Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted by the U.S. government. The Tax Act has impacted the U.S. corporate tax rate that the Company will use going forward, which has been reduced to 21% from 35%. As the Company has a June 30 fiscal year-end, the lower U.S. corporate tax rate will be phased in, resulting in a U.S. corporate tax rate of approximately 28% for the Company's fiscal year ended June 30, 2018, and 21% for subsequent fiscal years.

The Tax Act also includes items that the Company expects will increase its tax expense including, but not limited to, the elimination of the domestic manufacturing deduction and increased limitations on deductions for executive compensation. In addition, the actual effective tax rate may be materially different than the statutory Federal tax rate (including being higher) based on the availability and impact of various other adjustments including, but not limited to, state taxes, Federal research and development credits, discrete tax benefits related to stock compensation, and the inclusion or exclusion of various items in taxable income which may differ from GAAP income.

To transition to the reduced U.S. corporate tax rate, adjustments were required to be made to the Company’s U.S. deferred tax assets and liabilities, as well as discrete tax items recorded prior to the Tax Act. For the year ended June 30, 2018, these adjustments resulted in a tax benefit of $861. The Tax Act also provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through December 31, 2017. The Company had an estimated $5,627 of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $801 of income tax expense for the year ended June 30, 2018. After the utilization of existing tax credits, the Company expects to pay additional U.S. federal cash taxes of approximately $386 on the deemed mandatory repatriation, payable over eight years. No additional provision for U.S. federal or foreign taxes has been made on unrepatriated foreign earnings as it is not practicable to determine the amount of other taxes that would be payable if these amounts were repatriated to the U.S.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended June 30, 2018. The ultimate impact may differ from these provisional amounts due to additional regulatory guidance that may be issued and changes in interpretations and assumptions the Company has made. The Company does not expect the final amounts to be materially different than those recorded.

The components of income before income taxes and income tax expense were as follows:



	Year Ended June 30,
	2018			2017			2016
Income before income taxes:
United States	$	43,368		$	30,499		$	25,194
Foreign	(795		)	569			92
	$	42,573		$	31,068		$	25,286
Tax provision (benefit):
Federal:
Current	$	4,470		$	11,476		$	6,707
Deferred	(4,527		)	(7,645		)	(2,627		)
	$	(57	)	$	3,831		$	4,080
State:
Current	$	2,370		$	3,650		$	1,839
Deferred	(537		)	(1,684		)	(424		)
	$	1,833		$	1,966		$	1,415
Foreign:
Current	$	186		$	240		$	59
Deferred	(272		)	156			(10		)
	(86		)	396			49
	$	1,690		$	6,193		$	5,544

The following is the reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate:



	Year Ended June 30,
	2018		2017		2016
Tax provision at federal statutory rates	28.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit	5.6		4.9		5.0
Research and development credits	(5.1	)	(6.1	)	(8.4	)
Excess tax benefits on stock compensation	(18.5	)	(13.1	)	(4.4	)
Domestic manufacturing deduction	(2.0	)	(3.9	)	(3.5	)
Income from legal settlement excluded from taxable income	—		—		(2.8	)
Deemed repatriation of foreign earnings	1.9		(0.1	)	(0.2	)
Foreign income tax rate differential	0.3		0.2		—
Officer and equity compensation	1.7		1.8		2.6
Acquisition costs	1.4		0.9		—
Reserves for tax contingencies	0.3		(0.6	)	(3.2	)
Benefit from tax rate changes	(2.3	)	—		—
Impacts related to acquired tax attributes	(8.7	)	—		—
Other	1.4		0.9		1.8
	4.0	%	19.9	%	21.9	%

The effective tax rate for fiscal 2018 differed from the federal statutory rate primarily due to benefits related to research and development tax credits, domestic manufacturing deductions, excess tax benefits for equity compensation, and acquired tax attributes. These benefits are partially offset by additional tax expense for state and local income taxes, non-deductible officer compensation and non-deductible equity compensation. During fiscal 2018 and 2017, the Company recognized a discrete tax benefit of $7,897 and $4,066, respectively, related to excess tax benefits on stock-based compensation. The discrete tax benefit for fiscal 2018 included the enactment of the Tax Act. The benefit is the result of the increase in value from the stock award between the grant date and the vest date. Fiscal 2018 also included discrete tax benefits of $3,716 derived from new information obtained about net operating loss carry-forwards of the Carve-Out Business acquired from Microsemi Corporation in May 2016. The discrete items disclosed above for fiscal 2018 included the effect of the Tax Act.

The components of the Company’s net deferred tax liabilities were as follows:



	June 30,
	2018			2017
Deferred tax assets:
Inventory valuation and receivable allowances	$	8,476		$	13,845
Accrued compensation	3,803			4,555
Equity compensation	3,944			4,858
Federal and state research and development tax credit carryforwards	18,784			13,415
Other accruals	1,085			2,125
Deferred compensation	1,561			1,606
Acquired net operating loss carryforward	1,634			—
Capital loss carryforwards	2,413			3,562
Other temporary differences	1,565			1,500
	43,265			45,466
Valuation allowance	(16,992		)	(16,570		)
Total deferred tax assets	26,273			28,896
Deferred tax liabilities:
Prepaid expenses	(696		)	(481		)
Property and equipment	(4,436		)	(3,749		)
Intangible assets	(34,546		)	(28,163		)
Tax method of accounting change	—			(285		)
Other temporary differences	(230		)	(441		)
Total deferred tax liabilities	(39,908		)	(33,119		)
Net deferred tax (liabilities) assets	$	(13,635	)	$	(4,223	)

As reported:
Deferred tax assets	$	—		$	633
Deferred tax liabilities	(13,635		)	(4,856		)
	$	(13,635	)	$	(4,223	)

At June 30, 2018, the Company evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realizable, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the Company's past operating results, its forecast of future earnings, future taxable income, and tax planning strategies. The Company continues to conclude that it is more likely than not that most domestic deferred tax assets would be realizable based on recent financial performance, projected future taxable income and the reversal of existing deferred tax liabilities.

The Company continues to record a full valuation allowance on capital loss carryforwards and certain state research and development credits as of June 30, 2018 as management continues to believe that it is not more likely than not that these deferred tax assets would be realized. Any future reversals of the valuation allowance will impact income tax expense.

The Company had federal research and development credit carryforwards of $1,227, which will begin to expire in 2029. The Company had state research and development credit carryforwards of $17,557, which will expire from 2018 through 2033.

The Company files income tax returns in all jurisdictions in which it operates. The Company has established reserves to provide for additional income taxes that management believes will more likely than not be due in future years as these previously filed tax returns are audited. These reserves have been established based upon management’s assessment as to the potential exposures. All tax reserves are analyzed quarterly and adjustments are made as events occur and warrant modification.

The changes in the Company’s reserves for unrecognized income tax benefits are summarized as follows:



	Year Ended June 30,
	2018			2017
Unrecognized tax benefits, beginning of period	$	804		$	1,566
Increases for previously recognized positions	—			46
Settlements of previously recognized positions	—			(793		)
Reductions as a result of a lapse of the applicable statute of limitations	(81		)	(273		)
Increases for currently recognized positions	315			384
Reductions for previously recognized positions	(40		)	(126		)
Unrecognized tax benefits, end of period	$	998		$	804

The $998 of unrecognized tax benefits as of June 30, 2018, if released, would reduce income tax expense.

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of June 30, 2018 and 2017, the total amount of gross interest and penalties accrued were $84 and $54, respectively. In connection with tax matters, the Company recognized interest and penalty expense in fiscal 2018, 2017 and 2016 of $42, $30 and $204, respectively.

The Company’s major tax jurisdiction is the U.S. and the open tax years are fiscal 2015 through 2018.