Income Taxes

12 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of earnings (loss) before income taxes were as follows:

Year Ended June 30,	2022		2021		2020
($000)
U.S. income (loss)	$	(62,721)	$	21,692	$	(302,027)
Non-U.S. income	344,528		330,898		238,099
Earnings (loss) before income taxes	$	281,807	$	352,590	$	(63,928)

The components of income tax expense were as follows:

Year Ended June 30,	2022		2021		2020
($000)
Current:
Federal	$	1,569	$	415	$	7
State	768		1,632		496
Foreign	52,865		53,362		45,052
Total Current	$	55,202	$	55,409	$	45,555
Deferred:
Federal	$	(7,185)	$	13,744	$	(43,955)
State	(1,215)		(431)		1,007
Foreign	246		(13,684)		494
Total Deferred	$	(8,154)	$	(371)	$	(42,454)
Total Income Tax Expense	$	47,048	$	55,038	$	3,101

Principal items comprising deferred income taxes were as follows:

June 30,	2022		2021
($000)
Deferred income tax assets
Inventory capitalization	$	20,562	$	20,753
Interest rate swap	—		6,347
Non-deductible accruals	8,403		7,437
Accrued employee benefits	11,320		14,025
Net-operating loss and credit carryforwards	149,949		163,717
Share-based compensation expense	10,125		8,400
Other	3,565		1,832
Deferred revenue	12,416		7,124
Right of use asset	29,817		33,341
Valuation allowances	(55,420)		(53,765)
Total deferred income tax assets	$	190,737	$	209,211
Deferred income tax liabilities
Tax over book accumulated depreciation	$	(28,701)	$	(32,692)
Intangible assets	(134,972)		(153,582)
Interest rate swap	(6,105)		—
Interest rate cap	(4,102)		—
Tax on unremitted earnings	(26,383)		(21,569)
Convertible debt	—		(3,321)
Lease liability	(28,983)		(32,053)
Other	(7,036)		(6,458)
Total deferred income tax liabilities	$	(236,282)	$	(249,675)
Net deferred income taxes	$	(45,545)	$	(40,464)

The reconciliation of income tax expense at the statutory U.S. federal rate to the reported income tax expense is as follows:

Year Ended June 30,	2022		%	2021		%	2020		%
($000)
Taxes at statutory rate	$	59,179	21	$	74,044	21	$	(13,425)	21
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit	(339)		—	1,246		—	1,194		(2)
Taxes on non U.S. earnings	(2,704)		(1)	(26,557)		(7)	(915)		1
Valuation allowance	(1,513)		(1)	(3,720)		(1)	(9,365)		15
Research and manufacturing incentive deductions and credits	(24,341)		(9)	(22,968)		(6)	(15,836)		25
Stock compensation	2,095		1	(2,500)		(1)	4,334		(7)
GILTI and FDII	4,866		2	27,369		8	36,067		(56)
Other	9,805		4	8,124		2	1,047		(2)
	$	47,048	17	$	55,038	16	$	3,101	(5)

The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As a result of the Tax Cuts and Jobs Act (the “Tax Act”), among other things, the Company determined it will repatriate earnings for all non-U.S. subsidiaries with cash in excess of working capital needs. Such distributions could potentially be subject to U.S. state tax in certain states and foreign withholding taxes. Foreign currency gains (losses) related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. The Company has estimated the associated withholding tax to be $26 million.

Additionally, the Tax Act introduced a new category of income, referred to as global intangible low tax income (“GILTI”), which requires a current year inclusion of earnings of controlled foreign corporations taxed at a low rate and without a significant fixed asset base. The Company made a final accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.

During the fiscal years ended June 30, 2022, 2021, and 2020, cash paid by the Company for income taxes was $50 million, $60 million, and $40 million, respectively.

Our foreign subsidiaries in various tax jurisdictions operate under tax holiday arrangements. The impact of the tax holidays on our effective rate is a reduction in the rate of 1.60%, 3.22% and (8.91)% for the fiscal years ended June 30, 2022, 2021 and 2020, respectively, and the impact of the tax holidays on diluted earnings per share is $0.04, $0.10, and $0.07 for the fiscal years ended June 30, 2022, 2021, and 2020, respectively. The tax holiday related to II-VI Malaysia Advanced Manufacturing Center Sdn. Bhd will end during the fiscal year ended June 30, 2026, the tax holiday related to certain II-VI Laser Enterprise Philippines, Inc.'s business lines will end during the fiscal year ended June 30, 2026, and the tax holiday related to II-VI Vietnam Co., Ltd will end during the fiscal year ended June 30, 2024.

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2022:

Type	Amount		Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits	$	83,063	June 2023-June 2042
Foreign tax credits	3,540		June 2030-June 2032
State tax credits	15,632		June 2023-June 2037
State tax credits (indefinite)	39,243		Indefinite
Operating loss carryforwards:
Loss carryforwards - federal	$	42,012	June 2023-June 2036
Loss carryforwards - state	182,178		June 2023-June 2042
Loss carryforwards - state (indefinite)	25,899		Indefinite
Loss carryforwards - foreign	15,608		June 2023-June 2032
Loss carryforwards - foreign (indefinite)	38,600		Indefinite

The Company has recorded a valuation allowance against the majority of the foreign and state loss and credit carryforwards. The Company’s U.S. federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulting from the Company’s acquisitions are subject to various annual limitations under Section 382 of the U.S. Internal Revenue Code.

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2022, 2021 and 2020 were as follows:

	2022		2021		2020
($000)
Beginning balance	$	38,025	$	42,803	$	11,520
Increases in current year tax positions	1,803		3,940		1,506
Acquired business	—		5,341		31,791
Settlements	—		(7,514)		—
Expiration of statute of limitations	(2,417)		(6,545)		(2,014)
Ending balance	$	37,411	$	38,025	$	42,803

The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2022, 2021 and 2020, there was $0.4 million, $0.3 million and $0.6 million of interest and penalties within income tax expense, respectively. The Company had $3 million, $3 million and $4 million of interest and penalties accrued at June 30, 2022, 2021 and 2020, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate, was approximately $25 million, $26 million and $24 million at June 30, 2022, 2021 and 2020, respectively. The Company expects a decrease of $2 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.

Fiscal years 2019 to 2022 remain open to examination by the Internal Revenue Service, fiscal years 2018 to 2022 remain open to examination by certain state jurisdictions, and fiscal years 2010 to 2022 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in India for the year ended March 31, 2016; Philippines for the years ended June 2018 and 2019; and Germany for the years ended June 30, 2012 through June 30, 2018. The Company believes its income tax reserves for these tax matters are adequate.