Income Taxes
The components of (loss) income before income taxes are as follows (dollars in thousands):
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (228,406 | ) | | $ | (118,410 | ) | | $ | (196,925 | ) |
Foreign | 109,391 |
| | 120,149 |
| | 116,453 |
|
(Loss) income before income taxes | $ | (119,015 | ) | | $ | 1,739 |
| | $ | (80,472 | ) |
The components of the provision for income taxes are as follows (dollars in thousands):
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
Federal | $ | — |
| | $ | — |
| | $ | 82 |
|
State | 2,185 |
| | 3,230 |
| | 982 |
|
Foreign | 24,941 |
| | 22,981 |
| | 16,784 |
|
Total current | 27,126 |
| | 26,211 |
| | 17,848 |
|
Deferred: | |
| | |
| | |
|
Federal | 7,291 |
| | (7,235 | ) | | 15,694 |
|
State | 1,133 |
| | (1,962 | ) | | 3,278 |
|
Foreign | (3,569 | ) | | (2,817 | ) | | (2,282 | ) |
Total deferred | 4,855 |
| | (12,014 | ) | | 16,690 |
|
Provision for income taxes | $ | 31,981 |
| | $ | 14,197 |
| | $ | 34,538 |
|
Effective income tax rate | (26.9 | )% | | 816.4 | % | | (42.9 | )% |
The provision for income taxes differed from the amount computed by applying the federal statutory rate to our (loss) income before income taxes as follows (dollars in thousands):
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2017 | | 2016 | | 2015 |
Federal tax benefit at statutory rate | $ | (41,655 | ) | | $ | 609 |
| | $ | (28,165 | ) |
State tax provision, net of federal benefit | 2,560 |
| | 137 |
| | 3,278 |
|
Foreign tax rate and other foreign related tax items | (20,415 | ) | | (25,976 | ) | | (30,765 | ) |
Repatriated earnings, net of foreign tax credits | — |
| | 71,343 |
| | — |
|
Stock-based compensation | 6,934 |
| | 6,154 |
| | 10,734 |
|
Non-deductible expenditures | 3,247 |
| | 3,235 |
| | (162 | ) |
Change in U.S. and foreign valuation allowance | 72,318 |
| | (53,079 | ) | | 71,238 |
|
Executive compensation | 5,492 |
| | 4,749 |
| | 3,873 |
|
Other | 3,500 |
| | 7,025 |
| | 4,507 |
|
Provision for income taxes | $ | 31,981 |
| | $ | 14,197 |
| | $ | 34,538 |
|
The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States; the majority of our income before provision for income taxes from foreign operations has been earned by subsidiaries in Ireland. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.
The effective income tax rate in fiscal year 2017 differs from the U.S. federal statutory rate of 35% primarily due to current period losses in the United States that require additional valuation allowance, and an increase in deferred tax liabilities related to goodwill, partially offset by our earnings in foreign operations that are subject to significantly lower tax rates than U.S. statutory tax rate.
The effective income tax rate in fiscal year 2016 differs from the U.S. federal statutory rate of 35% primarily due to current period losses in the United States that require additional valuation allowance, an increase in the deferred tax liabilities related to goodwill, and an increase in current tax provisions due to the one-time repatriation of foreign earnings offset by the utilization of previously unbenefited domestic loss and credit carryforwards. These were partially offset by our earnings in foreign operations that are subject to a significantly lower tax rate than U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland, and a $22.1 million release of domestic valuation allowance as a result of tax benefits recorded in connection with our acquisitions during the period for which a deferred tax liability was established in purchase accounting.
The effective income tax rates in fiscal year 2015 differs from the U.S. federal statutory rate of 35% primarily due to current period losses in the United States that require additional valuation allowance and an increase to deferred tax liabilities related goodwill, partially offset by our earnings in foreign operations that are subject to a significantly lower tax rate than the U.S. statutory tax rate, driven primarily by our subsidiaries in Ireland.
As of September 30, 2017, the cumulative amount of undistributed earnings of our foreign subsidiaries amounted to $484.0 million. We have not provided taxes on $416.6 million of undistributed earnings of our foreign subsidiaries that we consider indefinitely reinvested. Our indefinite reinvestment determination is based on the future operational and capital requirements of our domestic and foreign operations. We expect the cash held by our foreign subsidiaries of $146.1 million will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2017, it is not practical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other tax assets.
Deferred tax assets (liabilities) consist of the following at September 30, 2017 and 2016 (dollars in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Net operating loss carryforwards | $ | 269,495 |
| | $ | 202,331 |
|
Federal and state credit carryforwards | 58,803 |
| | 50,927 |
|
Accrued expenses and other reserves | 53,795 |
| | 59,622 |
|
Difference in timing of revenue related items | 100,971 |
| | 59,818 |
|
Deferred compensation | 30,528 |
| | 31,564 |
|
Other | 20,424 |
| | 11,649 |
|
Total deferred tax assets | 534,016 |
| | 415,911 |
|
Valuation allowance for deferred tax assets | (229,449 | ) | | (110,172 | ) |
Net deferred tax assets | 304,567 |
| | 305,739 |
|
Deferred tax liabilities: | |
| | |
|
Depreciation | (36,016 | ) | | (40,032 | ) |
Convertible debt | (136,609 | ) | | (101,810 | ) |
Acquired intangibles | (221,707 | ) | | (237,280 | ) |
Unremitted earnings of foreign subsidiaries | (20,850 | ) | | (20,788 | ) |
Net deferred tax liabilities | $ | (110,615 | ) | | $ | (94,171 | ) |
Reported as: | |
| | |
|
Other assets | $ | 20,705 |
| | $ | 21,264 |
|
Long-term deferred tax liabilities | (131,320 | ) | | (115,435 | ) |
Net deferred tax liabilities | $ | (110,615 | ) | | $ | (94,171 | ) |
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During fiscal year 2017, the valuation allowance for deferred tax assets increased by $119.3 million. This increase mainly relates to the establishment of valuation allowance against our net domestic deferred tax assets in connection with net operating losses generated in fiscal year 2017 and the recording of additional net operating losses and credit carryforwards as a result of adopting ASU 2016-09, partially offset by the recording of deferred tax liabilities related to the issuance of convertible debt as well as acquisitions. As of September 30, 2017, we have $202.3 million and $27.1 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2016, we had $75.1 million and $35.1 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively.
The majority of deferred tax assets relate to net operating losses, the use of which may not be available as a result of limitations on the use of acquired losses. With respect to these operating losses, there is no assurance that they will be used given the current assessment of the limitations on their use or our current projection of future taxable income in the entities for which these losses relate. Based on our analysis, we have concluded that it is not more likely than not that the majority of our deferred tax assets can be realized and therefore a valuation allowance has been assigned to these deferred tax assets. If we are subsequently able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then we may be required to recognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to our results of operations in the period in which the benefit is determined.
At September 30, 2017 and 2016, we had U.S. federal net operating loss carryforwards of $642.0 million and $627.9 million, respectively. At September 30, 2017 and 2016, we had state net operating loss carryforwards of $262.7 million and $264.8 million, respectively. The net operating loss and credit carryforwards are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state tax provisions. At September 30, 2017 and 2016, we had foreign net operating loss carryforwards of $168.8 million and $178.2 million, respectively. These carryforwards will expire at various dates beginning in 2018 and extending up to an unlimited period.
At September 30, 2017 and 2016, we had federal research and development carryforwards and foreign tax credit carryforwards of $43.5 million and $52.2 million, respectively. At September 30, 2017 and 2016, we had state research and development credit and investment tax credit carryforwards of $6.2 million and $7.8 million, respectively. At September 30, 2017 and 2016, we had foreign investment tax credit carryforwards of $14.8 million and $13.1 million, respectively.
Uncertain Tax Positions
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit which is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements of operations.
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands):
|
| | | | | | | |
| September 30, |
| 2017 | | 2016 |
Balance at the beginning of the year | $ | 31,955 |
| | $ | 22,677 |
|
Increases related to tax positions from prior fiscal years | 2,745 |
| | 8,017 |
|
Decreases related to tax positions from prior fiscal years | (602 | ) | | — |
|
Increases for tax positions taken during current period | 1,676 |
| | 1,807 |
|
Decreases for tax settlements and lapse in statutes | (1,083 | ) | | (490 | ) |
Cumulative translation adjustments | (633 | ) | | (56 | ) |
Balance at the end of the year | $ | 34,058 |
| | $ | 31,955 |
|
As of September 30, 2017, $29.9 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect a significant change in the amount of unrecognized tax benefits within the next 12 months. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes of $2.1 million, $2.2 million, and $0.6 million during fiscal years 2017, 2016, and 2015, respectively. We recorded interest and penalties of $9.9 million and $7.5 million as of September 30, 2017 and 2016, respectively.
We are subject to U.S. federal income tax, various state and local taxes, and international income taxes in numerous jurisdictions. The federal tax returns for 1999 through 2013 remain subject to examination for the purpose of determining the amount of remaining tax NOL and other carryforwards. The 2014 through 2017 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.