Income Taxes

12 Months Ended

Jun. 30, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

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

(in thousands)	2023			2022			2021
Income (loss) before income taxes:
United States	$	(14,702)		$	10,109		$	(60,775)
International	174,323			196,624			125,435
Total income before income taxes	$	159,621		$	206,733		$	64,660
Current income taxes:
Federal	$	2,007		$	1,115		$	39
State	546			106			133
International	42,921			44,019			30,726
Total current income taxes	45,474			45,240			30,898
Deferred income taxes:
Federal	$	(3,394)		$	10,841		$	(23,170)
State	683			(676)			(2,948)
International	(6,508)			1,127			1,463
Total deferred income taxes:	(9,219)			11,292			(24,655)
Provision for income taxes	$	36,255		$	56,532		$	6,243
Effective tax rate	22.7		%	27.3		%	9.7		%

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 multi-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 considered the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which was subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities, and modifications to the underlying valuation. During the December quarter of the current year, we adjusted the calculation of the transitional provisions of Swiss tax reform after a review and receipt of a ruling from the Swiss federal and cantonal authorities and recorded a $2.2 million tax benefit to adjust the deferred tax asset and income tax liabilities related to fiscal years 2021 and 2022.

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)	2023		2022		2021
Income taxes at U.S. statutory rate	$	33,520	$	43,414	$	13,579
State income taxes, net of federal tax benefit	971		(450)		(1,725)
U.S. income taxes provided on international income	4,583		12,815		(6,479)
Combined tax effects of international income	5,761		2,747		5,860
Change in valuation allowance and other uncertain tax positions	(4,060)		(614)		1,127
U.S. research and development credit	(3,325)		(2,814)		(3,055)
Change in permanent reinvestment assertion	—		775		—
Combined effects of Swiss tax reform	(2,225)		—		—
Recognition of stranded deferred tax balance	—		—		(3,465)
Other	1,030		659		401
Provision for income taxes	$	36,255	$	56,532	$	6,243

During 2023, we released a $2.9 million valuation allowance that was previously recorded against our net deferred tax assets in Brazil. The impact of this item is included in the tax reconciliation table under the caption “Change in valuation allowance and other uncertain tax positions.”

During 2023, we recorded a tax benefit of $2.2 million to reflect the adjustment of our calculation of the transitional provisions of Swiss tax reform. The impact of this item is included in the tax reconciliation table under the caption “Combined effects of Swiss tax reform.”

During 2021, we recorded a tax benefit of $3.5 million for the recognition of a stranded deferred tax balance in accumulated other comprehensive loss associated with the forward starting interest rate swap contracts that were terminated when the 2022 Senior Notes were extinguished. The impact of this item is included in the tax reconciliation table under the caption “Recognition of stranded deferred tax balance” and in the consolidated statements of cash flows as a non-cash item within the caption "Debt refinancing charge."

During 2021, we recorded a net tax benefit of $9.3 million related to a tax election made in our fiscal 2020 U.S. income tax return pursuant to global intangible low-taxed income (GILTI) regulations which were issued during the current fiscal year. The impact of this item is included in the tax reconciliation table under the caption “U.S. income taxes provided on international income.”

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

(in thousands)	2023		2022
Deferred tax assets:
Net operating loss (NOL) carryforwards	$	24,111	$	25,868
Inventory valuation and reserves	9,677		11,747
Accrued employee benefits	14,758		14,825
Operating lease liabilities	11,229		11,995
Other accrued liabilities	13,963		12,992
Capitalized research and development costs	25,187		7,244
Tax credits and other carryforwards	22,601		27,686
Intangible assets	5,209		4,246
Total	126,735		116,603
Valuation allowance	8,281		14,385
Total deferred tax assets	$	118,454	$	102,218
Deferred tax liabilities:
Tax depreciation in excess of book	$	62,763	$	57,109
Operating lease right-of-use assets	11,084		11,852
Unremitted earnings not permanently reinvested	4,831		7,242
Pension benefits	1,808		1,061
Other	4,511		2,537
Total deferred tax liabilities	$	84,997	$	79,801
Total net deferred tax assets (liabilities)	$	33,457	$	22,417

Included in deferred tax assets at June 30, 2023 is $22.6 million associated with tax credits and other carryforward items in the U.S. and Europe. Of that amount, $2.7 million expires through 2038, $18.7 million expires through 2043, and $1.2 million does not expire.

Included in deferred tax assets at June 30, 2023 is $24.1 million associated with NOL carryforwards in U.S. state and foreign jurisdictions. Of that amount, $3.3 million expires through 2028, $0.8 million expires through 2033, $0.4 million expires through 2038, $5.4 million expires through 2043, and the remaining $14.2 million does not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.

A valuation allowance of $8.3 million has been placed against deferred tax assets primarily in U.S. state, Bolivia, and Russia jurisdictions, 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 2023, the valuation allowance related to these deferred tax assets decreased by $6.1 million.

We consider the majority of the $1.5 billion unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, 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. 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 small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $4.8 million as of June 30, 2023.

In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. While the outcome of the litigation is still pending, the tax authority served notice in the September quarter of fiscal 2020 requiring payment in the amount of €36.0 million. Accordingly, we requested and were granted a stay and are not currently required to make a payment in connection with this assessment. We continue to believe that the assessment is baseless and accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority would result in an increase to income tax expense for as much as €35.6 million, or $38.8 million, of which penalties and interest is €20.9 million, or $22.8 million. During the current year, the Italian government launched a tax amnesty program aimed at reducing the number of tax disputes pending before the Italian courts. Pursuant to program guidelines, payments made to successfully resolve a dispute must be received by the Italian government no later than September 30, 2023. We are currently evaluating whether this program could facilitate a resolution to this litigation.

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)	2023		2022		2021
Balance at beginning of year	$	7,598	$	8,656	$	8,680
(Decreases)/Increases for tax positions of prior years	(658)		105		—
Decreases related to lapse of statute of limitations	(99)		(779)		(229)
Foreign currency translation	94		(384)		205
Balance at end of year	$	6,935	$	7,598	$	8,656

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2023, 2022 and 2021 is $6.9 million, $7.6 million and $8.7 million, respectively. We believe that it is reasonably possible that the amount of unrecognized tax benefits will decrease by approximately $5.6 million 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 statements of income. We recognized a decrease of $0.3 million and $0.2 million in 2023 and 2021, respectively, and an increase of $0.1 million in 2022. As of June 30, 2023 and 2022, the amount of interest accrued was $1.0 million and $1.4 million, respectively. As of June 30, 2023, the amount of penalty accrued was $0.1 million. There was no penalty accrued of June 30, 2022.

With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2019. The Internal Revenue Service has audited, or the statute of limitations has expired, for all U.S. tax years prior to 2019. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 2019 to 2022. 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.