Income Taxes

12 Months Ended

Jun. 30, 2020

Income (loss) before income taxes consisted of the following for the years ended June 30:



(in thousands)	2020			2019			2018
Income (loss) before income taxes:
United States	$	(76,107	)	$	60,756		$	57,109
International	78,067			250,479			217,932
Total income before income taxes	$	1,960		$	311,235		$	275,041
Current income taxes:
Federal	$	(3,558	)	$	5,679		$	3,755
State	905			321			(816		)
International	33,559			54,553			44,127
Total current income taxes	30,906			60,553			47,066
Deferred income taxes:
Federal	$	(9,113	)	$	(3,606	)	$	1,121
State	724			45			3,552
International	(15,510		)	6,367			18,242
Total deferred income taxes:	(23,899		)	2,806			22,915
Provision for income taxes	$	7,007		$	63,359		$	69,981
Effective tax rate	357.5		%	20.4		%	25.4		%

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back to each of the 5 preceding taxable years to generate a refund of previously paid income taxes; permits net operating loss carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before January 1, 2021; and modifies the limitation on business interest by increasing the allowable business interest deduction from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income for taxable years beginning in 2019 or 2020. We are planning to carry back our taxable loss in the U.S. for fiscal 2020 under the provisions of the CARES Act and have recorded a $6.9 million benefit in our tax provision during fiscal 2020.

Swiss tax reform

Legislation was effectively enacted during the December quarter of fiscal 2020 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a ten-year transitional period at both the federal and cantonal levels.

The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the December quarter of fiscal 2020. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to the underlying valuation.

The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows for the years ended June 30:



(in thousands)	2020			2019			2018
Income taxes at U.S. statutory rate	$	412		$	65,359		$	77,286
State income taxes, net of federal tax benefit	1,283			289			2,975
U.S. income taxes provided on international income	12,422			7,347			1,010
Combined tax effects of international income	10,583			162			(9,333		)
Impact of goodwill impairment charges	5,651			—			—
Change in valuation allowance and other uncertain tax positions	755			(1,473		)	(90,817		)
U.S. research and development credit	(4,093		)	(3,911		)	(3,141		)
Change in permanent reinvestment assertion	—			6,093			—
Combined effects of U.S. tax reform	—			(9,280		)	86,044
Combined effects of Swiss tax reform	(14,500		)	—			—
Combined effects of the U.S. CARES Act	(6,913		)	—			—
Adjustment to deferred tax charges on intra-entity transfers	—			—			5,297
Other	1,407			(1,227		)	660
Provision for income taxes	$	7,007		$	63,359		$	69,981

During 2019, we recorded a net tax benefit of $9.3 million associated with the finalization of our toll tax charge which included a benefit of $15.0 million for the toll tax charge and a $5.3 million charge for an unrecognized tax benefit. The effect of these items is included in the tax reconciliation table under the caption “Combined effects of U.S. tax reform.”

During 2019, we released a $1.1 million valuation allowance that was previously recorded against the net deferred tax assets of our Australian subsidiary. The effect of this item is included in the tax reconciliation table under the caption “Change in valuation allowance and other uncertain tax positions.”

During 2018, we recorded a charge for the combined effects of tax reform of $86.0 million, which included $80.9 million for the toll tax charge and a net charge in our U.S. provision of $5.1 million for revaluation of U.S. net deferred taxes. The effect of these items is included in the tax reconciliation table under the caption “Combined effects of tax reform.” The revaluation of U.S. net deferred taxes was preliminary and subject to finalization of the 2018 U.S. federal income tax return.

During 2018, we released $91.3 million of the U.S. valuation allowance that was previously recorded against our net deferred tax assets in the U.S., including deferred tax assets related to items of Other Comprehensive Income. The valuation allowance release was triggered by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision.

The components of net deferred tax assets and liabilities were as follows at June 30:



(in thousands)	2020			2019
Deferred tax assets:
Net operating loss (NOL) carryforwards	$	31,891		$	28,886
Inventory valuation and reserves	8,220			8,230
Pension benefits	19,608			21,445
Other postretirement benefits	4,110			4,752
Accrued employee benefits	11,650			16,029
Operating lease liabilities	11,889			—
Other accrued liabilities	7,310			7,758
Tax credits and other carryforwards	21,048			4,733
Intangible assets	10,531			—
Other	364			2,813
Total	126,621			94,646
Valuation allowance	(16,654		)	(14,614		)
Total deferred tax assets	$	109,967		$	80,032
Deferred tax liabilities:
Tax depreciation in excess of book	$	67,411		$	74,645
Operating lease right-of-use assets	11,715			—
Intangible assets	—			4,259
Unremitted earnings not permanently reinvested	5,855			3,943
Total deferred tax liabilities	$	84,981		$	82,847
Total net deferred tax assets (liabilities)	$	24,986		$	(2,815	)

Included in deferred tax assets at June 30, 2020 is $21.0 million associated with tax credits and other carryforward items primarily for federal in the U.S. Of that amount, $2.1 million expires through 2030, $2.9 million expires through 2035 and $16.0 million expires through 2040.

Included in deferred tax assets at June 30, 2020 is $31.9 million associated with NOL carryforwards in state and foreign jurisdictions. Of that amount, $5.6 million expires through 2025, $3.8 million expires through 2030, $1.4 million expires through 2035, $3.7 million expires through 2040, and the remaining $17.4 million does not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.

A valuation allowance of $16.7 million has been placed against deferred tax assets primarily in the U.S. and Brazil, all of which would be allocated to income tax expense upon realization of the deferred tax assets. As the respective operations generate sufficient income, the valuation allowances will be partially or fully reversed at such time we believe it will be more likely than not that the deferred tax assets will be realized. In 2020, the valuation allowance related to these deferred tax assets increased by $2.0 million.

As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which among other provisions allows for a 100 percent dividends received deduction from controlled foreign subsidiaries, we re-evaluated our assertion with respect to permanent reinvestment in all jurisdictions during 2019 and concluded that a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates will no longer be permanently reinvested. These changes in assertion required the recognition of a tax charge of $6.1 million recorded in 2019 primarily for foreign withholding and U.S. state income taxes. The remaining amount of approximately $1.4 billion is substantially all of the unremitted earnings of our non-U.S. subsidiaries which continues to be indefinitely reinvested. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $5.9 million as of June 30, 2020. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the unremitted earnings which remain indefinitely reinvested, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalty) is as follows as of June 30:



(in thousands)	2020			2019			2018
Balance at beginning of year	$	8,952		$	5,775		$	2,632
Increases for tax positions of prior years	—			7,384			3,409
Decreases related to settlement with taxing authority	—			(3,765		)	—
Decreases related to lapse of statute of limitations	(214		)	(324		)	(289		)
Foreign currency translation	(58		)	(118		)	23
Balance at end of year	$	8,680		$	8,952		$	5,775

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2020, 2019 and 2018 is $8.7 million, $9.0 million and $5.8 million, respectively. We do not believe there will be a material change in the amount of unrecognized tax benefits within the next twelve months.

Our policy is to recognize interest and penalties related to income taxes as a component of the provision for income taxes in the consolidated statement of income. We recognized an increase of $1.0 million, a decrease of $0.4 million and an increase of $0.7 million in 2020, 2019 and 2018, respectively. As of June 30, 2020 and 2019, the amount of interest accrued was $1.2 million and $0.7 million, respectively. As of June 30, 2020 and 2019, the amount of penalty accrued was $0.5 million and $0.1 million, respectively.

With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2015. The Internal Revenue Service has audited or the statute of limitations has expired for all U.S. tax years prior to 2017. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 2014 to 2018. We continuously review our uncertain tax positions and evaluate any potential issues that may lead to an increase or decrease in the total amount of unrecognized tax benefits recorded.