Note 17 — Income Taxes

 

The amounts of income (loss) before income taxes attributable to domestic and foreign operations were as follows:

 

 

Significant components of the expense (benefit) for income taxes consisted of the following:

 

 

The income tax expense was reconciled to the tax expense computed at the U.S. federal statutory tax rate as follows:

 

 

The 2017 income tax benefit of $36.1 million includes a $24.2 million income tax benefit related to domestic losses incurred during the year ended December 31, 2017, as the deferred tax liability created by the issuance of the Convertible Senior Notes and recorded as a component of APIC is treated as a source of income in fiscal 2017. Additionally, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act makes broad and complex changes to the U.S. tax code that affects the Company’s 2017 financial results, including, but not limited to, a one-time transition tax on certain foreign earnings. The 2017 Tax Act also establishes new tax laws that will affect the Company’s financial results after 2017, including a reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent; current U.S. taxation of global intangible low tax income (“GILTI”) of non-U.S. operations; additional limitations on the deductibility of executive compensation; and limitations on the deductibility of interest.

 

The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB 118, which provides SEC staff guidance for the application of ASC 740 in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act, including provisional amounts for specific income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is incomplete but for which a reasonable estimate could be determined. The Company will complete its analysis and finalize the amounts within the measurement period as provided by SAB 118.

 

The Company is still in the process of evaluating the impacts of the 2017 Tax Act and considers the amounts recorded to be provisional, except for the impact of the change in tax rate on its deferred tax assets and liabilities as of December 31, 2017, for which the accounting is complete.

 

The most significant impacts of the 2017 Tax Act on the Company’s federal income taxes are as follows:

 

Reduction of the U.S. Corporate Income Tax Rate

 

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were re-measured as of December 22, 2017 to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent. The Company recorded an income tax benefit of $4.8 million, as the net deferred tax assets were reduced by $25.6 million, with a corresponding valuation allowance reduction of $30.4 million.

 

One-Time Transition Tax on Foreign Earnings

 

As of December 31, 2017, the Company had $155.8 million of accumulated undistributed earnings generated by its non-U.S. subsidiaries, of which approximately $140.2 million was subject to the one-time transition tax on foreign earnings. The determination of the transition tax requires further analysis regarding the amount and composition of the Company’s historical foreign earnings, which is expected to be completed in the second half of 2018. The Company is expecting to fully offset the U.S. tax liability with certain current year and carryforward tax attributes. As the Company maintains a full valuation allowance against its U.S. deferred tax assets, the Company did not record an income tax expense related to the transition tax.

 

Valuation Allowance

 

The 2017 Tax Act modified the net operating loss (“NOL”) provisions to provide for an indefinite carryforward of NOLs arising in tax years beginning after December 31, 2017. The 2017 Tax Act also limits the amount of NOL deductions that can be used in any one year to 80 percent of the taxpayer’s taxable income, effective with respect to NOLs arising in tax years beginning after December 31, 2017. The Company recognized an income tax benefit of $6.5 million for the year ended December 31, 2017 related to a reduction in the Company’s valuation allowance as a result of the Company scheduling out the reversals of its net deferred tax assets which resulted in tax amortization on indefinite-lived intangible assets becoming available to offset existing deferred tax assets that are now expected to have an indefinite life.

 

Deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The tax effects of the temporary differences were as follows:

 

 

The Company is no longer permanently reinvesting future earnings from certain foreign jurisdictions, and has recorded an expense for foreign tax withholdings of $6.2 million on its unremitted earnings as of December 31, 2017.

 

At December 31, 2017, the Company had U.S. federal NOL carryforwards of approximately $301.6 million that will expire between 2024 and 2037, if not utilized. In connection with the Ultratech acquisition, $119.0 million of historical NOL carryforwards were acquired, which are subject to an annual limitation. The Company has $3.5 million of capital loss carryforwards that expire in 2021. At December 31, 2017, the Company had U.S. federal research and development credits of $16.7 million that will expire between 2018 and 2037. The Ultratech acquisition resulted in the carryover of $10.9 million of research and development credit carryforwards, which are subject to an annual limitation. The Company also has state and local NOL carryforwards of approximately $127.4 million (a net deferred tax asset of $7.6 million, net of federal tax benefits and before the valuation allowance) that will expire between 2018 and 2036. Finally, the Company has state credits of $27.1 million, some of which are indefinite and others that will expire between 2018 and 2030.

 

The Company makes assessments to estimate if sufficient taxable income will be generated in the future to use existing deferred tax assets. As of December 31, 2017, the Company continued to have a cumulative three year loss with respect to its U.S. operations. As such, the Company has recorded a valuation allowance against its U.S. deferred tax assets. During 2017, the Company’s valuation allowance decreased by approximately $6.1 million, primarily related to re-measurement due to the reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent, utilization of certain carryforward tax attributes used for the mandatory repatriation tax partially offset by an increase in the valuation allowance related to the Ultratech business combination.

 

A roll-forward of the Company’s uncertain tax positions for all U.S. federal, state, and foreign tax jurisdictions was as follows:

 

 

If the amount of unrecognized tax benefits at December 31, 2017 were recognized, the Company’s income tax provision would decrease by $0.6 million. The gross amount of interest and penalties accrued in income tax payable in the Consolidated Balance Sheets was approximately $0.3 million at both December 31, 2017 and 2016.

 

The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction, and various state, local, and foreign jurisdictions. All material consolidated federal income tax matters have been concluded for years through 2014 subject to subsequent utilization of NOLs generated in such years. All material state and local income tax matters have been reviewed through 2012. The majority of the Company’s foreign jurisdictions have been reviewed through 2015. The Company’s major foreign jurisdictions’ statutes of limitation remain open with respect to the tax years 2017 for China, 2015 through 2017 for Germany and Singapore, and 2016 through 2017 for Taiwan. Income tax matters for Ultratech pre-acquisition periods have been reviewed through 2000 for federal, 1997 for major states and 2003 for foreign jurisdictions. The Company does not anticipate that its uncertain tax position will change significantly within the next twelve months subject to the completion of the ongoing tax audits and any resultant settlement.