Income taxes
The provision for income taxes is based upon the income (loss) before income taxes as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. operations | $ | (52,725 | ) | | $ | (10,217 | ) | | $ | (7,212 | ) |
Non-U.S. operations | 301 |
| | 13,609 |
| | 13,984 |
|
| $ | (52,424 | ) | | $ | 3,392 |
| | $ | 6,772 |
|
The components of the provision for income taxes consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current | |
| | |
| | |
|
Federal | $ | (144 | ) | | $ | (127 | ) | | $ | (48 | ) |
State | 3 |
| | (13 | ) | | (8 | ) |
Foreign | 363 |
| | (3,925 | ) | | (3,725 | ) |
| 222 |
| | (4,065 | ) | | (3,781 | ) |
Deferred | |
| | |
| | |
|
Federal | 4 |
| | (24 | ) | | (22 | ) |
State | — |
| | — |
| | — |
|
Foreign | (1,135 | ) | | 492 |
| | 699 |
|
Total provision | $ | (909 | ) | | $ | (3,597 | ) | | $ | (3,104 | ) |
The provision for income taxes differs from the amount obtained by applying the U.S. federal statutory tax rate as follows (in thousands, except percentages):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35 | % | | 35 | % | | 35 | % |
Tax at federal statutory rate | $ | 18,354 |
| | $ | (1,185 | ) | | $ | (2,378 | ) |
State taxes, net of federal benefit | 2 |
| | (8 | ) | | (8 | ) |
Mandatory repatriation/Section 956 | (5,718 | ) | | (19 | ) | | (66 | ) |
Nondeductible expenses | (67 | ) | | (727 | ) | | (135 | ) |
Stock-based compensation | (314 | ) | | (877 | ) | | (465 | ) |
Change in valuation allowance | 16,273 |
| | (1,455 | ) | | (958 | ) |
Research and development | 851 |
| | 1,175 |
| | 1,017 |
|
Foreign rate differences | (2,819 | ) | | (1,215 | ) | | (844 | ) |
Foreign tax credit | 144 |
| | 127 |
| | 30 |
|
Change in prior year deferred balances | (28,262 | ) | | 920 |
| | 417 |
|
Other | 647 |
| | (333 | ) | | 286 |
|
Total provision for income taxes from continuing operations | $ | (909 | ) | | $ | (3,597 | ) | | $ | (3,104 | ) |
Change in prior year deferred balances of $28.3 million include approximately $30.0 million related to remeasurement of U.S. federal deferred tax assets from corporate tax rate of 35% to 21%, based on the newly enacted tax laws in December 2017. See below for more discussion related to newly enacted tax laws in December 2017.
Deferred income tax assets and liabilities comprise the following (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred Tax Assets: | |
| | |
|
Net operating loss carryforwards | $ | 44,912 |
| | $ | 55,274 |
|
Federal and state credits | 26,170 |
| | 23,372 |
|
Reserves, accruals and other | 9,698 |
| | 14,423 |
|
Fixed assets and intangibles | 1,259 |
| | 1,817 |
|
Total deferred tax assets | 82,039 |
| | 94,886 |
|
Valuation allowance | (76,101 | ) | | (90,060 | ) |
Total deferred tax assets, net of valuation allowance | 5,938 |
| | 4,826 |
|
Less deferred tax liabilities: | |
| | |
|
Acquired intangibles | (2,054 | ) | | (2,295 | ) |
Property, plant and equipment | (3,338 | ) | | (949 | ) |
Net deferred tax assets | $ | 546 |
| | $ | 1,582 |
|
Reported as: | |
| | |
|
Long term deferred tax assets, included within other long-term assets | $ | 652 |
| | $ | 1,628 |
|
Long term deferred income tax liabilities, included within noncurrent liabilities | (106 | ) | | (46 | ) |
Net deferred tax assets | $ | 546 |
| | $ | 1,582 |
|
The net valuation allowance decreased by $14.0 million in 2017 and increased by $1.1 million in 2016. The changes are primarily due to changes in the U.S. deferred tax assets. U.S. deferred tax assets and the corresponding valuation allowance have been re-measured based on the newly enacted tax rate in December 2017. The change in valuation allowance balance in 2017 has reflected such accounting impact. See more discussion below for change in U.S. tax laws. The Company did not record a full valuation allowance against its net deferred tax assets in most foreign jurisdictions as it believes these deferred tax assets were realizable on a more likely than not basis as of December 31, 2017. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the reported cumulative net losses to date, the Company continues to maintain a full valuation allowance against its net U.S. deferred tax assets with the exception of indefinite deferred tax liabilities.
The Company adopted ASU 2016-9 effective January 1, 2017. Upon adoption, the Company's previously unrecognized excess tax benefits of $8.6 million had no impact on its accumulated deficit balance as the related U.S. deferred tax assets were fully offset by a valuation allowance.
As of December 31, 2017, the Company had federal and state net operating loss, or NOL, carryforwards of $244.7 million and $51.7 million, respectively. Federal NOL carryforwards start to expire in 2022 and a portion of the California NOL carryforwards will begin to expire in 2028. As of December 31, 2017, the Company also had federal and state research credit carryovers of $8.3 million and $15.8 million, respectively. The federal credits will begin to expire in 2018 and the state credits can be carried forward indefinitely. The Company also had $10.4 million of foreign tax credit carryforwards which will start to expire in 2022 if not utilized. Utilization of NOL carryforwards and carried over tax credits may be subject to substantial annual limitation due to federal and state ownership limitations. The annual limitation may result in the expiration of NOL and tax credit carryforwards before utilization. The deferred tax assets listed above do not include NOL carryforwards that are expected to expire unutilized as a result of existing ownership changes.
On December 22, 2017, the U.S. President signed into U.S. law the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). The new legislation, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects the way we can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred tax assets recorded on our balance sheet. Given that the deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on the Company's financial position and net loss. However, if and when we become profitable, we will receive a reduced benefit from such deferred tax assets. In addition, the Tax Reform includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a US taxpayer's foreign subsidiaries. We have performed an earnings and profits analysis, and as a result of net operating loss carry forward available to fully offset the anticipated transition tax, there will be no income tax effect in the current period. Therefore, the preliminary accounting for this matter is generally complete. Although foreign earnings have been included in US taxable income under the mandatory repatriation transition tax regime as discussed here, the Company has not changed its assertion to permanently reinvest the foreign earnings.
The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Reform enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Reform. We expect to complete our analysis within the measurement period in accordance with SAB 118.
One of the Company’s China subsidiaries qualified for a preferential 15% tax rate that is available under the China Enterprise Income Tax Law, or the EIT law, for new and high technology enterprises and was granted a 15% tax rate for tax years 2015 and 2014. In June 2016, China’s State Administration of Taxation issued a notice to adjust the requirements for high technology enterprise status and as a result, the Company’s China subsidiary did not meet the requirements for the tax year 2016 and computed its tax provision for 2016 based on a 25% regular corporate tax rate and remeasured its deferred tax assets accordingly. The Company realized benefits from the reduced tax rate of $0.9 million and $0.5 million in the years ended December 31, 2015 and 2014, respectively. The tax provision for 2017 was based on the 25% regular corporate tax rate.
At December 31, 2017, the Company’s gross unrecognized tax benefits were approximately $25.5 million, of which $0.2 million would impact the effective tax rate if recognized. Substantial portion of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit. The Company does not believe that the amount of unrecognized tax benefits will change significantly in the next twelve months. There were no interest or penalties related to unrecognized tax benefits. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | |
Balance at December 31, 2014 | $ | 18,372 |
|
Gross increases for tax positions of current year | 2,314 |
|
Balance at December 31, 2015 | 20,686 |
|
Gross increases for tax positions of current year | 2,920 |
|
Balance at December 31, 2016 | 23,606 |
|
Gross increases for tax positions of current year | 1,933 |
|
Balance at December 31, 2017 | $ | 25,539 |
|
The Company’s material tax jurisdictions are the United States federal, California, Japan and China. As a result of NOL carryforwards, substantially all of the Company’s tax years remain open to U.S. federal and state tax examination. Tax years for 2011 and forward remain open for Chinese tax examination.