Income Taxes
The U.S. and non-U.S. components of income (loss) before income taxes of continuing operations consist of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended |
| February 3,
2018 | | January 28,
2017 | | January 30,
2016 |
U.S. operations | $ | 24,377 |
| | $ | 30,601 |
| | $ | 32,095 |
|
Non-U.S. operations | 426,827 |
| | 116,828 |
| | (759,820 | ) |
| $ | 451,204 |
| | $ | 147,429 |
| | $ | (727,725 | ) |
The provision (benefit) for income taxes consists of the following (in thousands): |
| | | | | | | | | | | |
| Year Ended |
| February 3,
2018 | | January 28,
2017 | | January 30,
2016 |
Current income tax provision (benefit): | | | | | |
Federal | $ | 776 |
| | $ | 8,231 |
| | $ | 10,413 |
|
State | 2 |
| | 180 |
| | 83 |
|
Foreign | (2,541 | ) | | 19,560 |
| | (5,876 | ) |
Total current income tax provision (benefit) | (1,763 | ) | | 27,971 |
| | 4,620 |
|
Deferred income tax provision (benefit): | | | | | |
Federal | 10,136 |
| | (5,062 | ) | | (4,355 | ) |
State | 83 |
| | (12 | ) | | 580 |
|
Foreign | 9,606 |
| | 49,711 |
| | 9,871 |
|
Total deferred income tax provision (benefit) | 19,825 |
| | 44,637 |
| | 6,096 |
|
Total provision (benefit) for income taxes | $ | 18,062 |
| | $ | 72,608 |
| | $ | 10,716 |
|
Deferred tax assets consist of the following (in thousands): |
| | | | | | | |
| February 3,
2018 | | January 28,
2017 |
Deferred tax assets: | | | |
Federal and California research and other tax credits | $ | 607,726 |
| | $ | 450,503 |
|
Reserves and accruals | 16,951 |
| | 35,887 |
|
Share-based compensation | 2,493 |
| | 3,733 |
|
Net operating losses | 11,816 |
| | 5,361 |
|
Gross deferred tax assets | 638,986 |
| | 495,484 |
|
Valuation allowance | (618,353 | ) | | (456,541 | ) |
Total deferred tax assets | 20,633 |
| | 38,943 |
|
Total deferred tax liabilities | (52,204 | ) | | (51,112 | ) |
Net deferred tax assets (liabilities) | $ | (31,571 | ) | | $ | (12,169 | ) |
As presented in the consolidated balance sheets as of February 3, 2018 and January 28, 2017, and in the table above, unrecognized tax benefits have been offset by deferred tax assets for certain net operating losses that are available to be used in the amount of $8.6 million and $7.5 million, respectively.
In the first quarter of fiscal 2018, we adopted the new guidance related to improvements to employee share-based payment accounting, which simplified several aspects of accounting for share-based payment awards including accounting for income taxes. As a result of adopting this new standard, we recognized a deferred tax asset of $123.0 million for U.S. federal and California research tax credits that were attributable to unrecognized excess tax benefits from share-based payment awards. This deferred tax asset was offset by a valuation allowance.
At the end of fiscal 2018, the Company recorded a valuation allowance of $618.4 million which is an increase of $161.8 million from fiscal 2017. The Company provided a full valuation allowance against its federal and various state research and other tax credits which it earns in excess of its current year tax liabilities, as well as a portion against its net operating loss carryforwards in the U.S. federal and California jurisdictions. Based on the available objectively verifiable positive and negative evidence, the Company determined that it is more likely than not that these research and other tax credits and net operating losses will not be realized in the future. The Company also provided a valuation allowance against the deferred tax assets of a portion of its operations in Israel, which has cumulative losses in recent years and is not projecting sufficient future taxable income to realize the benefit of its deferred tax assets.
As of February 3, 2018, the Company had net operating loss carryforwards available to offset future taxable income of approximately $108.4 million, $1.2 million and $5.7 million for foreign, U.S. federal and state of California purposes, respectively. The federal carryforwards will expire in various fiscal years between 2022 and 2028, and the California carryforwards will expire at various fiscal years between 2019 and 2033, if not utilized before these years. The majority of the Company’s non-U.S. losses carry forward indefinitely. For U.S. federal income tax return purposes, the Company had research and other tax credit carryforwards of approximately $286.4 million that expire through fiscal 2038. As of February 3, 2018, the Company had unused California research tax credit carryforwards of approximately $298.3 million, which can be carried forward indefinitely. The Company also has research and other tax credit carryforwards of approximately $24.5 million in other U.S. states that expire through fiscal 2033 due to the statutes of limitation.
The Company consists of a Bermuda parent holding company with various foreign and U.S. subsidiaries. The applicable statutory rate in Bermuda is zero for the Company for fiscal 2018, 2017, and 2016. For purposes of the reconciliation between the provision (benefit) for income taxes at the statutory rate and the effective tax rate, a notional U.S. 33.7% rate for fiscal year 2018, and a notional rate of 35% for fiscal 2017 and 2016 is applied as follows: |
| | | | | | | | |
| Year Ended |
| February 3,
2018 | | January 28,
2017 | | January 30,
2016 |
Provision at U.S. notional statutory rate | 33.7 | % | | 35.0 | % | | 35.0 | % |
Difference in U.S. and non-U.S. tax rates | (31.7 | ) | | (26.3 | ) | | (37.1 | ) |
Benefits from utilization of general business credits | (4.8 | ) | | (28.4 | ) | | 5.5 |
|
Change in valuation allowance | 4.7 |
| | 24.3 |
| | (4.4 | ) |
Withholding taxes | — |
| | 34.0 |
| | — |
|
Tax effects of global restructuring | — |
| | 11.4 |
| | — |
|
Other | 2.1 |
| | (0.7 | ) | | (0.5 | ) |
Effective tax rate | 4.0 | % | | 49.3 | % | | (1.5 | )% |
The following table reflects changes in the unrecognized tax benefits (in thousands): |
| | | | | | | | | | | |
| Year Ended |
| February 3,
2018 | | January 28,
2017 | | January 30,
2016 |
Unrecognized tax benefits as of the beginning of the period | $ | 23,793 |
| | $ | 29,139 |
| | $ | 45,197 |
|
Increases related to prior year tax positions | — |
| | 2,080 |
| | 304 |
|
Decreases related to prior year tax positions | — |
| |
|
| | (4,334 | ) |
Increases related to current year tax positions | 2,776 |
| | 2,363 |
| | 4,237 |
|
Settlements | — |
| | — |
| | (704 | ) |
Lapse in the statute of limitations | (3,341 | ) | | (6,576 | ) | | (9,739 | ) |
Foreign exchange gain | 24 |
| | (3,213 | ) | | (5,822 | ) |
Gross amounts of unrecognized tax benefits as of the end of the period | $ | 23,252 |
| | $ | 23,793 |
| | $ | 29,139 |
|
Included in the balances as of February 3, 2018 is $22.1 million of unrecognized tax benefit that would affect the effective income tax rate if recognized. Also, $8.6 million, $7.5 million and $6.3 million of the gross unrecognized tax benefits presented in the table above are offset against deferred tax assets in the consolidated balance sheets as of February 03, 2018, January 28, 2017 and January 30, 2016, respectively.
The amounts in the table above do not include the related interest and penalties. The amount of interest and penalties accrued was approximately $17.2 million as of February 3, 2018, $21.6 million as of January 28, 2017, and $26.4 million as of January 30, 2016. The Company’s policy is to recognize these interest and penalties as a component of income tax expense. The consolidated statements of operations for fiscal 2018, 2017, and 2016 included $2.3 million, $2.7 million, and $4.6 million, respectively, of interest and penalties related to the unrecognized tax benefits.
The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it operates. The examination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. As of February 3, 2018, the material jurisdictions that are subject to examination include China, Israel, Singapore, Switzerland and the United States for the Company’s fiscal years 2006 through 2017. As of February 3, 2018, several of the Company’s non-U.S. entities are under examination for fiscal years encompassing 2006 and 2017.
For fiscal 2019, the Company will continue to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, uncertain tax positions may decrease by as much as $10.5 million from the lapse of the statutes of limitation in various jurisdictions during the next 12 months.
The Singapore Economic Development Board (“EDB”) initially granted a 10-year Pioneer Status in July 1999 to the Company’s Singapore subsidiary. In October 2004, the Company’s subsidiary in Singapore was granted a second incentive known as the Develop and Expansion Incentive (“DEI”), and in June 2006, the EDB agreed to extend the Pioneer status for 15 years to June 2014. The Company re-negotiated with the Singapore government and in fiscal 2015, they extended the DEI tax credits to the Company until June 2019. In order to retain these tax benefits in Singapore, the Company must meet certain operating conditions relating to, among other things, maintenance of a regional headquarters function, and research and development activities in Singapore. In fiscal 2017 and 2016 tax savings associated with these tax holidays were approximately $0.9 million and $3.0 million, respectively, which if paid would impact the Company’s earnings per share by less than $0.01 per share in fiscal 2017 and 2016. No tax savings was recognized in fiscal 2018.
Under the Israeli Encouragement law of “approved or benefited enterprise,” two branches of Marvell Israel (M.I.S.L) Ltd., the GTL branch and the cellular branch (formerly Marvell DSPC), are entitled to approved and benefited tax programs that include reduced tax rates and exemption of certain income, subject to various operating and other conditions. Income from the approved or benefited enterprises, with the exception of capital gains, is eligible up to fiscal 2027. There was no such benefit in fiscal 2018, 2017, and 2016.
During fiscal 2007, each of the Swiss Federal Department of Economy and the Vaud Cantonal Tax Administration granted the Company’s subsidiary in Switzerland a 10 year tax holiday on revenues from research and design wafer supply trading activities, which commenced in February 2007 and expired at the end of fiscal 2016. The fiscal 2016 tax savings associated with this tax holiday was approximately $3.7 million, which provided earnings per share of $0.01 per share in fiscal 2016. No tax savings was recognized in fiscal 2018 or 2017 due to expiration of the tax holiday.
The Tax Cuts and Jobs Act ("2017 Tax Act") was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. We have not completed our determination of the accounting implications of the 2017 Tax Act on our tax accruals. However, we have reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in our financial statements as of February 3, 2018. We recorded an immaterial provisional tax expense for the impact of the 2017 Tax Act, which was primarily comprised of the remeasurement of federal net deferred taxes resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.
The Company’s principal source of liquidity as of February 3, 2018 consisted of approximately $1.8 billion of cash, cash equivalents and short-term investments, of which approximately $1.1 billion was held by foreign subsidiaries (outside Bermuda). Approximately $630 million of this amount held by foreign subsidiaries is related to undistributed earnings which have been indefinitely reinvested outside of Bermuda. These funds are primarily held in China, Israel and the United States. We have plans to use such amounts to fund various activities outside of Bermuda, including working capital requirements, capital expenditures for expansion, funding of future acquisitions or other financing activities. The amount of undistributed earnings of these subsidiaries for which no deferred tax liability has been provided is $430 million. If such funds were needed by the parent company in Bermuda or if the amounts were otherwise no longer considered indefinitely reinvested, we would incur a tax expense of approximately $160 million.