NOTE 11—Income Taxes
Components of income tax expense
The U.S. and foreign components of the Company’s income before provision for income taxes consisted of the following (in thousands):
| Fiscal Years Ended | ||||||||||||
| February 28, 2017 |
February 29, 2016 |
February 28, 2015 |
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U.S. |
$ | 187,316 | $ | 155,550 | $ | 167,388 | ||||||
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Foreign |
132,864 | 119,315 | 88,110 | |||||||||
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Income before provision for income taxes |
$ | 320,180 | $ | 274,865 | $ | 255,498 | ||||||
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The components of the Company’s provision for income taxes consisted of the following (in thousands):
| Fiscal Years Ended | ||||||||||||
| February 28, 2017 |
February 29, 2016 |
February 28, 2015 |
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Current: |
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Foreign |
$ | 35,791 | $ | 39,168 | $ | 26,325 | ||||||
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Federal |
16,857 | 44,872 | 15,252 | |||||||||
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State |
1,502 | 5,133 | 4,090 | |||||||||
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Current tax expense |
$ | 54,150 | $ | 89,173 | $ | 45,667 | ||||||
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Deferred: |
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Foreign |
(4,854 | ) | (5,170 | ) | (8,188 | ) | ||||||
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Federal |
17,712 | (6,142 | ) | 36,197 | ||||||||
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State |
(531 | ) | (2,361 | ) | 1,621 | |||||||
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Deferred tax expense (benefit) |
$ | 12,327 | $ | (13,673 | ) | $ | 29,630 | |||||
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Net provision for income taxes |
$ | 66,477 | $ | 75,500 | $ | 75,297 | ||||||
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Statutory Rate Reconciliation
Taxes computed at the statutory federal income tax rates are reconciled to the provision for income taxes as follows (in thousands):
| Fiscal Years Ended | ||||||||||||||||||||||||
| February 28, 2017 | February 29, 2016 | February 28, 2015 | ||||||||||||||||||||||
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Provision at federal statutory rate |
$ | 112,063 | 35.0 | % | $ | 96,203 | 35.0 | % | $ | 89,424 | 35.0 | % | ||||||||||||
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State tax, net of federal tax benefit |
520 | 0.2 | % | 601 | 0.2 | % | 4,042 | 1.6 | % | |||||||||||||||
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Foreign rate differential (1) |
(11,795 | ) | (3.7 | )% | (8,232 | ) | (3.0 | )% | (13,983 | ) | (5.5 | )% | ||||||||||||
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Foreign dividend |
— | — | % | — | — | % | 8,720 | 3.4 | % | |||||||||||||||
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Nondeductible items |
3,077 | 1.0 | % | 3,426 | 1.2 | % | 3,339 | 1.3 | % | |||||||||||||||
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Share-based compensation (2) |
(12,749 | ) | (4.0 | )% | 149 | 0.1 | % | 105 | — | % | ||||||||||||||
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Research tax credit |
(9,532 | ) | (3.0 | )% | (5,105 | ) | (1.9 | )% | (5,329 | ) | (2.1 | )% | ||||||||||||
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Foreign tax credit |
(8,930 | ) | (2.8 | )% | (10,267 | ) | (3.7 | )% | (11,755 | ) | (4.6 | )% | ||||||||||||
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Domestic production activities deduction |
(4,601 | ) | (1.4 | )% | (5,033 | ) | (1.8 | )% | (4,433 | ) | (1.7 | )% | ||||||||||||
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Other |
(1,576 | ) | (0.5 | )% | 3,758 | 1.4 | % | 5,167 | 2.1 | % | ||||||||||||||
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Provision for income taxes |
$ | 66,477 | 20.8 | % | $ | 75,500 | 27.5 | % | $ | 75,297 | 29.5 | % | ||||||||||||
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| (1) | Foreign rate differential includes a reduction of $1.5 million related to a tax holiday in Israel. The tax holiday provides for a reduced tax rate on income attributable to research and development activities and is scheduled to terminate as of the fiscal year ending February 29, 2020. The financial impact from the tax holiday for the fiscal year ended February 28, 2017 resulted in an increase to the Company’s diluted earnings per share of approximately $0.01. |
| (2) | Share-based compensation in the fiscal year ended February 28, 2017 includes $15.8 million net windfall tax benefits from share-based payments resulting from the Company’s early adoption of ASU 2016-09. See NOTE 2—Summary of Significant Accounting Policies for additional discussion regarding the adoption of ASU 2016-09. This windfall is offset by certain stock-based compensation for which the Company receives no tax benefit. |
Deferred taxes
Significant components of the Company’s deferred tax assets and liabilities consisted of the following (in thousands):
| February 28, 2017 |
February 29, 2016 |
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Deferred tax assets: |
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Foreign net operating loss carryforwards |
$ | 4,218 | $ | 6,679 | ||||
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Domestic net operating loss carryforwards |
5,696 | 13,202 | ||||||
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Domestic credit carryforwards |
9,864 | 7,849 | ||||||
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Share-based compensation |
51,016 | 44,276 | ||||||
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Deferred revenue |
97,258 | 83,901 | ||||||
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Foreign deferred royalty expenses |
2,505 | 9,896 | ||||||
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Convertible notes |
11,377 | 15,182 | ||||||
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Other |
17,077 | 12,313 | ||||||
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Total deferred tax assets |
199,011 | 193,298 | ||||||
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Valuation allowance for deferred tax assets |
(5,621 | ) | (3,291 | ) | ||||
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Total deferred tax assets, net of valuation allowance |
193,390 | 190,007 | ||||||
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Deferred tax liabilities: |
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Goodwill |
10,757 | 9,450 | ||||||
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Property and equipment |
25,163 | 22,669 | ||||||
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Identifiable intangible assets |
21,101 | 21,416 | ||||||
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Compensation accruals |
30,128 | 21,415 | ||||||
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Other |
4,347 | 3,770 | ||||||
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Total deferred tax liabilities |
91,496 | 78,720 | ||||||
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Net deferred tax asset (1) |
$ | 101,894 | $ | 111,287 | ||||
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| (1) | Net deferred tax asset is reported on the Company’s Consolidated Balance Sheets as Deferred tax assets, net and included in Other long-term obligations. |
The Company maintains a valuation allowance against its deferred tax assets with respect to certain foreign and state NOL and credit carryforwards that the Company does not believe will ultimately be realized. For the fiscal year ended February 28, 2017, the valuation allowance increased $2.3 million primarily as a result of foreign NOL and credit carryforwards acquired through recent acquisitions.
As of February 28, 2017, the Company had U.S. federal NOL carryforwards of $9.2 million, foreign NOL carryforwards of $22.9 million and U.S. state NOL carryforwards of $72.3 million. The NOL carryforwards expire in varying amounts beginning in the fiscal year ending February 28, 2018. As of February 28, 2017, the Company had U.S. federal research tax credit carryforwards of $0.8 million, state research tax credit carryforwards of $18.1 million and foreign research tax credit carryforwards of $1.2 million, which expire in varying amounts beginning in the fiscal year ending February 28, 2018.
As of February 28, 2017, cumulative undistributed earnings of non-U.S. subsidiaries totaled $677.4 million. Determination of the deferred tax liability on these earnings reinvested indefinitely outside the U.S. is not practicable because of available foreign tax credits, continually changing variables and other factors. It is the Company’s policy to invest the earnings of foreign subsidiaries indefinitely outside the U.S. From time to time, however, the Company may remit a portion of these earnings to the extent it is economically prudent. The Company has provided U.S. income taxes on the earnings of certain foreign subsidiaries that are not considered as permanently reinvested outside the U.S. The U.S. income tax on such earnings has been offset by U.S. foreign tax credits. The Company has also provided U.S. income taxes on the earnings of certain foreign subsidiaries that are permanently reinvested outside the U.S. but are deemed distributed for U.S. federal income tax purposes. The U.S. income tax on such earnings is reduced or offset by available U.S. foreign tax credits.
Unrecognized tax benefits
The following table reconciles unrecognized tax benefits (in thousands):
| February 28, 2017 |
February 29, 2016 |
February 28, 2015 |
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Balance at beginning of year |
$ | 74,886 | $ | 60,343 | $ | 57,054 | ||||||
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Additions based on tax positions related to prior years |
2,142 | 13,486 | 514 | |||||||||
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Additions based on tax positions related to the current year |
4,893 | 3,494 | 3,374 | |||||||||
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(Reductions) additions related to changes in facts and circumstances |
(2,271 | ) | 256 | (229 | ) | |||||||
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Reductions related to lapse of the statute of limitations |
(2,748 | ) | (1,581 | ) | (370 | ) | ||||||
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Reductions related to settlements with tax authorities |
— | (1,112 | ) | — | ||||||||
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Balance at end of year |
$ | 76,902 | $ | 74,886 | $ | 60,343 | ||||||
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The Company’s unrecognized tax benefits as of February 28, 2017 and February 29, 2016, which, if recognized, would affect the Company’s effective tax rate were $69.1 million and $59.1 million, respectively.
It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as income tax expense. Uncertain tax position interest and penalties recognized in the Consolidated Statements of Operations totaled $2.5 million, $1.5 million and $2.7 million for the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015, respectively. Uncertain tax position accrued interest and accrued penalties recognized in the Consolidated Balance Sheets totaled $13.2 million and $10.7 million as of February 28, 2017 and February 29, 2016, respectively.
As of February 28, 2017, it is reasonably possible that total unrecognized tax benefits may be reduced by up to $7.6 million within the next 12 months as a result of statutes of limitations expirations in various tax jurisdictions, all of which would affect the Company’s effective tax rate.
The Company is subject to taxation in the U.S. and various other state and foreign jurisdictions. The material jurisdictions in which the Company is subject to potential examination include India, Ireland and the U.S., where the Company is no longer subject to examination prior to fiscal years ended February 28, 2006, February 29, 2012 and February 29, 2000, respectively. The Company is currently under examination in France, India and the United Kingdom. The Company believes it has adequately provided for any reasonably foreseeable outcomes related to tax audits.