes, net of federal tax benefit	1.0	%	0.3	%	1.6	%
International rate differential⁽¹⁾	5.1	%	2.2	%	(1.1)	%
Rate variances arising from foreign subsidiary distributions	0.2	%	(0.4)	%	0.8	%
Foreign tax credit carryforward valuation allowance⁽²⁾	(1.4)	%	1.8	%	14.1	%
Divestiture of business⁽³⁾	—	%	—	%	(0.8)	%
Adjustments to tax accruals and reserves⁽⁴⁾	(2.0)	%	(3.6)	%	2.2	%
Non-deductible executive compensation⁽⁵⁾	0.5	%	2.3	%	0.5	%
Research and development tax credits and domestic manufacturer’s deduction	(2.0)	%	(1.6)	%	(2.0)	%
Deferred tax and other adjustments, net	(2.3)	%	(1.7)	%	(2.1)	%
Income tax rate	20.1	%	20.3	%	40.1	%

(1)Represents the foreign income tax rate differential when compared to the U.S. statutory income tax rate for the years ended July 31, 2020, 2019, and 2018.

(2)The year ended July 31, 2018, includes the establishment of a valuation allowance against foreign tax credit carryforwards as a result of the Tax Reform Act.

(3)The year ended July 31, 2018, includes the divestiture of the Company's Runelandhs business based in Sweden. Refer to Note 15, "Divestiture" for additional information.

(4)The years ended July 31, 2020 and 2019, include reductions of uncertain tax positions resulting from the closure of audits and lapses in statues of limitations, while the year ended July 31, 2018, includes increases in uncertain tax positions.

(5)The years ended July 31, 2020, 2019 and 2018, include non-deductible compensation such as salaries, bonuses, and other equity compensation of the Company's executives (as defined in Internal Revenue Service Code Section 162(m)).

Uncertain Tax Positions

The Company follows the guidance in ASC 740, "Income Taxes" regarding uncertain tax positions. The guidance requires application of a more-likely-than-not threshold to the recognition and de-recognition of income tax positions. A reconciliation of unrecognized tax benefits (excluding interest and penalties) is as follows:


Balance at July 31, 2017	$	18,362
Additions based on tax positions related to the current year	2,467
Additions for tax positions of prior years	1,586
Reductions for tax positions of prior years	(23)
Lapse of statute of limitations	(489)
Settlements with tax authorities	(1,277)
Cumulative translation adjustments and other	(196)
Balance as of July 31, 2018	$	20,430
Additions based on tax positions related to the current year	2,518
Additions for tax positions of prior years	612
Reductions for tax positions of prior years	(378)
Lapse of statute of limitations	(8,140)
Cumulative translation adjustments and other	(201)
Balance as of July 31, 2019	$	14,841
Additions based on tax positions related to the current year	2,798
Additions for tax positions of prior years	1,295
Reductions for tax positions of prior years	(5,087)
Lapse of statute of limitations	(117)

Cumulative translation adjustments and other	(108)
Balance as of July 31, 2020	$	13,622

Of the $13,622 of unrecognized tax benefits, if recognized, $10,557 would affect the Company's income tax rate. The Company has classified $8,931 and $10,218, excluding interest and penalties, of the reserve for uncertain tax positions in "Other liabilities" on the Consolidated Balance Sheets as of July 31, 2020 and 2019, respectively. The Company has classified $4,691 and $4,623, excluding interest and penalties, as a reduction of long-term deferred income tax assets on the accompanying Consolidated Balance Sheets as of July 31, 2020 and 2019, respectively.

Interest expense is recognized on the amount of potentially underpaid taxes associated with the Company's tax positions, beginning in the first period in which interest starts accruing under the respective tax law and continuing until the tax positions are settled. The Company recognized a decrease of $372, an decrease of $1,013, and an increase of $556 in interest expense during the years ended July 31, 2020, 2019, and 2018, respectively. There was a $96 decrease to the reserve for uncertain tax positions for penalties during the year ended July 31, 2020, a decrease of $2,357 during the year ended July 31, 2019, and an increase of $83 during the year end July 31, 2018. These amounts are net of reversals due to reductions for tax positions of prior years, statute of limitations, and settlements. At July 31, 2020 and 2019, the Company had $1,354 and $1,740, respectively, accrued for interest on unrecognized tax benefits. Penalties are accrued if the tax position does not meet the minimum statutory threshold to avoid the payment of a penalty. At July 31, 2020 and 2019, the Company had $658 and $663, respectively, accrued for penalties on unrecognized tax benefits. Interest expense and penalties are recorded as a component of "Income tax expense" in the Consolidated Statements of Income.

The Company estimates that it is reasonably possible that the unrecognized tax benefits may be reduced by $1,437 within 12 months as a result of the resolution of worldwide tax matters, tax audit settlements, amended tax filings, and/or the expiration of statute of limitations, all of which, if recognized, would result in an income tax benefit in the Consolidated Statements of Income.

During the year ended July 31, 2020, the Company recognized $504 of tax benefits (including interest and penalties) associated with the lapse of statutes of limitations. The Company also recognized $5,133 of tax benefits (including interest and penalties) associated with the reduction of tax positions for prior years due to the closure of certain tax audits.

The Company and its subsidiaries file income tax returns in the U.S., various states, and foreign jurisdictions. The following table summarizes the open tax years for the Company's major jurisdictions:


Jurisdiction						Open Tax Years
United States — Federal						F’18 — F’20

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details