Income taxes

12 Months Ended

Jun. 29, 2024

Income taxes

Income taxes

9. Income taxes

The components of income tax 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
	June 29, 2024		July 1, 2023		July 2, 2022
	(Thousands)
Current:
Federal	$	50,428	$	64,224	$	58,512
State and local		4,519		7,865		8,871
Foreign		94,663		173,450		126,522
Total current taxes		149,610		245,539		193,905
Deferred:
Federal		(16,452)		(15,422)		(32,424)
State and local		86		2,606		(22,320)
Foreign		320		(20,675)		1,794
Total deferred taxes		(16,046)		(33,491)		(52,950)
Income tax expense	$	133,564	$	212,048	$	140,955

The tax provision is computed based upon income before income taxes from both U.S. and foreign operations. U.S. income before income taxes was $186.6 million, $250.8 million and, $197.1 million, in fiscal 2024, 2023, and 2022, respectively, and foreign income before income taxes was $445.6 million, $732.1 million, and $636.3 million, in fiscal 2024, 2023, and 2022, respectively.

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the "IRA"). The IRA includes various tax provisions, including a 15% corporate minimum income tax rate ("CAMT"), expanded tax credits for clean energy incentives, and 1% excise tax on corporate stock repurchases. The CAMT is effective for tax periods beginning with fiscal 2024. The company has evaluated the applicability and determined that there is no CAMT liability in fiscal 2024. In addition, the Company purchased $36.6 million of transferable federal tax credits in fiscal 2024.

The Organization for Economic Co-operation and Development (OECD) has recently enacted a new global minimum tax framework known as Pillar Two. These rules have been agreed to by most OECD members. The OECD has since issued administrative guidance providing transition and safe harbor rules around the implementation of Pillar Two rules. The Company will be subject to Pillar Two rules starting in fiscal 2025. The Company does not currently expect Pillar Two taxes to have a significant impact on its income tax expense. The Company is continuing to evaluate the potential impacts of proposed and enacted legislative changes as new guidance becomes available.

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 U.S. federal statutory income tax rate to the effective income tax rates are as follows:

	Years Ended
	June 29, 2024		July 1, 2023		July 2, 2022
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State and local income taxes, net of federal benefit	0.9		0.9		1.1
Tax on foreign income, net of valuation allowances	(2.1)		0.5		(1.7)
Establishment/release of valuation allowances, net of U.S. tax expense	0.8		0.5		(5.8)
Change in unrecognized tax benefit reserves	0.1		(0.5)		(0.6)
Tax audit settlements	0.3		0.3		0.2
Impact of surrender of Company owned life insurance policies	—		—		1.4
Impact on foreign currency translation loss	—		(1.2)		—
Other, net	0.1		0.1		1.3
Effective tax rate	21.1	%	21.6	%	16.9	%

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 21.1% in fiscal 2024 as compared with an effective tax rate of 21.6% on fiscal 2023 income before income taxes. Included in the fiscal 2024 effective tax rate are U.S. state taxes, tax expense related to the increase to valuation allowances against the deferred tax assets and the impact of mix of income in lower tax jurisdictions.

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:

	June 29,		July 1,
	2024		2023
	(Thousands)
Deferred tax assets:
Federal, state and foreign net operating loss carry-forwards	$	207,087	$	211,719
Depreciation and amortization		18,501		15,311
Inventories valuation		19,022		11,525
Operating lease liabilities		51,581		56,424
Receivables valuation		18,417		13,946
Interest deductions		51,388		39,175
Various accrued liabilities and other		103,346		101,713
		469,342		449,813
Less — valuation allowances		(216,179)		(207,744)
		253,163		242,069
Deferred tax liabilities:
Operating lease assets		(49,956)		(54,799)
Net deferred tax assets	$	203,207	$	187,270

The change in valuation allowances in fiscal 2024 from fiscal 2023 was related to a $10.4 million increase resulting from current year activities, and a $2.0 million decrease resulting from changing foreign exchange rates.

As of June 29, 2024, the Company had net operating and capital loss carry-forwards of approximately $988.4 million, of which $15.5 million will expire during fiscal 2025 and fiscal 2026, $211.0 million have expiration dates ranging from fiscal 2027 to fiscal 2043, and the remaining $761.9 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 June 29, 2024, unrecognized tax benefits were $130.3 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $29.6 million and $27.7 million, net of applicable state tax benefits, as of the end of fiscal 2024 and 2023, respectively.

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

	June 29, 2024		July 1, 2023
	(Thousands)
Balance at beginning of year	$	102,841	$	109,285
Additions for tax positions taken in prior periods		86		6,086
Reductions for tax positions taken in prior periods		(3,242)		(3,485)
Additions for tax positions taken in current period		6,814		7,523
Reductions related to settlements with taxing authorities		(1,862)		(2,873)
Reductions related to the lapse of applicable statutes of limitations		(3,427)		(14,691)
Adjustments related to foreign currency translation		(549)		996
Balance at end of year	$	100,661	$	102,841

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 income tax expense 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 $55.3 million of these liabilities for unrecognized tax benefits will be settled by the expiration of the statutes of limitations or through settlements with the tax authorities. No cash payment related to the settlement of these contingencies is expected.

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, 2017, 2019 - 2024
Taiwan	2019 - 2024
Hong Kong	2018 - 2024
Germany	2019 - 2024
Singapore	2019 - 2024
Belgium	2021 - 2024
United Kingdom	2021 - 2024
Canada	2017 - 2024