INCOME TAXES
The geographic distribution of income (loss) before income taxes and the components of income tax benefit (provision) are summarized below:
|
| | | | | | | | | | | |
| Year Ended |
| December 31,
2017 | | January 1, 2017 | | January 3, 2016 |
| | | (In thousands) | | |
United States loss | $ | (108,146 | ) | | $ | (786,610 | ) | | $ | (460,168 | ) |
Foreign income | 38,388 |
| | 105,992 |
| | 111,836 |
|
Income (loss) before income taxes | (69,758 | ) | | (680,618 | ) | | (348,332 | ) |
Income tax benefit (provision): | |
| | |
| | |
|
Current tax benefit (expense): | |
| | |
| | |
|
Federal | (1,358 | ) | | (1,144 | ) | | 219 |
|
State | (125 | ) | | 204 |
| | 55 |
|
Foreign | (15,081 | ) | | (926 | ) | | (17,189 | ) |
Total current tax benefit (expense) | (16,564 | ) | | (1,866 | ) | | (16,915 | ) |
Deferred tax benefit (expense): | |
| | |
| | |
|
Federal | 4,341 |
| | (556 | ) | | (610 | ) |
State | (67 | ) | | (31 | ) | | (155 | ) |
Foreign | 1,133 |
| | (163 | ) | | 720 |
|
Total deferred tax benefit (expense) | 5,407 |
| | (750 | ) | | (45 | ) |
Income tax benefit (provision) | $ | (11,157 | ) | | $ | (2,616 | ) | | $ | (16,960 | ) |
Income tax benefit (provision) differs from the amounts obtained by applying the statutory United States federal income tax rate to income (loss) before taxes as shown below:
|
| | | | | | | | | | | |
| Year Ended |
| December 31,
2017 | | January 1, 2017 | | January 3, 2016 |
| | | (In thousands) | | |
Benefit (provision) at U.S. statutory rate of 35% | $ | 24,415 |
| | $ | 238,216 |
| | $ | 121,916 |
|
Foreign income at other than U.S. rates | (67,685 | ) | | (36,552 | ) | | (22,385 | ) |
Future benefits not recognized | 29,762 |
| | (29,207 | ) | | (121,300 | ) |
Goodwill impairment | — |
| | (181,987 | ) | | — |
|
Reversal of previously accrued taxes | 1,447 |
| | 13,371 |
| | 10,939 |
|
Tax impact of acquisitions | — |
| | — |
| | (6,457 | ) |
Foreign withholding taxes | (3,718 | ) | | (2,018 | ) | | (243 | ) |
State income taxes, net of federal benefit | (192 | ) | | (87 | ) | | (138 | ) |
Tax credit refund | 5,637 |
| | — |
| | — |
|
Other, net | (823 | ) | | (4,352 | ) | | 708 |
|
Income tax benefit (provision) | $ | (11,157 | ) | | $ | (2,616 | ) | | $ | (16,960 | ) |
The components of deferred tax assets and liabilities were as follows:
|
| | | | | | | |
| As of |
| December 31,
2017 | | January 1, 2017 |
| (In thousands) |
Deferred tax assets: | |
| | |
|
Credits and net operating loss carryovers | $ | 460,329 |
| | $ | 496,448 |
|
Reserves and accruals | 92,655 |
| | 120,453 |
|
Excess of book over tax depreciation | 11,744 |
| | 35,886 |
|
Deferred income | 39,367 |
| | 26,457 |
|
Total deferred tax assets | 604,095 |
| | 679,244 |
|
Less valuation allowance | (513,191 | ) | | (445,030 | ) |
Deferred tax assets, net | 90,904 |
| | 234,214 |
|
Deferred tax liabilities: | |
| | |
|
Foreign earnings and others | (68,013 | ) | | (163,914 | ) |
Intangible assets arising from acquisitions | (24,477 | ) | | (71,960 | ) |
Total deferred tax liabilities | (92,490 | ) | | (235,874 | ) |
Net deferred tax assets | $ | (1,586 | ) | | $ | (1,660 | ) |
The Company has the following tax loss and credit carryforwards available to offset future income tax liabilities:
|
| | | | | | |
Carryforward | | Amount | | Expiration Date |
| | ($ in millions) | | |
Federal net operating loss carryforward | | $ | 1,195 |
| | 2022-2037 |
Federal research credit carryforward | | $ | 118 |
| | 2018-2037 |
International foreign tax credit carryforward | | $ | 8 |
| | 2018-2023 |
State research credit carryforward | | $ | 97 |
| | Indefinite |
State net operating loss carryforward | | $ | 434 |
| | 2018-2036 |
The federal and state net operating loss carryforward is subject to limitations under Internal Revenue Code Section 382.
As of December 31, 2017, of the total deferred tax assets of $604.1 million, a valuation allowance of $513.2 million has been recorded for the portion that is not more likely than not to be realized. As of January 1, 2017, of the total deferred tax assets of $679.2 million, a valuation allowance of $445.0 million has been recorded for the portion which is not more likely than not to be realized. The Company’s determination of the need for a valuation allowance each year is based on a jurisdictional assessment.
The Company’s global operations involve manufacturing, research and development, and selling activities. The Company’s operations outside the U.S. are in certain countries that impose a statutory tax rate lower than the U.S. The Company is subject to tax holidays in Malaysia and Thailand where it manufactures and designs certain products. These tax holidays are scheduled to expire at varying times within the next five years. The Company’s tax benefit of these tax holidays for the year ended December 31, 2017 had an insignificant impact on earnings per share. Overall, the Company expects its foreign earnings to be taxed at rates lower than the statutory tax rate in the U.S.
Unrecognized Tax Benefits
The following table is a reconciliation of unrecognized tax benefits:
|
| | | |
| (In thousands) |
Unrecognized tax benefits, as of December 28, 2014 | $ | 11,607 |
|
Decrease related to settlements with taxing authorities | (838 | ) |
Decrease related to lapsing of statute of limitation | (818 | ) |
Decrease based on tax positions related to prior year | (10,272 | ) |
Increase based on tax positions related to current year | 6,487 |
|
Increases in balances related to tax positions taken during prior periods (including those related to acquisitions made during the year) | 108,677 |
|
Unrecognized tax benefits, as of January 3, 2016 | $ | 114,843 |
|
Decrease related to lapsing of statute of limitation | (7,190 | ) |
Decrease based on tax positions related to prior year | — |
|
Increase based on tax positions related to current year | 5,639 |
|
Increases in balances related to tax positions taken during prior periods | 33,032 |
|
Unrecognized tax benefits, as of January 1, 2017 | $ | 146,324 |
|
Decrease related to lapsing of statute of limitation | (1,108 | ) |
Decrease based on tax positions related to prior year | — |
|
Increase based on tax positions related to current year | 4,475 |
|
Increases in balances related to tax positions taken during prior periods | 1,631 |
|
Decrease in balances due to the Tax Reform corporate tax rate change from 35% to 21% | (36,087 | ) |
Unrecognized tax benefits, as of December 31, 2017 | $ | 115,235 |
|
Gross unrecognized tax benefits decreased by $31.1 million during fiscal year 2017, resulting in gross unrecognized tax benefits of $115.2 million as of December 31, 2017.
During fiscal year 2017, the Company recognized $1.1 million of previously unrecognized tax benefits as a result of either the expiration of the statute of limitations for certain audit periods or settlement with taxing authorities.
The Company recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes line in the accompanying consolidated statements of operations. The Company recognized approximately $2.2 million of benefit related to interest and penalties in fiscal year 2017. Accrued interest and penalties are included within other long-term liabilities in the consolidated balance sheets. As of December 31, 2017 and January 1, 2017, the combined amount of cumulative accrued interest and penalties was approximately $11.0 million and $8.5 million, respectively.
As of December 31, 2017 and January 1, 2017, the amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate totaled $28.9 million and $24.3 million, respectively.
Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:
| |
• | completion of examinations by the U.S. or foreign taxing authorities; and |
| |
• | expiration of statute of limitations on the Company’s tax returns. |
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. The Company regularly assesses its tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which it does business. The Company believes it is reasonably possible that it may recognize up to approximately $0.2 million of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.
Classification of Interest and Penalties
The Company's policy is to classify interest expense and penalties, if any, as components of income tax provision in the Consolidated Statements of Operations. As of December 31, 2017 and January 1, 2017, the amount of accrued interest and penalties totaled $11.0 million and $8.5 million, respectively. The Company recorded a charge or (benefit) from interest and penalties of $2.2 million, ($3.4) million and $9.1 million during fiscal 2017, 2016 and 2015, respectively.
Tax Examinations
The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of December 31, 2017:
|
| | |
Tax Jurisdictions | | Tax Years |
United States | | 2010 and onward |
Philippines | | 2014 and onward |
Israel | | 2014 and onward |
India | | 2004 and onward |
Thailand | | 2011 and onward |
Malaysia | | 2007 and onward |
Switzerland | | 2008 and onward |
California | | 2011 and onward |
Japan | | 2010 and onward |
Income tax examinations of the Company’s Malaysian subsidiary for the fiscal years 2007 to 2013 and our Philippine subsidiary for fiscal year 2014 are in progress. The Company does not believe the ultimate outcome of these examinations will result in a material increase to its tax liability.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code effective for tax years beginning after December 31, 2017. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, the repeal of corporate AMT, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated a reasonable estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of the issuance of the consolidated financial statements. As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax assets at December 31, 2017, which resulted in a provisional decrease of deferred tax balance and corresponding valuation allowance balance of $158.7 million. The provisional amount related to the remeasurement of certain deferred tax liabilities, based on the rates at which it is expected to reverse in the future, resulted in a tax benefit of $3.0 million. The provisional amount related to the repeal of corporate AMT was a tax benefit of $5.6 million as the prior year AMT credit will be refunded over 2018 - 2021. Based on the Act and guidance available as of the date of the issuance of the consolidated financial statements, the Company determined a provisional estimate of the impact of the one-time transition tax on the mandatory deemed repatriation of accumulative foreign subsidiary earnings. The Company estimates that the transition tax will result in the utilization of $46.0 million of net operating loss carryforwards against which the Company maintains a corresponding valuation allowance.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that there is no additional current tax expense required to be recorded in connection with the transition tax on the mandatory deemed repatriation of net cumulative foreign earnings and a reasonable estimate at December 31, 2017 as the Company believes it has sufficient tax attributes such as net operating loss and tax credits to offset any tax imposed on this income. Additional work is necessary for a more detailed analysis of the Company's historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense upon completion of the analysis during the subsequent quarters of 2018.
United States income taxes and foreign withholding taxes have not been provided on a cumulative total of $361.3 million of undistributed earnings for non-United States subsidiaries as of December 31, 2017, because such earnings are intended to be indefinitely reinvested. The Company did not record a provision for additional United States income taxes caused by the one-time transition tax on the mandatory deemed repatriation of accumulative foreign subsidiary earnings as the Company has sufficient net operating loss carryforwards to offset the income. Withholding taxes associated with these undistributed earnings are not significant.
The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, considering the Company's current assessment of the probability of maintaining profitability, there is a reasonable possibility that, within the next year, sufficient positive evidence may become available to reach a conclusion that a significant portion, or all, of the valuation allowance will no longer be needed. As such, the Company may release a significant portion, or all, of its valuation allowance against its deferred tax assets within the next 12 months. This release, if any, would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded.