Income taxes

12 Months Ended

Jul. 02, 2022

Income taxes

Income taxes

9. Income taxes

The components of income tax expense (benefit) (“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 2, 2022		July 3, 2021		June 27, 2020
	(Thousands)
Current:
Federal	$	58,512	$	(62,445)	$	(127,250)
State and local		8,871		(4,723)		17,990
Foreign		126,522		21,530		22,816
Total current taxes		193,905		(45,638)		(86,444)
Deferred:
Federal		(32,424)		21,590		14,845
State and local		(22,320)		259		4,450
Foreign		1,794		3,604		(31,355)
Total deferred taxes		(52,950)		25,453		(12,060)
Income tax expense (benefit)	$	140,955	$	(20,185)	$	(98,504)

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 $197.1 million, $(89.4) million and, $(254.8) million, in fiscal 2022, 2021, and 2020, respectively, and foreign income before income taxes was $636.3 million, $262.3 million, and $125.2 million, in fiscal 2022, 2021, and 2020, 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 has utilized this carryback provision. An income tax refund receivable of $56.1 million, associated with the fiscal 2021 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 2, 2022		July 3, 2021		June 27, 2020
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State and local income taxes, net of federal benefit	1.1		(2.2)		4.6
Tax on foreign income, net of valuation allowances	(1.7)		(10.7)		5.0
Establishment/release of valuation allowances, net of U.S. tax expense	(5.8)		2.1		(28.5)
Change in unrecognized tax benefit reserves	(0.6)		14.3		20.1
Tax audit settlements	0.2		0.4		(5.6)
Impact of surrender of Company owned life insurance policies	1.4		—		—
Impact of the CARES Act	—		(8.4)		10.2
Impairments of investments, goodwill and long-lived assets	—		(22.4)		56.5
Other, net	1.3		(5.8)		(7.3)
Effective tax rate	16.9	%	(11.7)	%	76.0	%

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 16.9% in fiscal 2022 as compared with an effective tax rate of 11.7% of benefit on fiscal 2021 income before income taxes. Included in the fiscal 2022 effective tax rate is a tax benefit arising from the decreases to valuation allowance against deferred tax assets.

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 2,		July 3,
	2022		2021
	(Thousands)
Deferred tax assets:
Federal, state and foreign net operating loss carry-forwards	$	226,072	$	282,882
Depreciation and amortization		11,525		17,333
Inventories valuation		29,798		25,336
Operating lease liabilities		56,256		69,759
Receivables valuation		18,321		13,757
Interest deductions		29,358		35,516
Various accrued liabilities and other		47,717		26,566
		419,047		471,149
Less — valuation allowances		(207,889)		(293,569)
		211,158		177,580
Deferred tax liabilities:
Operating lease assets		(54,632)		(68,135)
Net deferred tax assets	$	156,526	$	109,445

The decrease in valuation allowances in fiscal 2022 from fiscal 2021 was related to a $65.2 million net release of valuation allowance primarily as a result of changes to management’s expectation of its ability to realize certain deferred tax assets, and a $20.5 million decrease resulting from changing foreign exchange rates.

As of July 2, 2022, the Company had net operating and capital loss carry-forwards of approximately $1.18 billion, of which $11.0 million will expire during fiscal 2023 and fiscal 2024, substantially all of which have full valuation allowances, $281.9 million have expiration dates ranging from fiscal 2025 to fiscal 2041, and the remaining $888.6 million 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.

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 2, 2022, unrecognized tax benefits were $134.6 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $25.3 million and $26.4 million, net of applicable state tax benefits, as of the end of fiscal 2022 and 2021, respectively.

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

	July 2, 2022		July 3, 2021
	(Thousands)
Balance at beginning of year	$	118,660	$	96,292
Additions for tax positions taken in prior periods		3,569		36,452
Reductions for tax positions taken in prior periods		(4,075)		(4,880)
Reductions related to tax rate change		—		(200)
Additions for tax positions taken in current period		1,269		4,030
Reductions related to settlements with taxing authorities		(1,660)		(711)
Reductions related to the lapse of applicable statutes of limitations		(3,883)		(15,713)
Adjustments related to foreign currency translation		(4,595)		3,390
Balance at end of year	$	109,285	$	118,660

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 $14.5 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 $1.1 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 2016. The years remaining subject to audit, by major jurisdiction, are as follows:

Jurisdiction	Fiscal Year
United States (Federal and state)	2016 - 2022
Taiwan	2017 - 2022
Hong Kong	2016 - 2022
Germany	2016 - 2022
Singapore	2018 - 2022
Belgium	2020 - 2022
United Kingdom	2020 - 2022
Canada	2016 - 2022