Income taxes

12 Months Ended

Jul. 03, 2021

Income taxes

Income taxes

10. Income taxes

The components of income tax (benefit) expense (“tax provision”) are included in the table below. The tax provision for deferred income taxes results from temporary differences arising primarily from net operating losses, inventories valuation, receivables valuation, suspended interest deductions, certain accrued amounts, and depreciation and amortization, net of any changes to valuation allowances.

	Years Ended
	July 3, 2021		June 27, 2020		June 29, 2019
	(Thousands)
Current:
Federal	$	(62,445)	$	(127,250)	$	(20,250)
State and local		(4,723)		17,990		8,248
Foreign		21,530		22,816		79,004
Total current taxes		(45,638)		(86,444)		67,002
Deferred:
Federal		21,590		14,845		17,725
State and local		259		4,450		580
Foreign		3,604		(31,355)		(25,048)
Total deferred taxes		25,453		(12,060)		(6,743)
Income tax (benefit) expense	$	(20,185)	$	(98,504)	$	60,259

The tax provision is computed based upon income (loss) before income taxes from both U.S. and foreign operations. U.S. income (loss) before income taxes was $(89.4) million, $(254.8) million and, $54.9 million, in fiscal 2021, 2020, and 2019, respectively, and foreign income before income taxes was $262.3 million, $125.2 million, and $181.7 million in fiscal 2021, 2020, and 2019, respectively.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 pandemic, which among other things contains numerous income tax provisions. The CARES Act allows net operating losses incurred in fiscal years 2019, 2020, and 2021 to be carried back to each of the five preceding taxable

years to generate a refund of previously paid income taxes. The Company expects to utilize this carryback provision, which is generating a tax benefit in fiscal 2021. An income tax refund receivable of $241.3 million, associated with the fiscal 2021 and fiscal 2020 income tax benefit, is classified within Receivables on the consolidated balance sheets.

The Company asserts that all of its unremitted foreign earnings are permanently reinvested and any unrecorded liabilities related to this assertion are not material.

Reconciliations of the federal statutory tax rate to the effective tax rates are as follows:

	Years Ended
	July 3, 2021		June 27, 2020		June 29, 2019
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State and local income taxes, net of federal benefit	(2.2)		4.6		0.3
Tax on foreign income, net of valuation allowances	(10.7)		5.0		(0.5)
Establishment/release of valuation allowances, net of U.S. tax expense	2.1		(28.5)		(3.3)
Change in unrecognized tax benefit reserves	14.3		20.1		18.3
Tax audit settlements	0.4		(5.6)		1.0
Impact of the Tax Cuts and Jobs Act (the Act) - transition tax	—		—		7.3
Impact of the Act - deferred tax effects	—		—		(5.8)
Impact of the CARES Act	(8.4)		10.2		—
Impairment of investments, including goodwill	(22.4)		56.5		(8.2)
Other, net	(5.8)		(7.3)		(4.6)
Effective tax rate	(11.7)	%	76.0	%	25.5	%

Tax rates on foreign income represents the impact of the difference between foreign rates and the U.S. federal statutory rate applied to foreign income or loss, foreign income taxed in the U.S. at rates other than its statutory rate, and the impact of valuation allowances previously established against the Company’s otherwise realizable foreign deferred tax assets, which are primarily net operating loss carry-forwards.

Avnet’s effective tax rate on income before income taxes was 11.7% of benefit in fiscal 2021 as compared with an effective tax rate of 76.0% of benefit on fiscal 2020 loss before income taxes. Included in the fiscal 2021 effective tax rate is a tax benefit arising from the reduction in fair value of certain businesses, resulting in losses that can be carried back under U.S. tax law, partially offset by the net increase to unrecognized tax benefit reserves.

The Company applies the guidance in ASC 740 Income Taxes, which requires management to use its judgment to the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Company examines all available evidence on a jurisdiction-by-jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels and types of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risks associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the Company’s served industries; (iii) jurisdictional specific limitations on the utilization of deferred tax assets, including when such assets expire; and (iv) prudent and feasible tax planning strategies.

The significant components of deferred tax assets and liabilities, included in “other assets” on the consolidated balance sheets, are as follows:

	July 3,		June 27,
	2021		2020
	(Thousands)
Deferred tax assets:
Federal, state and foreign net operating loss carry-forwards	$	282,882	$	237,200
Depreciation and amortization		17,333		16,585
Inventories valuation		25,336		35,509
Operating lease liabilities		69,759		67,814
Receivables valuation		13,757		11,868
Various accrued liabilities and other		62,082		102,298
		471,149		471,274
Less — valuation allowances		(293,569)		(283,721)
		177,580		187,553
Deferred tax liabilities:
Operating lease assets		(68,135)		(66,316)
Net deferred tax assets	$	109,445	$	121,237

The increase in valuation allowances in fiscal 2021 from fiscal 2020 was primarily related to the $25.2 million increase resulting from a tax rate change in the United Kingdom, a $10.0 million increase resulting from changing foreign exchange rates, partially offset by a $27.6 million decrease relating to the current year activity in the United States.

As of July 3, 2021, the Company had net operating and capital loss carry-forwards of approximately $1.45 billion, of which $35.2 million will expire during fiscal 2022 and fiscal 2023, substantially all of which have full valuation allowances, $301.9 million have expiration dates ranging from fiscal 2024 to fiscal 2040, and the remaining $1.12 billion have no expiration date. A significant portion of these losses are not expected to be realized in the foreseeable future and have valuation allowances against them. The carrying value of the Company’s net operating and capital loss carry-forwards depends on the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions. In addition, the Company considers historic levels and types of income or losses, expectations and risk associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances as discussed further above.

Estimated liabilities for unrecognized tax benefits are included in “Accrued expenses and other” and “Other liabilities” on the consolidated balance sheets. These contingent liabilities relate to various tax matters that result from uncertainties in the application of complex income tax regulations in the numerous jurisdictions in which the Company operates. As of July 3, 2021, unrecognized tax benefits were $145.1 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $26.4 million and $20.2 million, net of applicable state tax benefits, as of the end of fiscal 2021 and 2020, respectively.

Reconciliations of the beginning and ending liability balances for unrecognized tax benefits, excluding interest and penalties, are as follows:

	July 3, 2021		June 27, 2020
	(Thousands)
Balance at beginning of year	$	96,292	$	123,765
Additions for tax positions taken in prior periods		36,452		10,456
Reductions for tax positions taken in prior periods		(4,880)		(33,880)
Reductions related to tax rate change		(200)		—
Additions for tax positions taken in current period		4,030		23,611
Reductions related to settlements with taxing authorities		(711)		(5,480)
Reductions related to the lapse of applicable statutes of limitations		(15,713)		(21,339)
Adjustments related to foreign currency translation		3,390		(841)
Balance at end of year	$	118,660	$	96,292

The evaluation of uncertain income tax positions requires management to estimate the ability of the Company to sustain its position with applicable tax authorities and estimate the final benefit to the Company. If the actual outcomes differ from the Company’s estimates, there could be an impact on the consolidated financial statements in the period in which the position is settled, the applicable statutes of limitations expire, or new information becomes available, as the impact of these events are recognized in the period in which they occur. It is difficult to estimate the period in which the amount of a tax position will change as settlement may include administrative and legal proceedings beyond the Company’s control. The effects of settling tax positions with tax authorities and statute expirations may significantly impact the estimate for unrecognized tax benefits. Within the next twelve months, the Company estimates that approximately $11.3 million of these liabilities for unrecognized tax benefits will be settled by the expiration of the statutes of limitations or through agreement with the tax authorities for tax positions related to valuation matters and positions related to acquired entities. The expected cash payment related to the settlement of these contingencies is approximately $2.4 million.

The Company conducts business globally and consequently files income tax returns in numerous jurisdictions, including those listed in the following table. It is also routinely subject to audit in these and other countries. The Company is no longer subject to audit in its major jurisdictions for periods prior to fiscal 2010. The years remaining subject to audit, by major jurisdiction, are as follows:

Jurisdiction	Fiscal Year
United States (Federal and state)	2016 - 2021
Taiwan	2016 - 2021
Hong Kong	2015 - 2021
Germany	2010 - 2021
Singapore	2017 - 2021
Belgium	2019 - 2021
United Kingdom	2019 - 2021
Canada	2011 - 2021

In connection with the sale of the TS business during fiscal 2017, several legal entities were sold to the Buyer and post-closing tax obligations are the responsibility of the Buyer. Under the terms of the sale agreement, the Company still maintains responsibility for certain pre-closing taxes including any amounts that arise from audits or other judgments received from tax authorities. The Company believes that its current estimates related to tax reserves related to the TS

business are reasonable, but future changes in facts and circumstances could result in significant changes in estimates that impact tax expense in the period of change.