Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.22.2
INCOME TAXES
 12 Months Ended
Jun. 30, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The components of income before income taxes were as follows: 
  Year Ended June 30,
(In thousands) 2022 2021 2020
Domestic income before income taxes $ 1,909,699  $ 1,251,820  $ 752,844 
Foreign income before income taxes 1,579,538  1,108,634  563,867 
Total income before income taxes $ 3,489,237  $ 2,360,454  $ 1,316,711 
The provision for income taxes was comprised of the following:
(In thousands) Year Ended June 30,
2022 2021 2020
Current:
Federal $ 341,614  $ 201,413  $ 108,136 
State 14,149  6,164  518 
Foreign 165,194  121,146  86,374 
520,957  328,723  195,028 
Deferred:
Federal 11,564  (31,989) (26,743)
State (311) (1,155) (1,174)
Foreign (365,033) (12,478) (65,425)
(353,780) (45,622) (93,342)
Provision for income taxes $ 167,177  $ 283,101  $ 101,686 
The significant components of deferred income tax assets and liabilities were as follows:
(In thousands) As of June 30,
2022 2021
Deferred tax assets:
Tax credits and net operating losses $ 268,416  $ 237,480 
Inventory reserves 86,059  81,224 
Employee benefits accrual 78,021  82,055 
Non-deductible reserves 53,426  36,267 
Unearned revenue 11,843  15,712 
SBC 9,864  7,284 
Depreciation and amortization 1,760  — 
Unrealized loss on investments —  5,384 
Other 56,911  54,615 
Gross deferred tax assets 566,300  520,021 
Valuation allowance (244,429) (204,433)
Net deferred tax assets $ 321,871  $ 315,588 
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries not indefinitely reinvested $ (358,374) $ (278,014)
Deferred profit (30,268) (10,044)
Unrealized gain on investments (12,993) — 
Depreciation and amortization —  (407,692)
Total deferred tax liabilities (401,635) (695,750)
Total net deferred tax liabilities $ (79,764) $ (380,162)
As of June 30, 2022, we, excluding Orbotech, had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $11 million, $12 million and $14 million, respectively. Orbotech had U.S. federal, state, and foreign NOLs of approximately $24 million, $13 million and $219 million, respectively. Orbotech also had capital loss carry-forwards of approximately $35 million as of June 30, 2022. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2023 through 2033. The utilization of NOLs created by acquired companies is subject to annual limitations under Section 382 of the Internal Revenue Code. However, it is not expected that such annual limitation will significantly impair the realization of these NOLs. The state NOLs began to expire in 2022. Foreign NOLs and capital loss carry-forwards will be carried forward indefinitely. State credits of $301.0 million for us, including Orbotech, will also be carried forward indefinitely.
The net deferred tax asset valuation allowance was $244.4 million and $204.4 million as of June 30, 2022 and June 30, 2021, respectively. The change was primarily due to an increase in the valuation allowance related to U.S. federal and state credit carry-forwards generated in the fiscal year ended June 30, 2022. The valuation allowance is based on our assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Of the valuation allowance as of June 30, 2022, $231.2 million was related to federal and state credit carry-forwards. The remainder of the valuation allowance was related to state and foreign NOL carry-forwards.
 As of June 30, 2022, we intend to indefinitely reinvest $185.9 million of cumulative undistributed earnings held by certain non-U.S. subsidiaries. If these undistributed earnings were repatriated to the U.S., the potential deferred tax liability associated with the undistributed earnings would be approximately $39 million.
We benefit from tax holidays in Singapore where we manufacture certain of our products. These tax holidays are on approved investments and are scheduled to expire in six to nine years. We are in compliance with all the terms and conditions of the tax holidays as of June 30, 2022. The net impact of these tax holidays was to decrease our tax expense by approximately $544 million, $12 million and $33 million in the fiscal years ended June 30, 2022, 2021 and 2020, respectively. The benefits of the tax holidays on diluted net income per share were $3.83, $0.08 and $0.21 for the fiscal years ended June 30, 2022, 2021 and 2020, respectively. The benefits during the fiscal year ended June 30, 2022 include a one-time deferred tax benefit of approximately $398 million due to a tax basis step-up from a restructuring.
The reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate was as follows:
  Year ended June 30,
  2022 2021 2020
Federal statutory rate 21.0  % 21.0  % 21.0  %
GILTI 2.0  % 2.6  % 3.0  %
Net change in tax reserves 2.0  % (1.1) % 1.5  %
State income taxes, net of federal benefit 0.3  % 0.2  % 0.2  %
Tax rate change on deferred tax liability on purchased intangibles —  % 1.7  % —  %
Non-deductible impairment of goodwill —  % —  % 4.1  %
Effect of SBC (0.2) % (0.3) % (0.3) %
R&D tax credit (1.1) % (1.1) % (1.8) %
Foreign derived intangible income (4.0) % (4.3) % (5.0) %
Effect of foreign operations taxed at various rates (4.2) % (6.6) % (12.1) %
Restructuring (11.2) % —  % (2.6) %
Other 0.2  % (0.1) % (0.3) %
Effective income tax rate 4.8  % 12.0  % 7.7  %
A reconciliation of gross unrecognized tax benefits was as follows: 
  Year Ended June 30,
(In thousands) 2022 2021 2020
Unrecognized tax benefits at the beginning of the year $ 149,642  $ 172,443  $ 146,426 
Increases for tax positions taken in current year 49,311  31,113  34,278 
Increases for tax positions taken in prior years 20,917  6,557  6,826 
Decreases for settlements with taxing authorities —  (28,651) — 
Decreases for tax positions taken in prior years (267) (19,360) (518)
Decreases for lapsing of statutes of limitations (1,676) (12,460) (14,569)
Unrecognized tax benefits at the end of the year $ 217,927  $ 149,642  $ 172,443 
The amounts of unrecognized tax benefits that would impact the effective tax rate were $205.0 million, $137.8 million and $161.5 million as of June 30, 2022, 2021 and 2020, respectively. The amounts of interest and penalties recognized during the years ended June 30, 2022, 2021 and 2020 were expenses of $11.5 million, $2.8 million and $4.6 million, respectively. Our policy is to include interest and penalties related to unrecognized tax benefits within other expense (income), net. The amounts of interest and penalties accrued as of June 30, 2022 and 2021 were approximately $52 million and $42 million, respectively.
In the normal course of business, we are subject to examination by tax authorities throughout the world. We are subject to U.S. federal income tax examinations for all years beginning from the fiscal year ended June 30, 2018 and are under U.S. federal income tax examination for the fiscal years ended June 30, 2018, 2019 and 2020. We are subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2018. We are also subject to examinations in other major foreign jurisdictions, including Singapore and Israel, for all years beginning from the calendar year ended December 31, 2012. We are under audit in Germany related to Orbotech for the years ended December 31, 2013 to December 31, 2015.
In May 2017, Orbotech received an assessment from the Israel Tax Authority (“ITA”) with respect to its fiscal years 2012 through 2014 (the “Assessment”), for an aggregate amount of tax, after offsetting all NOLs available through the end of 2014, of approximately NIS 229 million (equivalent to approximately $66 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Tax Decrees, as defined below).
On August 31, 2018, Orbotech filed an objection in respect of the Assessment (the “Objection”). The ITA completed the second stage of the audit, in which the claims Orbotech raised in the Objection were examined by different personnel at the ITA. In addition, the ITA examined additional items during this second stage of the audit. As Orbotech and the ITA did not reach an agreement during the second stage, the ITA issued Tax Decrees to Orbotech on August 28, 2019 (“Tax Decrees”) for an aggregate amount of tax, after offsetting all NOLs available through the end of 2014, of approximately NIS 257 million (equivalent to approximately $73 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Tax Decrees). These Tax Decrees replaced the Assessment. We believe that our recorded unrecognized tax benefits are sufficient to cover the resolution of these Tax Decrees.
Orbotech filed a notice of appeal with respect to the above Tax Decrees with the District Court of Tel Aviv on September 26, 2019. On February 27, 2020 the ITA filed its arguments in support of the Tax Decrees. Orbotech filed the grounds of appeal with respect to the above Tax Decrees on July 30, 2020. We are currently in the pre-trial hearing stage of the process. The ITA and Orbotech are continuing discussions in an effort to resolve this matter in a mutually agreeable manner.
In connection with the above, there was an ongoing criminal investigation in Israel against Orbotech, certain of its employees and a tax consultant. On April 11, 2018, Orbotech received a “suspect notification letter” (dated March 28, 2018) from the Tel Aviv District Attorney’s Office (Fiscal and Financial). In the letter, it was noted that the investigation file was transferred from the Assessment Investigation Officer to the District Attorney’s Office. The letter further stated that the District Attorney’s Office had not yet made a decision regarding submission of an indictment against Orbotech; and that if after studying the case, a decision is made to consider prosecuting Orbotech, Orbotech will receive an additional letter, and within 30 days, Orbotech may present its arguments to the District Attorney’s Office as to why it should not be indicted. On October 27, 2019, we received a request for additional information from the District Attorney’s Office. On March 23, 2022, Orbotech received a letter from the Assessment Investigation Officer that the investigation was closed due to lack of evidence. In addition, the Orbotech employees and its tax consultant also received letters in March 2022 noting the investigation against them had been closed.
In December 2020, Orbotech received an assessment from the ITA with respect to its fiscal years 2015 through 2018 (the “Second Assessment”), for an aggregate amount of tax, after offsetting all NOLs available through the end of 2018, of approximately NIS 227 million (equivalent to approximately $68 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Second Assessment). We filed an objection to the Second Assessment with the ITA in March 2021. The objection moved the 2015-2018 audit to the second stage, in which the ITA reviews the objections. The ITA has completed the second stage review for 2015 and 2016 of the Second Assessment and issued Tax Decrees to Orbotech on March 3, 2022 for 2015-2016 in the amount of approximately NIS 63 million (equivalent to approximately $19 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Tax Decrees). These Tax Decrees replaced the Second Assessment for 2015 and 2016. The second stage review for 2017 and 2018 has not been completed. The Second Assessment for 2017 and 2018 remains at approximately NIS 114 million (equivalent to approximately $34 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Second Assessment). We believe that our recorded unrecognized tax benefits are sufficient to cover the resolution of the Second Assessment.
We believe that we may recognize up to $1.3 million of our existing unrecognized tax benefits within the next 12 months as a result of the lapse of statutes of limitations. It is possible that certain income tax examinations may be concluded in the next 12 months. Given the uncertainty around the timing of the resolution of these ongoing examinations, we are unable to estimate the full range of possible adjustments to our unrecognized tax benefits within the next 12 months.