Income taxes
The components of income before income taxes are as follows:
|
| | | | | | | | | | | | |
(In thousands) | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Domestic | | $ | 46,308 |
| | $ | 43,418 |
| | $ | 50,102 |
|
Foreign | | 101,072 |
| | 71,217 |
| | 81,177 |
|
Total | | $ | 147,380 |
| | $ | 114,635 |
| | $ | 131,279 |
|
The provision for income taxes charged to operations is as follows:
|
| | | | | | | | | | | | |
(In thousands) | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current tax expense: | | | | | | |
U.S. federal | | $ | 91,043 |
| | $ | 13,579 |
| | $ | 12,678 |
|
State | | 348 |
| | 1,251 |
| | 446 |
|
Foreign | | 9,352 |
| | 22,631 |
| | 11,874 |
|
Total current | | $ | 100,743 |
| | $ | 37,461 |
| | $ | 24,998 |
|
Deferred tax expense (benefit): | | | | | | |
U.S. federal | | $ | (4,796 | ) | | $ | 2,373 |
| | $ | 14,148 |
|
State | | (151 | ) | | 323 |
| | 747 |
|
Foreign | | (827 | ) | | (8,126 | ) | | (3,114 | ) |
Total deferred | | $ | (5,774 | ) | | $ | (5,430 | ) | | $ | 11,781 |
|
Change in valuation allowance | | — |
| | (130 | ) | | (762 | ) |
Total provision | | $ | 94,969 |
| | $ | 31,901 |
| | $ | 36,017 |
|
Deferred tax liabilities (assets) at December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
(In thousands) | | December 31, |
| | 2017 | | 2016 |
Capitalized software | | $ | 18,361 |
| | $ | 22,694 |
|
Depreciation and amortization | | 12,927 |
| | 15,535 |
|
Intangible assets | | 11,647 |
| | 15,285 |
|
Cumulative translation adjustment on undistributed earnings | | 385 |
|
| — |
|
Unrealized exchange gain | | 1,338 |
| | — |
|
Unrealized gain on derivative instruments | | — |
| | 1,827 |
|
Undistributed earnings of foreign subsidiaries | | 5,330 |
| | 8,917 |
|
Gross deferred tax liabilities | | 49,988 |
| | 64,258 |
|
Operating loss carryforwards | | (81,701 | ) | | (65,230 | ) |
Vacation and other accruals | | (6,242 | ) | | (6,744 | ) |
Inventory valuation and warranty provisions | | (2,279 | ) | | (1,862 | ) |
Doubtful accounts and sales provisions | | (804 | ) | | (919 | ) |
Unrealized exchange loss | | — |
| | (3,408 | ) |
Deferred revenue | | (7,316 | ) | | (9,249 | ) |
Accrued expenses | | (495 | ) | | (533 | ) |
Unrealized loss on derivative instruments | | (924 | ) | | — |
|
10% minority stock investment | | — |
| | (916 | ) |
Stock-based compensation | | (4,540 | ) | | (6,043 | ) |
Research and development tax credit carryforward | | (297 | ) | | (396 | ) |
Capital loss carryforward | | (463 | ) | | (395 | ) |
Foreign tax credit carryforward | | (130 | ) | | (203 | ) |
Cumulative translation adjustment on undistributed earnings | | — |
| | (393 | ) |
Other | | (1,118 | ) | | (636 | ) |
Gross deferred tax assets | | (106,309 | ) | | (96,927 | ) |
Valuation allowance | | 77,504 |
| | 61,679 |
|
Net deferred tax liability | | $ | 21,183 |
| | $ | 29,010 |
|
A reconciliation of income taxes at the U.S. federal statutory income tax rate to our effective tax rate follows:
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal statutory rate | | 35 | % | | 35 | % | | 35 | % |
Foreign taxes greater (less) than federal statutory rate | | (12 | ) | | (7 | ) | | (1 | ) |
Research and development tax credits | | (3 | ) | | (3 | ) | | (3 | ) |
Enhanced deduction for certain research and development expenses | | (3 | ) | | (2 | ) | | (7 | ) |
State income taxes, net of federal tax benefit | | — |
| | 1 |
| | 1 |
|
Employee share-based compensation | | — |
| | 1 |
| | 1 |
|
Change in intercompany prepaid tax asset | | (2 | ) | | 1 |
| | 1 |
|
Change in valuation allowance | | — |
| | — |
| | (1 | ) |
Amortization of intangible assets | | 1 |
| | 1 |
| | — |
|
Remeasurement of U.S. deferred tax balance | | (10 | ) | | — |
| | — |
|
Transition tax on deferred foreign income | | 54 |
| | — |
| | — |
|
Foreign tax on undistributed foreign earnings | | 3 |
| | — |
| | — |
|
Other | | 1 |
| | 1 |
| | 1 |
|
Effective tax rate | | 64 | % | | 28 | % | | 27 | % |
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act. However, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. We have recognized a provisional amount of $69.9 million, which is included as a component of income tax expense from continuing operations. We will continue to make and refine our calculations as additional analysis is completed. Our estimates may also be affected as we gain a more thorough understanding of the tax law.
Provisional Amounts
Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional benefit recorded related to the remeasurement of our deferred tax balance was $15.1 million.
Transition Tax: The one-time transition tax is based on our total post-1986 earnings and profits (“E&P”) that we previously deferred from US income taxes. We recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries, resulting in an increase in income tax expense of $79.7 million. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalize the amounts held in cash or other specified assets.
As of December 31, 2017, unremitted earnings from our foreign subsidiaries were approximately $867 million and have been included in our computation of the transition tax. We recorded a provisional amount of $5.3 million for foreign withholding and distribution taxes on these earnings as these amounts are not expected to be indefinitely reinvested. We have not provided additional income taxes for any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis difference in these entities is not practicable.
As of December 31, 2017, we had a federal net operating loss carryforward of $0.4 million which expires in the years 2034 to 2035, a federal capital loss carryforward of $2.1 million which expires during the years 2018 to 2021, and federal tax credit carryforwards of $0.4 million which expire during the years 2021 to 2034. Certain of these carryforwards are subject to limitations following a change in ownership.
As of December 31, 2017, 13 of our subsidiaries had available, for income tax purposes, foreign net operating loss carryforwards of an aggregate of approximately $884.0 million, of which $875 million expires during the years 2020 to 2026 and $9 million of which may be carried forward indefinitely. Our tax valuation allowance relates primarily to our ability to realize certain of these foreign net operating loss carryforwards.
Effective January 1, 2010, a new tax law in Hungary provided for an enhanced deduction for the qualified research and development expenses of NI Hungary Software and Hardware Manufacturing Kft. (“NI Hungary”). During the three months ended December 31, 2009, we obtained confirmation of the application of this new tax law for the qualified research and development expenses of NI Hungary. Based on the application of this new tax law to the qualified research and development expense of NI Hungary, we do not expect to have sufficient future taxable income in Hungary to realize the benefits of NI Hungary’s deferred tax assets. Therefore, we had a full valuation allowance against those assets at December 31, 2017.
Earnings from our operations in Malaysia are free of tax under a tax holiday effective January 1, 2013. This tax holiday expires in 2027. If we fail to satisfy the conditions of the tax holiday, this tax benefit may be terminated early. The tax holiday resulted in income tax benefits of $5.5 million and $3.3 million for the years ended December 31, 2017 and 2016, respective1y. The impact of the tax holiday on a per share basis for the years ended December 31, 2017 and 2016 was a benefit of $0.04 and $0.03 per share, respectively.
We account for uncertainty in income taxes recognized in our financial statements using prescribed recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax returns. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
|
| | | | | | | | |
(In thousands) | | December 31, 2017 | | December 31, 2016 |
Balance at beginning of period | | $ | 11,719 |
| | $ | 12,496 |
|
Additions based on tax positions related to the current year | | 1,763 |
| | 2,296 |
|
Additions for tax positions of prior years | | 399 |
| | 435 |
|
Reductions as a result of the closing of open tax periods | | (3,723 | ) | | (3,508 | ) |
Balance at end of period | | $ | 10,158 |
| | $ | 11,719 |
|
All of our unrecognized tax benefits at December 31, 2017 would affect our effective income tax rate if recognized. As of December 31, 2017, it is reasonably possible that we will recognize tax benefits in the amount of $1.5 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority.
We recognize interest and penalties related to income tax matters in income tax expense. During each of the years ended December 31, 2017 and 2016, we recognized interest expense related to uncertain tax positions of approximately $0.4 million.
The tax years 2008 through 2017 remain open to examination by the major taxing jurisdictions to which we are subject. The Internal Revenue Service ("IRS") concluded an examination of our U.S. income tax returns for 2010 and 2011 in the third quarter of 2014.