| (9) | Income Taxes |
The components of income (loss) before income taxes for the years ended January 1, 2018, January 2, 2017 and December 28, 2015 are:
| For the Year Ended | ||||||||||||
| January 1, 2018 |
January 2, 2017 |
December 28, 2015 |
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| (In thousands) | ||||||||||||
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United States |
$ | (4,178 | ) | $ | (85,323 | ) | $ | (104,068 | ) | |||
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Foreign |
144,136 | 152,325 | 113,044 | |||||||||
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Income before income taxes |
$ | 139,958 | $ | 67,002 | $ | 8,976 | ||||||
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The Company expects its earnings attributable to foreign subsidiaries will be indefinitely reinvested outside of the U.S., except as noted below and, therefore, no deferred tax liabilities for U.S. income taxes on undistributed earnings are recorded. The undistributed earnings of the foreign subsidiaries amounted to approximately $836,309 as of January 1, 2018. The determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable. Foreign earnings from certain subsidiaries may be repatriated to the ultimate parent holding company located in the Cayman Islands, and therefore, a deferred tax liability of approximately $8,977 for the foreign tax impact has been recorded on the undistributed earnings of these subsidiaries.
The components of income tax provision for the years ended January 1, 2018, January 2, 2017 and December 28, 2015 are:
| For the Year Ended | ||||||||||||
| January 1, 2018 |
January 2, 2017 |
December 28, 2015 |
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| (In thousands) | ||||||||||||
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Current (provision) benefit: |
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Federal |
$ | 82 | $ | (342 | ) | $ | 477 | |||||
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State |
(462 | ) | (512 | ) | (345 | ) | ||||||
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Foreign |
(24,006 | ) | (29,672 | ) | (19,379 | ) | ||||||
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Total current |
(24,386 | ) | (30,526 | ) | (19,247 | ) | ||||||
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Deferred (provision) benefit: |
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Federal |
11 | — | (10,084 | ) | ||||||||
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State |
(31 | ) | — | (2,184 | ) | |||||||
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Foreign |
9,175 | (901 | ) | (3,079 | ) | |||||||
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Total deferred |
9,155 | (901 | ) | (15,347 | ) | |||||||
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Total provision |
$ | (15,231 | ) | $ | (31,427 | ) | $ | (34,594 | ) | |||
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The following is a reconciliation of the provision for income taxes at the statutory federal income tax rate compared to the Company’s provision for income taxes for the years ended January 1, 2018, January 2, 2017 and December 28, 2015:
| For the Year Ended | ||||||||||||
| January 1, 2018 |
January 2, 2017 |
December 28, 2015 |
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| (In thousands) | ||||||||||||
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Statutory federal income tax |
$ | (48,985 | ) | $ | (22,780 | ) | $ | (3,052 | ) | |||
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State income taxes, net of federal benefit and state tax credits |
(462 | ) | 906 | (345 | ) | |||||||
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Foreign deemed dividends |
(457 | ) | (4,585 | ) | (5,691 | ) | ||||||
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Acquisition related expenses |
— | (591 | ) | (7,692 | ) | |||||||
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Intercompany profit in inventory elimination |
(743 | ) | (335 | ) | 596 | |||||||
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Permanently reinvested earnings assertion |
— | — | 8,281 | |||||||||
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Tax Act deferred tax revaluation |
(59,228 | ) | — | — | ||||||||
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Foreign tax differential on foreign earnings |
30,412 | 17,530 | 15,543 | |||||||||
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Change in valuation allowance |
66,716 | (19,119 | ) | (39,148 | ) | |||||||
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Uncertain tax positions |
(3,992 | ) | (3,464 | ) | (3,911 | ) | ||||||
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Federal research and development credits |
1,270 | 1,270 | 1,270 | |||||||||
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Other |
238 | (259 | ) | (445 | ) | |||||||
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Total provision for income taxes |
$ | (15,231 | ) | $ | (31,427 | ) | $ | (34,594 | ) | |||
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the net deferred income tax assets as of January 1, 2018 and January 2, 2017 are as follows:
| As of | ||||||||
| January 1, 2018 |
January 2, 2017 |
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Deferred income tax assets: |
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Net operating loss carryforwards |
$ | 143,095 | $ | 212,553 | ||||
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Reserves and accruals |
23,655 | 32,420 | ||||||
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Tax credit carryforwards |
27,012 | 18,148 | ||||||
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Stock-based compensation |
5,099 | 4,965 | ||||||
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Original issue discount on convertible senior notes |
7,345 | 15,329 | ||||||
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Property, plant and equipment |
24,170 | 13,398 | ||||||
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Other deferred income tax assets |
1,282 | 2,036 | ||||||
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| 231,658 | 298,849 | |||||||
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Less: valuation allowance |
(167,238 | ) | (221,951 | ) | ||||
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| 64,420 | 76,898 | |||||||
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Deferred income tax liabilities: |
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Discount on convertible senior notes |
(6,413 | ) | (13,410 | ) | ||||
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Repatriation of foreign earnings |
(8,977 | ) | (6,903 | ) | ||||
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Property, plant and equipment basis differences |
(33,661 | ) | (32,582 | ) | ||||
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Goodwill and intangible amortization |
(19,400 | ) | (36,097 | ) | ||||
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Other deferred income tax liabilities |
(828 | ) | (1,955 | ) | ||||
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Net deferred income tax liabilities |
$ | (4,859 | ) | $ | (14,049 | ) | ||
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Deferred income tax liabilities, net: |
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Current deferred income taxes |
$ | — | $ | — | ||||
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Noncurrent deferred income taxes |
(4,859 | ) | (14,049 | ) | ||||
As of January 1, 2018, the Company had the following net operating loss (NOL) carryforwards: $500,542 in the U.S. for federal, $496,369 in various U.S. states, $52,348 in China, and $34,212 in Hong Kong. The U.S. federal NOLs expire in 2018 through 2036, the various U.S. states’ NOLs expire in 2018 through 2036, the China NOLs expire in 2018 through 2022, and the Hong Kong NOLs carryforward indefinitely. Further, the Company’s tax credits were approximately $32,480 of which $8,021 carryforward indefinitely.
In connection with the Company’s acquisition of Viasystems, there was more than a 50% change in ownership under Section 382 of the Internal Revenue Code of 1986, as amended, and regulations issued there under. As a consequence, the utilization of the acquired Viasystems U.S. NOLs is limited to approximately $9,826 per year. In addition, the Company recognized certain gains built in at the time of the ownership change, which increase the limitation by approximately $47,463 for each of the first 5 years after the acquisition. Any unused limitation in a year can be carried over to succeeding years.
A valuation allowance is provided when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. Based on historical performance and future expectations, the Company has a full valuation allowance on its net U.S. deferred tax assets. Certain subsidiaries within China continue to have NOL carryforwards in various tax jurisdictions that the Company has determined are not more likely than not to be utilized. As a result, a full valuation allowance has been recorded for these subsidiaries at January 1, 2018. For the remaining net deferred income tax asset, management has determined that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax asset.
The following summarizes the activity in the Company’s valuation allowance for the years ended January 1, 2018, January 2, 2017 and December 28, 2015:
| For the Year Ended | ||||||||||||
| January 1, 2018 |
January 2, 2017 |
December 28, 2015 |
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Balance at beginning of year |
$ | 221,951 | $ | 234,192 | $ | 38,839 | ||||||
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(Reduction) additions related to acquisition |
— | (18,234 | ) | 177,699 | ||||||||
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Additions charged to expense |
4,515 | 5,993 | 39,149 | |||||||||
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Reduction charged to expense — Tax Act |
(59,228 | ) | — | — | ||||||||
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Reduction related to sale of foreign subsidiary |
— | — | (21,495 | ) | ||||||||
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Balance at end of year |
$ | 167,238 | $ | 221,951 | $ | 234,192 | ||||||
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Certain entities within China qualified for the high and new technology enterprise (HNTE) status enabling those entities to enjoy certain benefits, which were effective for the years ended January 1, 2018, January 2, 2017 and December 28, 2015. The HNTE status as well as enhanced research and development (R&D) deductions decreased Chinese taxes. HNTE and R&D benefit and effect on earnings per share are as follows:
| For the Year Ended | ||||||||||||
| January 1, 2018 |
January 2, 2017 |
December 28, 2015 |
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HNTE and R&D benefits |
$ | 11,935 | $ | 7,666 | $ | 7,600 | ||||||
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Basic shares |
101,580 | 100,099 | 92,675 | |||||||||
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Diluted shares |
132,476 | 101,482 | 92,675 | |||||||||
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Increases earnings (decreases losses) per share: |
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Basic |
$ | 0.12 | $ | 0.08 | $ | (0.08 | ) | |||||
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Diluted |
$ | 0.09 | $ | 0.08 | $ | (0.08 | ) | |||||
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HNTE status expires at various dates through 2018, but the Company expects to continue to file for renewal of such HNTE status for the foreseeable future.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of accrued interest and penalties, is as follows:
| For the Year Ended | ||||||||||||
| January 1, 2018 |
January 2, 2017 |
December 28, 2015 |
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| (In thousands) | ||||||||||||
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Beginning balance |
$ | 39,727 | $ | 15,404 | $ | 2,441 | ||||||
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Additions related to acquisition |
— | 22,182 | 11,293 | |||||||||
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Additions based on tax positions related to the current year |
1,965 | 5,389 | 3,349 | |||||||||
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Additions for tax positions of prior years |
1,661 | 1,545 | 14 | |||||||||
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Reductions for tax positions of prior years |
(3,846 | ) | (2,286 | ) | (1,371 | ) | ||||||
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Lapse of statute of limitations |
(666 | ) | (2,507 | ) | (322 | ) | ||||||
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Ending balance |
$ | 38,841 | $ | 39,727 | $ | 15,404 | ||||||
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As of January 1, 2018 and January 2, 2017, the Company recorded unrecognized tax benefits of $29,033 and $28,037, respectively, as well as interest and penalties of $12,679 and $10,754, respectively, to other long-term liabilities. The Company has also recorded unrecognized tax benefits of $9,808 and $11,689 against certain deferred tax assets as of January 1, 2018 and January 2, 2017, respectively. The amount of unrecognized tax benefits that would, if recognized, reduce the Company’s effective income tax rate in any future periods is $41,712 including interest and penalties. The Company expects its unrecognized tax benefits to decrease by $774 along with related interest of $1,288 over the next 12 months due to expiring statutes.
As of January 1, 2018, the Company is subject to (i) U.S. federal income tax examination and / or NOL adjustment for tax years from 1999 to 2017, (ii) state and local income tax examination for tax years 1999 to 2017, and (iii) foreign income tax examinations generally for tax years from 2007 to 2017.