12. Income Taxes
On December 22, 2017, the United States enacted comprehensive tax legislation called the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including reducing the US federal corporate tax rate from 35% to 21%, requiring a mandatory transition tax on unremitted foreign earnings, moving from a worldwide to a territorial tax system and placing potential limits on the deductibility of interest expense. We have recorded a deferred income tax benefit of $36.8 million related to the revaluation of the Company’s net deferred tax assets and liabilities at the December 22, 2017 enactment date using the new 21% statutory rate. The calculation of the one-time transition tax is based on our total post-1986 deferred foreign income held in cash and other assets. Due to the timing of the enactment and the complexity of the Tax Act, the Company is unable to estimate a reasonable range of its post-1986 deferred foreign income and the related one-time impact associated with the mandatory transition tax. In addition, we continue to assess the other provisions of the Tax Act and will provide additional disclosures in the quarterly report on Form 10-Q for the period ending March 31, 2018.
The components of Benefit from income taxes are as follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | (47 | ) | | $ | — |
| | $ | (1,669 | ) |
Foreign | | 7,729 |
| | 8,352 |
| | 8,660 |
|
State and local | | 416 |
| | 104 |
| | (141 | ) |
| | 8,098 |
| | 8,456 |
| | 6,850 |
|
Deferred | | | | | | |
Federal | | (59,477 | ) | | (46,124 | ) | | (34,419 | ) |
Foreign | | (2,696 | ) | | (1,558 | ) | | (2,010 | ) |
State and local | | 10,129 |
| | (3,581 | ) | | (1,698 | ) |
| | (52,044 | ) | | (51,263 | ) | | (38,127 | ) |
Benefit from income taxes | | $ | (43,946 | ) | | $ | (42,807 | ) | | $ | (31,277 | ) |
The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income tax, net of federal tax benefit | 4.3 |
| | 2.7 |
| | 0.3 |
|
Impact of foreign tax rates | 13.7 |
| | 18.5 |
| | 33.8 |
|
Foreign withholding and audit | (5.5 | ) | | (2.6 | ) | | (4.4 | ) |
Tax credits | (2.3 | ) | | 1.3 |
| | — |
|
Changes to uncertain tax positions | 20.0 |
| | 1.2 |
| | 0.2 |
|
Impact of the Tax Act | 56.8 |
| | — |
| | — |
|
Changes in measurement of deferred tax liabilities and other | 0.9 |
| | (15.9 | ) | | 1.3 |
|
Change in valuation allowance | (49.9 | ) | | 4.7 |
| | (28.5 | ) |
Unrealized gain (loss) | — |
| | (0.1 | ) | | 5.0 |
|
Nondeductible stock-based compensation | (4.3 | ) | | (4.8 | ) | | (1.8 | ) |
Other, net | (0.8 | ) | | (0.4 | ) | | (2.1 | ) |
| 67.9 | % | | 39.6 | % | | 38.8 | % |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was $11.9 million, $27.3 million and $30.2 million at December 31, 2017, 2016 and 2015, respectively. Uncertain tax positions are included in other long-term liabilities on the consolidated balance sheets. A rollforward of the beginning and ending amount of uncertain tax positions is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Balance at beginning of period | $ | 83,535 |
| | $ | 73,497 |
| | $ | 67,185 |
|
Additions based on tax positions related to the current year | 20,149 |
| | 16,147 |
| | 13,679 |
|
Additions for tax positions of prior years | 8,814 |
| | — |
| | 2,727 |
|
Reductions for tax positions of prior years | (1,641 | ) | | (3,369 | ) | | (7,430 | ) |
Reductions for tax positions effectively settled | (10,328 | ) | | — |
| | — |
|
Reductions for lapse of statute of limitations | (2,263 | ) | | (2,740 | ) | | (2,664 | ) |
Balance at end of period | $ | 98,266 |
| | $ | 83,535 |
| | $ | 73,497 |
|
We recognize accrued interest and penalties related to uncertain tax positions as a component of Benefit from income taxes. Accrued interest and penalties was $1.3 million as of December 31, 2017 and $2.3 million for each of the periods ended December 31, 2016 and 2015, in the consolidated balance sheets. Expense (benefit) for interest and penalties was $1.0 million, $(0.1) million and $0.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, in the consolidated statements of operations. Included in the additions for 2015 is $0.6 million related to the Aicent acquisition.
We conduct business globally and file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States. Tax years 2014 through 2017 are subject to examination by the federal taxing authorities. Tax years 2006 through 2017 are subject to examination by the state taxing authorities. In our international tax jurisdictions, tax years 2007 or later remain open in all of our major international tax jurisdictions.
The Company's non-U.S. subsidiaries had $125.0 million in cumulative undistributed earnings as of December 31, 2017. As mentioned above, this does not include the effects of the mandatory transition tax. This amount represents the post-income tax earnings under U.S. GAAP adjusted for previously taxed income. The earnings from the Company's non-U.S. subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for tax has been made in the accompanying consolidated financial statements. Further, a determination of the unrecognized deferred tax liability is not practicable. Any future distribution of these non-U.S. earnings may subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to various non-U.S. countries.
The components of Loss before benefit from income taxes are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
United States | $ | (120,123 | ) | | $ | (141,565 | ) | | $ | (111,192 | ) |
Foreign | 55,378 |
| | 33,588 |
| | 30,603 |
|
| $ | (64,745 | ) | | $ | (107,977 | ) | | $ | (80,589 | ) |
Deferred income tax assets and liabilities are recorded due primarily to different carrying amounts for financial and income tax reporting purposes arising from cumulative temporary differences. Significant components of deferred tax assets (liabilities) are shown in the following table:
|
| | | | | | | |
| December 31, |
(in thousands) | 2017 | | 2016 |
Deferred tax assets (liabilities): | | | |
Intangibles | $ | (116,000 | ) | | $ | (184,266 | ) |
Property & equipment | (8,269 | ) | | (27,523 | ) |
Interest | 4,159 |
| | (3,679 | ) |
Employee benefit accruals | 11,832 |
| | 18,378 |
|
Accrued expenses | 5,390 |
| | 7,538 |
|
Deferrals | 1,697 |
| | 1,353 |
|
Software development costs | (7,863 | ) | | (11,071 | ) |
Net operating loss carryforwards | 153,394 |
| | 181,376 |
|
Other, net | 4,685 |
| | 7,179 |
|
| 49,025 |
| | (10,715 | ) |
Less: Valuation allowance | (119,210 | ) | | (100,677 | ) |
Deferred tax liabilities, net | $ | (70,185 | ) | | $ | (111,392 | ) |
The activity in deferred tax assets includes the deferred tax impact of foreign currency translation adjustments and actuarial gains associated with our defined benefit pension plan totaling $(0.3) million to decrease the deferred tax asset on accumulated other comprehensive (loss) income for the year ended December 31, 2017. There was no change in our deferred tax asset associated with foreign currency translation adjustments and actuarial gains associated with our defined pension plan during the year ended December 31, 2016.
Our deferred tax assets include net accumulated foreign net operating losses (NOLs) of $188.5 million, net accumulated federal NOLs of $37.3 million and net accumulated state NOLs of $15.0 million at December 31, 2017. The foreign NOLs remain available indefinitely to offset future taxable income in specific jurisdictions subject to applicable tax laws and regulations. U.S. federal and state NOLs in specific jurisdictions will expire if not utilized between tax years 2018 and 2037. The deferred tax assets also include federal and state tax credit carry forwards of $3.2 million and $1.1 million, respectively, at December 31, 2017. The federal credits will expire if not utilized between tax years 2022 and 2036. The majority of the state credits have an indefinite carryforward period.
We continue to maintain a valuation allowance for deferred tax assets primarily associated with certain foreign NOLs. We have determined that it is more likely than not that we will realize the benefit of our net deferred tax assets for which we have not established a valuation allowance. The total amount of valuation allowance on our deferred tax assets was $119.2 million and $100.7 million at December 31, 2017 and 2016, respectively. The change is primarily related to losses in jurisdictions with existing valuation allowances offset by the impact of enacted foreign tax rates changes, the translation of foreign currencies, and the establishment of a full valuation allowance on U.S. net deferred tax assets previously discussed.
Certain intangible assets and goodwill arising from our prior acquisition activities have tax deductible basis. However, these assets were subsequently recorded at fair value in prior periods in accordance with the applicable accounting guidance for business combinations as it relates to the Merger. We believe the tax benefits for these historical assets will continue in future periods and are included in our deferred tax liabilities.