Income Taxes

12 Months Ended

Jun. 30, 2019

Income before provision for income taxes consists of the following:



	Year Ended June 30,
	2019		2018		2017
			As Adjusted		As Adjusted
	(Dollars in Thousands)
Domestic	$	298,665	$	229,745	$	228,890
Foreign	4,525		7,901		8,293
Income before provision for income taxes	$	303,190	$	237,646	$	237,183

The provision for income taxes shown in the accompanying consolidated statements of operations is composed of the following:



	Year Ended June 30,
	2019			2018			2017
				As Adjusted			As Adjusted
	(Dollars in Thousands)
Federal—
Current	$	64,194		$	47,734		$	69,385
Deferred	(26,983		)	(108,867		)	(13,110		)
State—
Current	3,246			1,471			1,737
Deferred	(1,026		)	1,042			(771		)
Foreign—
Current	1,549			2,296			2,067
Deferred	(524		)	267			(1,511		)
	$	40,456		$	(56,057	)	$	57,797

On December 22, 2017, the President of the United States signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), following its passage by the United States Congress. The Tax Act made significant changes to U.S. federal income tax laws, including reduction of the corporate tax rate from 35.0% to 21.0%, and the implementation of a territorial tax system resulting in a one-time transition tax on the unremitted earnings of our foreign subsidiaries. The Tax Act also contains additional provisions that are effective for us in fiscal year 2019, including a new deduction for Foreign-Derived Intangible Income (“FDII”), the repeal of the domestic production activity deduction, a new tax on Global Intangible Low-Taxed Income (“GILTI”), and increased limitations on the deductibility of certain executive compensation.

Our tax expense for fiscal 2019 was favorably impacted primarily by FDII deduction which reduced our effective tax rate by approximately 6.7%, the recognition of excess tax benefits related to stock-based compensation and the lower U.S. statutory tax rate of 21.0% as the result of the enactment of the Tax Act.

The provision for income taxes differs from that based on the federal statutory rate due to the following:



	Year Ended June 30,
	2019			2018			2017
				As Adjusted			As Adjusted
	(Dollars in Thousands)
Federal tax provision at statutory rate	$	63,670		$	66,683		$	83,014
State income taxes	1,540			1,503			1,167
Remeasurement of deferred taxes	—			(115,536		)	—
Foreign-derived intangible income (FDII)	(20,326		)	—			—
Global intangible low-taxed income (GILTI)	797			—			—
Effect of foreign operations	7,395			4,700			2,912
Foreign taxes and rate differences	514			(164		)	(206		)
Stock-based compensation	(3,774		)	(2,951		)	991
Tax credits	(9,677		)	(7,913		)	(6,614		)
Uncertain tax positions	1,055			(185		)	(19,645		)
Return to provision adjustments	(482		)	(488		)	464
Domestic production activity deduction	—			(4,869		)	(6,261		)
Valuation allowance	(550		)	2,326			1,522
Other	294			837			453
Provision for income taxes	$	40,456		$	(56,057	)	$	57,797

Net deferred tax liabilities consist of the following at June 30, 2019 and 2018:



	Year Ended June 30,
	2019			2018
				As Restated
	(Dollars in Thousands)
Deferred tax assets:
Federal and state credits	$	4,055		$	4,363
Capital loss carryforwards	—			4,856
Net operating loss carryforwards	906			1,452
Deferred revenue	5,252			3,163
Other reserves and accruals	6,082			6,550
Intangible assets	1,020			1,015
Property, leasehold improvements, and other basis differences	1,433			1,646
Other temporary differences	453			450
	19,201			23,495
Deferred tax liabilities:
Contract assets and costs	(156,346		)	(121,631		)
Deferred revenue	(8,610		)	(68,546		)
Intangible assets	(5,635		)	(5,231		)
Property, leasehold improvements, and other basis differences	(1,146		)	(1,340		)
	(171,737		)	(196,748		)
Valuation allowance	(4,866		)	(10,416		)
Net deferred tax liabilities	$	(157,402	)	$	(183,669	)

Reflected in the deferred tax assets above at June 30, 2019, we have foreign net operating loss carryforwards of $0.9 million, some of which will expire beginning in 2019 and others with unlimited carryforwards, and state research and development credits of $4.0 million which begin to expire in 2025.

We adopted ASU No. 2016-09 effective July 1, 2017. As a result of adopting the new standard, excess tax benefits from stock-based compensation are now reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they were previously a component of stockholders’ equity. The adoption of ASU No. 2016-09 resulted in a decrease in our provision for income taxes of $3.8 million and $3.0 million during fiscal 2019 and 2018, respectively. This represents a decrease in our effective tax rate of approximately one percentage point during fiscal 2019 and 2018, respectively, due to the recognition of excess tax benefits for options exercised and the vesting of equity awards.

Our valuation allowance for deferred tax assets was $4.9 million and $10.4 million as of June 30, 2019 and 2018 respectively. The most significant portion of the valuation allowance as of June 30, 2019 is attributable to a reserve against state R&D tax credits of $3.9 million. There was a decrease in the valuation allowance of $4.8 million during fiscal 2019 related to a capital loss expiring that had no impact on our tax provision.

For fiscal 2019, our income tax provision included amounts determined under the provisions of ASC 740 intended to satisfy additional income tax assessments, including interest and penalties, that could result from any tax return positions for which the likelihood of sustaining the position on audit does not meet a threshold of "more likely than not." Tax liabilities were recorded as a component of our income taxes payable and other non-current liabilities. The ultimate amount of taxes due will not be known until examinations are completed and settled or the audit periods are closed by statutes.

A reconciliation of the reserve for uncertain tax positions is as follows:



	Year Ended June 30,
	2019			2018			2017
				As Adjusted			As Adjusted
	(Dollars in Thousands)
Uncertain tax positions, beginning of year	$	3,931		$	3,921		$	23,535
Gross increases (decreases) —tax positions in prior period	407			544			(19,116		)
Gross increases—tax positions in current period	1,789			—			—
Gross decreases—lapse of statutes	(740		)	(637		)	(830		)
Currency translation adjustment	(7		)	103			332
Uncertain tax positions, end of year	$	5,380		$	3,931		$	3,921

At June 30, 2019, the total amount of unrecognized tax benefits is $5.4 million. Upon being recognized, the amount would reduce the effective tax rate. Our policy is to recognize interest and penalties related to income tax matters as provision for (benefit from) income taxes. At June 30, 2019, we had approximately $0.5 million of accrued interest and $0.1 million of penalties related to uncertain tax positions. We recorded a benefit for interest and penalties of approximately $0.1 million during fiscal 2019.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 2008 to 2017, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our consolidated financial statements.