Income Taxes
The components of (loss) income before income tax (benefit) provision were as follows:
|
| | | | | | | | | | | |
| Fiscal years ended January 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Domestic | $ | (161,642 | ) | | $ | (211,223 | ) | | $ | (17,091 | ) |
Foreign | 5,570 |
| | 2,530 |
| | 3,746 |
|
| $ | (156,072 | ) | | $ | (208,693 | ) | | $ | (13,345 | ) |
The (benefit) provision for income taxes were as follows:
|
| | | | | | | | | | | |
| Fiscal years ended January 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 35 |
| | $ | (343 | ) | | $ | (361 | ) |
Foreign | 2,148 |
| | 1,499 |
| | 2,231 |
|
State | 119 |
| | (442 | ) | | (147 | ) |
| 2,302 |
| | 714 |
| | 1,723 |
|
Deferred: | | | | | |
Federal | (30,434 | ) | | (31,429 | ) | | (6,690 | ) |
Foreign | (583 | ) | | (948 | ) | | (673 | ) |
State | (3,222 | ) | | (4,810 | ) | | (1,062 | ) |
| (34,239 | ) | | (37,187 | ) | | (8,425 | ) |
Income tax benefit | $ | (31,937 | ) | | $ | (36,473 | ) | | $ | (6,702 | ) |
A reconciliation of the income tax benefit and the amount computed by applying the statutory federal income tax rate of 35% to the (loss) income before income taxes are the following:
|
| | | | | | | | | | | |
| Fiscal years ended January 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Tax benefit computed at the statutory rate | $ | (54,625 | ) | | $ | (73,041 | ) | | $ | (4,670 | ) |
State tax, federally effected | (1,953 | ) | | (4,047 | ) | | (862 | ) |
Permanent differences | 233 |
| | 372 |
| | 453 |
|
Foreign earnings taxed at non-United States rates | (187 | ) | | (356 | ) | | 1,609 |
|
Loss from Mexico sale | — |
| | — |
| | (1,697 | ) |
Goodwill impairment | 24,452 |
| | 39,850 |
| | — |
|
Return to provision adjustments | 258 |
| | (182 | ) | | (438 | ) |
FIN 48 reserve | 310 |
| | (175 | ) | | 701 |
|
Valuation allowance | (608 | ) | | 665 |
| | (1,363 | ) |
Other | 183 |
| | 441 |
| | (435 | ) |
Income tax benefit | $ | (31,937 | ) | | $ | (36,473 | ) | | $ | (6,702 | ) |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
| | | | | | | |
| January 31, |
(in thousands) | 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating losses and tax credits | $ | 85,973 |
| | $ | 75,789 |
|
Accruals and other | 5,835 |
| | 10,407 |
|
Share-based compensation | 3,304 |
| | 3,400 |
|
Other comprehensive loss | — |
| | 362 |
|
Investment in subsidiaries | 419 |
| | 427 |
|
Goodwill | 7,555 |
| | 441 |
|
Total deferred tax assets | 103,086 |
| | 90,826 |
|
Deferred tax liabilities: | | | |
Depreciation | (80,188 | ) | | (84,998 | ) |
Other amortization expense | (132,756 | ) | | (149,053 | ) |
Total deferred tax liabilities | (212,944 | ) | | (234,051 | ) |
Less valuation allowance | (256 | ) | | (865 | ) |
Net deferred tax liabilities | $ | (110,114 | ) | | $ | (144,090 | ) |
As of January 31, 2017, our valuation allowance was approximately $0.3 million on certain of our deferred tax assets. The change of $0.6 million in our valuation allowance relates to a net decrease in allowances related to foreign and state net operating losses. Based on the available evidence, we believe that it is more likely than not that these deferred tax assets will not be realized.
As of January 31, 2017, we estimated federal and state net operating loss carry-forwards of approximately $236.0 million and $103.1 million, respectively, which will begin to expire in fiscal year 2023 and fiscal year 2018, respectively, unless utilized. Included in our U.S. net operating loss deferred tax assets above is approximately $21.7 million of unrecognized tax benefits that would be offset against the net operating loss carryforwards if such settlement is required or expected in the event the uncertain tax position is disallowed.
As of January 31, 2017, we estimated a federal AMT credit of $0.1 million, which will carry forward indefinitely until utilized.
As of January 31, 2017, we estimated state tax credit carryforwards of approximately $0.6 million, which will begin to expire in 2023, unless utilized.
Utilization of the net operating loss and tax credit carryforwards may become subject to annual limitations due to ownership change limitations that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership changes may limit the amount of the net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income. An ownership change occurred in May 2011 in connection with the acquisition by Permira. The annual limitation as a result of that ownership change did not result in the loss or substantial limitation of net operating loss or tax credit carryforwards. There have been no subsequent ownership changes through January 31, 2017.
The majority of our deferred tax assets relate to U.S. net operating loss carry-forwards. We believe that we will fully realize the benefit of existing deferred tax assets based on the scheduled reversal of U.S. deferred tax liabilities related to depreciation and amortization expenses not deductible for tax purposes, which is ordinary income and of the same character as the temporary differences giving rise to the deferred tax assets. This will reverse in substantially similar time periods as the deferred tax assets and in the same jurisdictions. As such, the deferred tax liabilities are considered to provide a source of income sufficient to support our U.S. deferred tax assets and our conclusion that no valuation allowance is needed as of January 31, 2017. A valuation allowance of $0.3 million and $0.9 million has been recorded as of January 31, 2017 and 2016, respectively, against deferred tax assets related to certain foreign and state net operating loss carry-forwards as we believe it is more likely than not that those deferred tax assets will not be realized.
Undistributed earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. We intend to reinvest these earnings indefinitely in our foreign subsidiaries. As of January 31, 2017, we estimated cumulative earnings at our foreign subsidiaries of $6.5 million. No provision for U.S. income tax has been provided on the $6.5 million of cumulative foreign earnings. However, if these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits and net operating loss carryforwards would be available to reduce some portion of the U.S. liability.
Under the accounting guidance applicable to uncertainty in income taxes we have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns as well as all open tax years in these jurisdictions. This accounting guidance clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements; prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return; and provides guidance on the description, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The following table summarizes the activity related to our gross unrecognized tax benefits (excluding interest and penalties and related tax carryforwards):
|
| | | | | | | |
| January 31, |
(in thousands) | 2017 | | 2016 |
Balance, beginning of the year | $ | 3,653 |
| | $ | 2,740 |
|
Gross increases related to prior year income tax provision | — |
| | 57 |
|
Gross decreases related to current year income tax provision | (941 | ) | | — |
|
Gross increases related to current year income tax provision | 478 |
| | 856 |
|
Balance, end of the year | $ | 3,190 |
| | $ | 3,653 |
|
Included in the unrecognized tax benefit as of January 31, 2017 is $1.5 million that, if recognized, would affect the effective income tax rate.
We did not have any accrued interest or penalties associated with any unrecognized tax benefits during the fiscal years ended January 31, 2017, 2016 and 2015.
We file income tax returns and are subject to audit in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to U.S. federal, state and foreign income tax examinations for fiscal years prior to 2014, 2013 and 2012, respectively.
We believe appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years. However, audit outcomes and settlements are subject to significant uncertainty and we continue to evaluate such uncertainties in light of current facts and circumstances. As a result our current estimates of the total amounts of unrecognized tax benefits could increase or decrease for all open tax years. It is reasonably possible that an additional $0.9 million of uncertain tax positions will decrease within the next 12 months due to the expiration of the net operating loss carryforwards associated with such positions.