Income Taxes
The following table presents the components of income (loss) before income taxes (in millions):
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016(1) | | 2015(1) |
United States | $ | (210.0 | ) | | $ | (195.3 | ) | | $ | (21.3 | ) |
Foreign | 15.9 |
| | 23.0 |
| | (100.6 | ) |
Total | $ | (194.1 | ) | | $ | (172.3 | ) | | $ | (121.9 | ) |
______________
| |
(1) | Certain amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for more information. |
The following table summarizes our provision for income taxes (in millions):
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016(1) | | 2015 |
Federal: | | | | | |
Current | $ | 3.4 |
| | $ | 1.9 |
| | $ | 1.8 |
|
Deferred | — |
| | (0.6 | ) | | (3.0 | ) |
State: | | | | | |
Current | 0.9 |
| | 1.1 |
| | 0.7 |
|
Deferred | — |
| | (0.1 | ) | | (0.4 | ) |
Foreign: | | | | | |
Current | 19.7 |
| | 19.1 |
| | 10.7 |
|
Deferred | (1.5 | ) | | (1.0 | ) | | (0.4 | ) |
Total | $ | 22.5 |
| | $ | 20.4 |
| | $ | 9.4 |
|
______________
| |
(1) | Certain amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for more information. |
For the year ended July 31, 2017, our provision for income taxes increased compared to the year ended July 31, 2016 primarily due to increases in foreign withholding taxes and U.S. income taxes related to intercompany transactions, offset by tax benefits from our adoption of new share-based payment accounting guidance in fiscal 2017. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for more information on our adoption of the accounting guidance.
For the year ended July 31, 2016, our provision for income taxes increased compared to the year ended July 31, 2015 primarily due to an increase in foreign taxes and amortization of our deferred tax charges.
The following table presents the items accounting for the difference between income taxes computed at the federal statutory income tax rate and our provision for income taxes:
|
| | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016(1) | | 2015(1) |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Effect of: | | | | | |
State taxes, net of federal tax benefit | 2.8 |
| | (1.7 | ) | | 4.6 |
|
Foreign income at other than U.S. rates | (14.4 | ) | | (7.8 | ) | | (6.1 | ) |
Change in valuation allowance | (39.4 | ) | | (25.4 | ) | | (28.8 | ) |
Share-based compensation | 1.6 |
| | (15.9 | ) | | (13.0 | ) |
Amortization of deferred tax charges | (3.6 | ) | | (3.4 | ) | | (2.8 | ) |
Research credits | 10.1 |
| | 11.3 |
| | 8.6 |
|
Other, net | (3.7 | ) | | (3.9 | ) | | (5.2 | ) |
Total | (11.6 | )% | | (11.8 | )% | | (7.7 | )% |
______________
| |
(1) | Certain amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for more information. |
The change in foreign income at other than U.S. rates from the year ended July 31, 2016 to July 31, 2017 was due to current year intercompany transactions.
During the year ended July 31, 2017, we adopted new share-based payment accounting guidance that requires us to recognize excess tax benefits or deficiencies as income tax expense or benefit in the period in which they occur, rather than additional paid-in capital. The effect of the change from this guidance is reflected in the share-based compensation line above.
During the year ended July 31, 2016, we accounted for the outcome of The Gillette Company et al. v. California Franchise Tax Board which disallowed the election to use an evenly weighted, three factor apportionment formula utilized by us on our tax return for the year ended July 31, 2014. The impact for the change in apportionment is reflected in state taxes, net of federal tax benefit above and is fully offset by changes in our valuation allowance.
The following table presents the components of our deferred tax assets and liabilities as of July 31, 2017 and July 31, 2016 (in millions):
|
| | | | | | | |
| July 31, |
| 2017 | | 2016(1) |
Deferred tax assets: | | | |
Accruals and reserves | $ | 35.9 |
| | $ | 43.5 |
|
Deferred revenue | 123.2 |
| | 62.0 |
|
Net operating loss carryforwards | 245.3 |
| | 5.4 |
|
Research and development and foreign tax credits | 69.3 |
| | 41.4 |
|
Share-based compensation | 45.4 |
| | 55.2 |
|
Gross deferred tax assets | 519.1 |
| | 207.5 |
|
Valuation allowance | (464.1 | ) | | (161.3 | ) |
Total deferred tax assets | 55.0 |
| | 46.2 |
|
Deferred tax liabilities: | | | |
Fixed assets and intangible assets | (9.1 | ) | | (14.2 | ) |
Deferred commissions | (36.8 | ) | | (27.7 | ) |
Other deferred tax liabilities | (4.0 | ) | | (2.5 | ) |
Total deferred tax liabilities | (49.9 | ) | | (44.4 | ) |
Total | $ | 5.1 |
| | $ | 1.8 |
|
______________
| |
(1) | Certain amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for more information. |
During the year ended July 31, 2017, we adopted new share-based payment accounting guidance related to the timing of when excess tax benefits are recognized. We adopted the guidance on a modified retrospective basis and, as a result, our deferred tax assets for the year ended July 31, 2017 reflect additional net operating losses of $385.7 million and research and development credits of $5.3 million that were not included in the balances for the year ended July 31, 2016. In addition, our valuation allowance increased $389.2 million as a result of adopting the new guidance. The increase in net operating losses due to the adoption of the new guidance was partially offset by income in the U.S. due to intercompany transactions.
A valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. At such time, if it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be adjusted. As of July 31, 2017, we have provided a valuation allowance for our federal, state, and certain foreign deferred tax assets that we believe will, more likely than not, be unrealizable. The net valuation allowance increased by approximately $302.8 million from the year ended July 31, 2016 to the year ended July 31, 2017. The increase was primarily due to the adoption of new share-based payment accounting guidance and was partially offset by NOL utilization related to intercompany transactions.
As of July 31, 2017, we had federal, state, and foreign NOL carryforwards of approximately $1.1 billion, $806.4 million, and $45.8 million, respectively, as reported on our tax returns, available to reduce future taxable income, if any. If not utilized, our federal and state NOL carryforwards will expire in various amounts at various dates beginning in the years ending July 31, 2027 and July 31, 2018, respectively. Our foreign NOL will carry forward indefinitely.
As of July 31, 2017, we had federal and state research and development tax credit carryforwards of approximately $48.6 million and $49.7 million, respectively as reported on our tax returns. If not utilized, the federal credit carryforwards will expire in various amounts at various dates beginning in the year ending July 31, 2026. The state credit will carry forward indefinitely.
As of July 31, 2017, we had foreign tax credit carryforwards of $2.5 million as reported on our tax returns. If not utilized, the foreign tax credit carryforwards will expire in various amounts at various dates beginning in the year ending July 31, 2021.
Utilization of the NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before utilization.
As a result of adopting the new share-based payment guidance, we did not reflect the impact of excess tax benefits in additional paid-in capital for the year ended July 31, 2017. Prior to adopting this guidance, we recorded excess tax benefits of $0.5 million and $2.5 million directly to additional paid-in capital for the years ended July 31, 2016 and 2015, respectively.
During the year ended July 31, 2017, we were awarded a tax incentive by a foreign jurisdiction. The incentive is effective through September 30, 2031, and is conditional upon meeting certain investment and employment thresholds. The impact of this incentive on our provision for income taxes was not material for the year ended July 31, 2017.
As of July 31, 2017, we had $301.3 million of unrecognized tax benefits, $34.0 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in the United States and other assets. As of July 31, 2016, we had $127.7 million of unrecognized tax benefits, $21.9 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in the United States. As of July 31, 2017, our federal, state, and foreign returns for the tax years 2008 through the current period remain subject to adjustment due to examination. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in earlier years, which have been carried forward and may be audited in subsequent years when utilized. We do not expect the amount of unrecognized tax benefits as of July 31, 2017 to change significantly over the next 12 months. We recognize both interest and penalties associated with uncertain tax positions as a component of income tax expense. During the years ended July 31, 2017, 2016, and 2015, we recognized income tax expense related to interest and penalties of $2.1 million, $1.6 million, and $1.1 million, respectively. We had accrued interest and penalties on our consolidated balance sheets related to unrecognized tax benefits of $5.4 million and $3.3 million as of July 31, 2017 and 2016, respectively. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty.
The following table presents a reconciliation of the beginning and ending amount of our gross unrecognized tax benefits (in millions):
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefits at the beginning of the period | $ | 127.7 |
| | $ | 67.2 |
| | $ | 10.4 |
|
Additions for tax positions taken in prior years | 3.1 |
| | 25.2 |
| | 6.1 |
|
Reductions for tax positions taken in prior years | — |
| | — |
| | (0.6 | ) |
Additions for tax positions taken in the current year | 170.5 |
| | 35.3 |
| | 51.3 |
|
Unrecognized tax benefits at the end of the period | $ | 301.3 |
| | $ | 127.7 |
| | $ | 67.2 |
|
During the year ended July 31, 2017, our additions for tax positions taken in the current year were primarily attributable to uncertainties related to intercompany transactions.
During the year ended July 31, 2016, our additions for tax positions taken in prior years and additions for tax positions taken in the current year were primarily attributable to uncertain tax positions relating to federal and state research and development credits, adjustments for California apportionment, and transfer pricing methodologies.
As of July 31, 2017, we had no unremitted earnings when evaluating our outside basis differences relating to our investment in foreign subsidiaries. Accordingly, we have not provided a deferred tax liability for any potential U.S. income taxes or foreign withholding taxes.