Income tax benefit consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 |
| 2016 |
| 2015 |
Current: | | | | | |
U.S. federal | $ | 123 |
| | $ | 14,695 |
| | $ | 7,470 |
|
State | 962 |
| | 2,048 |
| | 514 |
|
Foreign | 122 |
| | 27 |
| | — |
|
Total current expense | 1,207 |
| | 16,770 |
| | 7,984 |
|
Deferred: | | | | | |
U.S. federal | (26,012 | ) | | (16,608 | ) | | (12,004 | ) |
State | (1,022 | ) | | (1,421 | ) | | (538 | ) |
Foreign | (63 | ) | | (26 | ) | | (65 | ) |
Total deferred benefit | (27,097 | ) | | (18,055 | ) | | (12,607 | ) |
Income tax benefit | $ | (25,890 | ) | | $ | (1,285 | ) | | $ | (4,623 | ) |
Income tax benefit differed from the amount computed by applying the statutory federal income tax rate of 35% as follows (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 |
| 2016 | | 2015 |
Income tax expense (benefit) at the statutory federal income tax rate | $ | 1,220 |
| | $ | (930 | ) | | $ | (6,072 | ) |
State income taxes, net of federal benefit | 582 |
| | 454 |
| | (15 | ) |
Deductible domestic manufacturing costs | — |
| | (1,225 | ) | | (787 | ) |
Non-deductible compensation | 283 |
| | 249 |
| | 27 |
|
Non-deductible acquisition-related transaction costs | — |
| | 37 |
| | 2,524 |
|
Tax Legislation impact | (21,430 | ) | | — |
| | — |
|
Excess tax benefit due to stock-based compensation | (11,558 | ) | | — |
| | — |
|
Change in liabilities for uncertain tax positions | (321 | ) | | (86 | ) | | — |
|
Change in valuation allowance | 4,974 |
| | 15 |
| | (223 | ) |
Other | 360 |
| | 201 |
| | (77 | ) |
Income tax benefit | $ | (25,890 | ) | | $ | (1,285 | ) | | $ | (4,623 | ) |
The tax effect of temporary differences and net operating loss carryforwards that gave rise to the Company’s deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 |
| 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 111,416 |
| | $ | 176,722 |
|
Accrued compensation | 4,586 |
| | 12,069 |
|
Deferred revenue | 1,638 |
| | 3,740 |
|
Tax credit carryforwards | — |
| | 10,925 |
|
Stock-based compensation | 3,592 |
| | 9,689 |
|
Capital loss | 22,579 |
| | 37,680 |
|
Other, net | 3,466 |
| | 5,798 |
|
Total gross deferred tax assets | 147,277 |
| | 256,623 |
|
Valuation allowance | (109,242 | ) | | (226,813 | ) |
Deferred tax assets, net of valuation allowance | 38,035 |
| | 29,810 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (81,182 | ) | | (138,034 | ) |
Discount on Notes | — |
| | (2,385 | ) |
Other, net | (286 | ) | | (517 | ) |
Total gross deferred tax liabilities | (81,468 | ) | | (140,936 | ) |
Net deferred tax liabilities | $ | (43,433 | ) | | $ | (111,126 | ) |
At December 31, 2017, the Company evaluated the need for a valuation allowance for certain deferred tax assets based upon its assessment of whether it is more likely than not that the Company will generate sufficient future taxable income necessary to realize the deferred tax benefits. The Company maintains a valuation allowance against its deferred tax assets that are capital in nature to the extent that it is more likely than not that the related deferred tax benefit will not be realized. The Company also has a deferred tax asset related to the net operating losses ("NOLs") that it believes are more likely than not to expire before utilization. If assumptions change and the Company determines it will be able to realize these NOLs, the tax benefit relating to any reversal of the valuation allowance on deferred tax assets as of December 31, 2017 will be recognized as a reduction of income tax expense.
On December 22, 2017, President Donald Trump signed into law "H.R. 1", formerly known as the Tax Cuts and Jobs Act (the "Tax Legislation"). The Tax Legislation, which was effective January 1, 2018, significantly revised the U.S. tax code by, among other things, lowering the corporate income tax rate from 35% to 21%. At December 31, 2017, the Company has not completed its accounting for the tax effects of the Tax Legislation; however, in certain cases, as described below, we have made a reasonable estimate of the effects on the Company’s existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which the Company was able to determine a reasonable estimate, the Company recognized a provisional amount of approximately $21.4 million, which is recorded as additional income tax benefit in 2017. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law.
Provisional amounts: The Company 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, the Company is still analyzing certain aspects of the Tax Legislation and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded related to the remeasurement of the Company’s net deferred tax liabilities was approximately $21.4 million.
The changes in the valuation allowance for deferred tax assets are shown below (in thousands):
|
| | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 |
Balance at beginning of year | $ | 226,813 |
| | $ | 217,452 |
|
Increase (decrease) in valuation allowance - capital items | (15,980 | ) | | 14,926 |
|
Decrease in valuation allowance - utilization of equity-based deferred tax assets | (101,830 | ) | | (5,684 | ) |
Increase in valuation allowance - other | 239 |
| | 119 |
|
Balance at end of year | $ | 109,242 |
| | $ | 226,813 |
|
For the year ended December 31, 2017, the decrease in valuation allowance for capital items related primarily to the enactment of a change in the federal tax rate from 35% to 21% for tax years beginning after December 31, 2017. The decrease in valuation allowance for utilization of equity-based deferred tax assets related primarily to the enactment of a change in the federal tax rate from 35% to 21% for tax years beginning after December 31, 2017, a $50.2 million decrease related to the adoption of ASU 2016-09, which required a cumulative-effect adjustment for historical equity net operation losses (see Note 2: Summary of Significant Accounting Policies for additional details) and a $0.4 million adjustment related to the future taxable income expected to be available to partially utilize the carryforwards, offset by a $5.6 million increase related to the current year generation of NOLs.
For the year ended December 31, 2016, the valuation allowance change included an increase of $14.9 million for increases in deferred tax assets that were capital in nature, and a decrease of $5.7 million for the utilization of equity-based deferred tax assets to reduce taxes payable.
As of December 31, 2017, the Company’s U.S. federal and state net operating loss carryforwards for income tax purposes were $520.3 million and $32.7 million, respectively, which primarily related to excess tax benefits for stock-based compensation. Prior to January 1, 2017, when the net operating loss carryforwards related to stock-based compensation were recognized, the income tax benefit of those losses was accounted for as a credit to stockholders’ equity on the consolidated balance sheets. Beginning on January 1, 2017, we recognized such income tax benefit on the consolidated financial statements, as further described in the Recent accounting pronouncements section of "Note 2: Summary of Significant Accounting Policies." If not utilized, the Company’s federal net operating loss carryforwards will expire between 2020 and 2037, with the majority of them expiring between 2020 and 2024. Additionally, changes in ownership, as defined by Section 382 of the Internal Revenue Code, may limit the amount of net operating loss carryforwards used in any one year.
A reconciliation of the unrecognized tax benefit balances is as follows (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 22,919 |
| | $ | 21,741 |
| | $ | 18,403 |
|
Gross increases for tax positions of prior years | 93 |
| | 331 |
| | 2,708 |
|
Gross decreases for tax positions of prior years | (31 | ) | | (93 | ) | | (9 | ) |
Gross increases for tax positions of current year | — |
| | 997 |
| | 751 |
|
Settlements | (66 | ) | | (57 | ) | | (112 | ) |
Lapse of statute of limitations | (290 | ) | | — |
| | — |
|
Balance at end of year | $ | 22,625 |
| | $ | 22,919 |
| | $ | 21,741 |
|
The total amount of unrecognized tax benefits that could affect the Company’s effective tax rate if recognized was $4.2 million and $4.5 million as of December 31, 2017 and 2016, respectively. The remaining $18.4 million has not been recognized on the consolidated balance sheets as of December 31, 2017 and 2016, if recognized, would create a deferred tax asset subject to a valuation allowance. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2013, although NOL carryforwards and tax credit carryforwards from any year are subject to examination and adjustment for at least three years following the year in which they are fully utilized. As of December 31, 2017, no significant adjustments have been proposed relative to the Company’s tax positions.
During the years ended December 31, 2017, 2016, and 2015, the Company recognized less than $0.2 million of interest and penalties related to uncertain tax positions. The Company had approximately $1.1 million and $1.0 million accrued for interest and penalties as of December 31, 2017 and 2016, respectively.