Income Taxes
Income (loss) from continuing operations before income taxes is derived from (in thousands):
|
| | | | | | | | | | | |
| Year Ended |
| October 29,
2017 | | October 30,
2016 | | November 1,
2015 |
U.S. Domestic | $ | 22,464 |
| | $ | (20,643 | ) | | $ | (63,205 | ) |
International | 9,749 |
| | 8,248 |
| | 48,065 |
|
Income (loss) from continuing operations before income tax | $ | 32,213 |
| | $ | (12,395 | ) | | $ | (15,140 | ) |
Income tax provision (benefit) by taxing jurisdiction consists of (in thousands): |
| | | | | | | | | | | |
| Year Ended |
| October 29,
2017 | | October 30,
2016 | | November 1,
2015 |
Current: | | | | | |
U.S. Federal | $ | (1,178 | ) | | $ | 86 |
| | $ | 90 |
|
U.S. State and local | 448 |
| | 186 |
| | (1,616 | ) |
International | 3,399 |
| | 2,444 |
| | 5,200 |
|
Total current | $ | 2,669 |
| | $ | 2,716 |
| | $ | 3,674 |
|
Deferred: | | | | | |
U.S. Federal | $ | 1 |
| | $ | — |
| | $ | — |
|
U.S. State and local | 721 |
| | (190 | ) | | 634 |
|
International | (3 | ) | | (351 | ) | | 338 |
|
Total deferred | 719 |
| | (541 | ) | | 972 |
|
Income tax provision | $ | 3,388 |
| | $ | 2,175 |
| | $ | 4,646 |
|
The difference between the income tax provision on income (loss) and the amount computed at the U.S. federal statutory rate is due to (in thousands):
|
| | | | | | | | | | | |
| Year Ended |
| October 29,
2017 | | October 30,
2016 | | November 1,
2015 |
U.S. Federal statutory rate | $ | 11,275 |
| | $ | (4,338 | ) | | $ | (5,299 | ) |
U.S. State income tax, net of U.S. Federal tax benefits | 419 |
| | 513 |
| | (1,435 | ) |
International permanent differences | 651 |
| | (110 | ) | | (4,293 | ) |
International tax rate differentials | (467 | ) | | (1,291 | ) | | (7,046 | ) |
U.S. tax on international income | 3,446 |
| | 3,136 |
| | (1,118 | ) |
General business credits | 1,099 |
| | (4,287 | ) | | (3,839 | ) |
Meals and entertainment | 163 |
| | 209 |
| | 531 |
|
Other, net | (387 | ) | | (160 | ) | | 942 |
|
Change in valuation allowance for dispositions | (2,211 | ) | | — |
| | (4,237 | ) |
Change in valuation allowance for deferred tax assets | (10,600 | ) | | 8,503 |
| | 30,440 |
|
Income tax provision | $ | 3,388 |
| | $ | 2,175 |
| | $ | 4,646 |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and also include operating loss carryforwards. The significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| October 29,
2017 | | October 30,
2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 66,806 |
| | $ | 62,670 |
|
Capital loss carryforwards | 5,293 |
| | 21,131 |
|
U.S. federal tax credit carryforwards | 48,154 |
| | 47,866 |
|
Deferred income | 10,251 |
| | 10,714 |
|
Compensation accruals | 6,276 |
| | 6,170 |
|
Other, net | 8,738 |
| | 7,813 |
|
Total deferred tax assets | 145,518 |
| | 156,364 |
|
Less valuation allowance | (134,195 | ) | | (144,863 | ) |
Deferred tax assets, net | 11,323 |
| | 11,501 |
|
| | | |
Deferred tax liabilities: | | | |
Unremitted earnings from foreign subsidiaries | 3,453 |
| | 3,356 |
|
Software development costs | 6,403 |
| | 5,226 |
|
Other, net | 1,606 |
| | 3,914 |
|
Total deferred tax liabilities | 11,462 |
| | 12,496 |
|
Net deferred tax asset (liability) | $ | (139 | ) | | $ | (995 | ) |
| | | |
Balance sheet classification | | | |
Non-current assets | $ | 1,067 |
| | $ | 2,142 |
|
Non-current liabilities | (1,206 | ) | | (3,137 | ) |
Net deferred tax asset (liability) | $ | (139 | ) | | $ | (995 | ) |
At October 29, 2017, the Company has available unused U.S. federal net operating loss (“NOL”) carryforwards of $155.7 million, U.S. state NOL carryforwards of $195.2 million, international NOL carryforwards of $9.6 million and capital loss carryforwards of $13.5 million. As of October 29, 2017, the U.S. federal NOL carryforwards will expire at various dates between 2031 and 2037, the U.S. state NOL carryforwards expire at various dates between 2020 and 2037, the international NOL carryforwards expire at various dates beginning in 2018 (with some indefinite) and capital loss carryforwards expire in 2022. At October 29, 2017, the undistributed earnings of the Company’s non-U.S. subsidiaries are not intended to be permanently invested outside of the U.S. and therefore U.S. deferred taxes have been provided.
A valuation allowance has been recognized due to the uncertainty of realization of the loss carryforwards and other deferred tax assets. Beginning in fiscal 2010, the Company’s cumulative U.S. domestic and certain non-U.S. results for each three-year period were a loss. Accordingly, the Company recorded a full valuation allowance against its net U.S. domestic and certain net non-U.S. deferred tax assets as a non-cash charge to income tax expense. The three-year cumulative loss continued in fiscal 2017, 2016, and 2015 so the Company maintained a full valuation allowance against its net U.S. domestic and certain net non-U.S. deferred tax assets resulting in a total valuation allowance of $134.2 million and $144.9 million for fiscal 2017 and fiscal 2016, respectively. In reaching this conclusion, the Company considered the U.S. domestic demand and recent operating losses causing the Company to be in a three-year cumulative loss position. Management believes that the remaining deferred tax assets are more likely than not to be realized based upon consideration of all positive and negative evidence, including scheduled reversal of deferred tax liabilities and tax planning strategies determined on a jurisdiction-by-jurisdiction basis.
The Company recognizes income tax benefits for tax positions determined more likely than not to be sustained upon examination based on the technical merits of the positions. The following table sets forth the change in the accrual for uncertain tax positions, excluding interest and penalties (in thousands): |
| | | | | | | |
| October 29,
2017 | | October 30,
2016 |
Balance, beginning of year | $ | 5,237 |
| | $ | 5,215 |
|
Add related to current year tax provision | 269 |
| | 52 |
|
Reduction for tax provision of prior years - (a) | (2,973 | ) | | — |
|
Settlements | (993 | ) | | — |
|
Lapse of statute of limitations | (45 | ) | | (30 | ) |
Total | $ | 1,495 |
| | $ | 5,237 |
|
(a) - As a result of the sale of the quality assurance business, the parent-subsidiary relationship between the Company and Volt Canada, Inc. no longer exists and, as such, the indemnity granted at the time of sale is subject to recognition under ASC 460 by the Company. As of October 27, 2017, the Company recognized approximately $3.7 million related to the fair value of amounts accrued by Volt Canada, Inc. as of the date of the separation which are expected to be covered by the indemnity. If additional information becomes available, the Company will update the liability provision for the indemnity. This amount had previously been recognized as part of the Company’s FIN 48 liability and has been reclassified to Accrued insurance and other under ASC 460.
Of the total unrecognized tax benefits at October 29, 2017 and October 30, 2016, approximately $1.5 million and $2.5 million, respectively, would affect the Company’s effective income tax rate, if and when recognized in future years. The amount accrued for related potential interest and penalties at October 29, 2017 and October 30, 2016 was $0.2 million and $1.5 million, respectively. The Company anticipates a release of approximately $1.0 million in the first quarter of fiscal 2018, however, various events could cause the Company’s current expectations to change in the future.
The Company is subject to taxation at the federal, state and local levels in the U.S. and in various international jurisdictions. With few exceptions, the Company is generally no longer subject to examination by the U.S. federal, state, local or non-U.S. income tax authorities for years before fiscal 2004. The Company recorded a net discrete tax benefit of approximately $1.3 million resulting from the resolution of uncertain tax positions upon the completion and effective settlement of the audit of the Company’s fiscal 2004 through 2010 federal income tax returns and associated state tax audits. In March 2017, the Company received $13.8 million of federal refunds related to the completion of the audit periods. The Company continues to work with the IRS to resolve one remaining matter related to fiscal 2010 and anticipates having the matter resolved within the next several quarters.