Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

v3.23.2
INCOME TAXES
 12 Months Ended
Jun. 30, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The components of income before income taxes were as follows: 
  Year Ended June 30,
(In thousands) 2023 2022 2021
Domestic income before income taxes $ 2,017,338  $ 1,909,699  $ 1,251,820 
Foreign income before income taxes 1,771,852  1,579,538  1,108,634 
Total income before income taxes $ 3,789,190  $ 3,489,237  $ 2,360,454 
The provision for income taxes was comprised of the following:
(In thousands) Year Ended June 30,
2023 2022 2021
Current:
Federal $ 553,197  $ 341,614  $ 201,413 
State 14,804  14,149  6,164 
Foreign 188,991  165,194  121,146 
756,992  520,957  328,723 
Deferred:
Federal (228,414) 11,564  (31,989)
State (4,295) (311) (1,155)
Foreign (122,444) (365,033) (12,478)
(355,153) (353,780) (45,622)
Provision for income taxes $ 401,839  $ 167,177  $ 283,101 
The significant components of deferred income tax assets and liabilities were as follows:
(In thousands) As of June 30,
2023 2022
Deferred tax assets:
Tax credits and net operating losses $ 271,500  $ 268,416 
Capitalized R&D expenses 201,228  — 
Inventory reserves 103,646  86,059 
Employee benefits accrual 92,696  78,021 
Depreciation and amortization 73,691  1,760 
Non-deductible reserves 52,147  53,426 
Unearned revenue 16,668  11,843 
SBC 12,710  9,864 
Other 35,360  56,911 
Gross deferred tax assets 859,646  566,300 
Valuation allowance (259,172) (244,429)
Net deferred tax assets $ 600,474  $ 321,871 
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries not indefinitely reinvested $ (279,677) $ (358,374)
Deferred profit (23,149) (30,268)
Unrealized gain on investments (9,994) (12,993)
Total deferred tax liabilities (312,820) (401,635)
Total net deferred tax liabilities $ 287,654  $ (79,764)
Our deferred tax assets for the year ended June 30, 2023 reflect the impact of the mandatory capitalization of research and experimental expenditures as required by the 2017 Tax Cuts and Jobs Act. This provision was first effective for the Company in the year ending June 30, 2023. We will continue to monitor legislative developments with respect to this capitalization requirement.
As of June 30, 2023, we, excluding Orbotech, had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $8 million, $9 million and $16 million, respectively. Orbotech had state and foreign NOLs of approximately $15 million and $163 million, respectively. Orbotech also had capital loss carry-forwards of approximately $9 million as of June 30, 2023. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2024 through 2037. 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 will expire at various dates beginning in 2028 through 2036. Foreign NOLs and capital loss carry-forwards will be carried forward indefinitely. State credits of approximately $331 million for us, including Orbotech, will also be carried
forward indefinitely.
The net deferred tax asset valuation allowance was $259.2 million and $244.4 million as of June 30, 2023 and 2022, respectively. The change was primarily due to an increase in the valuation allowance related to state credit carry-forwards generated in the fiscal year ended June 30, 2023. 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, 2023, $256.1 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, 2023, 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, 2023. The net impact of these tax holidays was to decrease our tax expense by approximately $162 million, $544 million and $12 million in the fiscal years ended June 30, 2023, 2022 and 2021, respectively. The benefits of the tax holidays on diluted net income per share were $1.18, $3.83 and $0.08 for the fiscal years ended June 30, 2023, 2022 and 2021, 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,
  2023 2022 2021
Federal statutory rate 21.0  % 21.0  % 21.0  %
GILTI 3.4  % 2.0  % 2.6  %
State income taxes, net of federal benefit 0.2  % 0.3  % 0.2  %
Effect of SBC 0.1  % (0.2) % (0.3) %
Net change in tax reserves —  % 2.0  % (1.1) %
Tax rate change on deferred tax liability on purchased intangibles —  % —  % 1.7  %
Restructuring —  % (11.2) % —  %
R&D tax credit (1.5) % (1.1) % (1.1) %
Foreign derived intangible income (5.7) % (4.0) % (4.3) %
Effect of foreign operations taxed at various rates (7.1) % (4.2) % (6.6) %
Other 0.2  % 0.2  % (0.1) %
Effective income tax rate 10.6  % 4.8  % 12.0  %
A reconciliation of gross unrecognized tax benefits was as follows: 
  Year Ended June 30,
(In thousands) 2023 2022 2021
Unrecognized tax benefits at the beginning of the year $ 217,927  $ 149,642  $ 172,443 
Increases for tax positions taken in current year 44,590  49,311  31,113 
Increases for tax positions taken in prior years 434  20,917  6,557 
Decreases for settlements with taxing authorities (45,042) —  (28,651)
Decreases for tax positions taken in prior years (3,929) (267) (19,360)
Decreases for lapsing of statutes of limitations (888) (1,676) (12,460)
Unrecognized tax benefits at the end of the year $ 213,092  $ 217,927  $ 149,642 
The amounts of unrecognized tax benefits that would impact the effective tax rate were $199.0 million, $205.0 million and $137.8 million as of June 30, 2023, 2022 and 2021, respectively. The amounts of interest and penalties recognized during the years ended June 30, 2023, 2022 and 2021 were a benefit of $20.2 million and expenses of $11.5 million and $2.8 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, 2023 and 2022 were approximately $33 million and $52 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, 2019. 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, 2019.
In August 2022, Orbotech executed a settlement agreement with the Israel Tax Authority (“ITA”) in resolution of tax examinations for fiscal years 2012 through 2014 and 2015 through 2018. The settlement agreement included a payment of approximately $25.7 million, including interest, to the ITA. In addition, Orbotech paid approximately $16.2 million to the ITA related to previous “tax exempt” earnings under the historical Approved or Beneficial Enterprises regimes. The current year election to pay tax on the previous exempt earnings was made under the Temporary Order issued in the Israel Budget, which allows for a reduced tax rate on such earnings. Approximately $5.7 million of the settlement payment related to the amount of R&D expenses eligible for deduction during the above referenced years was refunded to Orbotech in January 2023. Orbotech currently has no ongoing ITA examinations. Orbotech is subject to income tax examination in Israel for all years beginning from the calendar year ended December 31, 2019.
We believe that we may recognize up to $2.7 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.
Legislative Developments
President Biden signed into law the CHIPS and Science Act of 2022 (“CHIPS Act,” where “CHIPS” stands for Creating Helpful Incentives to Produce Semiconductors) on August 9, 2022. The CHIPS Act provides for various incentives and tax credits among other items, including the Advanced Manufacturing Investment Credit (“AMIC”), which equals 25% of qualified investments in an advanced manufacturing facility that is placed in service after December 31, 2022. There was no material impact to our financial statements from the AMIC provision.
President Biden also signed into law the IRA on August 16, 2022. The IRA has several provisions including a 15% corporate alternative minimum tax (“CAMT”) for certain large corporations that have at least an average of $1.0 billion of adjusted financial statement income over a consecutive three-tax-year period. The CAMT will be effective for us in the first quarter of our fiscal year ending June 30, 2024.
The IRA also introduced a 1% excise tax imposed on certain stock repurchases by publicly traded companies made after December 31, 2022. We began recording the excise tax as part of the cost basis of treasury stock repurchased after December 31, 2022.
Other than the AMIC and the excise tax imposed on certain stock repurchases as mentioned above, we are currently evaluating the applicability and impact of the other provisions in the IRA and the CHIPS Act on our Consolidated Financial Statements including our future cash flows.