Income (l
oss) from continuing operations before income taxes consists of the following:
| | | | |
| | | | | | | | | | |
| United States | | $ | (77,649 | ) | | $ | (15,202 | ) | | $ | (5,642 | ) |
| Foreign | | | (18,431 | ) | | | 26,658 | | | | (4,462 | ) |
| Total | | $ | (96,080 | ) | | $ | 11,456 | | | $ | (10,104 | ) |
Income tax
provision consisted of the following:
| | | | |
| | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| U.S. Federal | | $ | 96 | | | $ | 938 | | | $ | 5,272 | |
| U.S. State | | | 51 | | | | (22 | ) | | | 187 | |
| Foreign | | | 1,105 | | | | 35 | | | | 541 | |
| | | | 1,252 | | | | 951 | | | | 6,000 | |
| Deferred: | | | | | | | | | | | | |
| U.S. Federal | | | (11,312 | ) | | | (16,755 | ) | | | (114 | ) |
| U.S. State | | | (613 | ) | | | — | | | | (15 | ) |
| Foreign | | | (10,503 | ) | | | 747 | | | | (14 | ) |
| | | | (22,428 | ) | | | (16,008 | ) | | | (143 | ) |
| Total | | $ | (21,176 | ) | | | (15,057 | ) | | $ | 5,857 | |
Income tax
provision differed from the amounts computed by applying the U.S. federal income tax rate of
in
2017,
2016
and
2015
to loss before income taxes as a result of the following:
| | | | |
| | | | | | | | | | |
| Expenses (benefit) at statutory rate | | $ | (32,562 | ) | | $ | 3,895 | | | $ | (3,435 | ) |
| State income taxes | | | (585 | ) | | | 222 | | | | (4 | ) |
| Research and development credits | | | (12,983 | ) | | | (8,566 | ) | | | (8,526 | ) |
| Change in valuation allowance | | | 40,028 | | | | 9,768 | | | | 12,748 | |
| Impact of foreign operations | | | (1,951 | ) | | | (13,570 | ) | | | 2,652 | |
| Unrecognized tax benefits | | | 3,596 | | | | 3,151 | | | | 3,044 | |
| Stock-based compensation | | | (10,248 | ) | | | (9,925 | ) | | | 143 | |
| Prior year return to provision adjustment | | | 1,105 | | | | (524 | ) | | | (392 | ) |
| Effect of U. S. tax law change | | | (4,602 | ) | | | — | | | | — | |
| Impairment of intangibles | | | (2,328 | ) | | | — | | | | — | |
| Other | | | (646 | ) | | | 492 | | | | (373 | ) |
| | | $ | (21,176 | ) | | $ | (15,057 | ) | | $ | 5,857 | |
Significant components of the Company
’s net deferred taxes consist of the following:
| | | | |
| | | | | | | |
| | | | | | | | | |
| Net operating loss carry forwards | | $ | 34,366 | | | $ | 38,337 | |
| Research and development credits | | | 62,118 | | | | 46,492 | |
| Stock-based compensation | | | 6,021 | | | | 9,225 | |
| Accrued expenses and allowances | | | 2,004 | | | | 2,621 | |
| Amortization and depreciation | | | 4,910 | | | | — | |
| Other temporary differences | | | 4,018 | | | | 3,088 | |
| Foreign tax credit | | | 2,557 | | | | 1,290 | |
| Valuation allowance | | | (78,538 | ) | | | (38,631 | ) |
| Total deferred tax assets | | | 37,456 | | | | 62,422 | |
| | | | | | | | | |
| | | | | | | | | |
| Acquired intangible assets | | | (26,602 | ) | | | (55,563 | ) |
| Acquired tangible assets | | | (255 | ) | | | (3,629 | ) |
| Convertible debt | | | (15,213 | ) | | | (30,177 | ) |
| Amortization and depreciation | | | — | | | | (415 | ) |
| Other deferred tax liabilities | | | (68 | ) | | | (9 | ) |
| Total deferred tax liabilities | | | (42,138 | ) | | | (89,793 | ) |
Deferred tax liabilities, net | | $ | (4,682 | ) | | $ | (27,371 | ) |
On
December 22, 2017,
the Tax Reform Act
was signed into law. The Tax Reform Act contains significant changes to U.S. federal corporate income taxation, including a reduction of the corporate tax rate from
35%
to
21%
effective
January 1, 2018,
a
one
-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries in conjunction with the elimination of U.S. tax on dividend distributions from foreign subsidiaries, and a temporary
100%
first
-year depreciation deduction for certain capital investments. The effect of the tax law changes must be recognized in the period of enactment. Pursuant to the Tax Reform Act, the Company computed a provisional estimate of the net tax benefit of
$4,602
which includes the remeasurement of the federal deferred tax assets and liabilities as of
December 31, 2017
to reflect the reduced U.S. statutory corporate tax rate to
21%,
the tax effect of the mandatory repatriation income which was absorbed into the Company’s net operating loss generated in the current year, the related valuation allowance offset, and valuation allowance release on deferred tax assets for the federal AMT credit that was made refundable by the Tax Reform Act.
The Company records a valuation allowance to reduce deferred tax assets to the amount that the Company believes is more likely than
not
to be realized. The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate sufficient future taxable income against which benefits of the deferred tax assets
may
or
may
not
be realized. This assessment requires management to exercise significant judgment and make estimates with respect to the Company
’s ability to generate revenue, gross profits, operating income and taxable income in future periods. Amongst other factors, management must make assumptions regarding overall current and projected business and semiconductor industry conditions, operating efficiencies, the Company’s ability to timely develop, introduce and consistently manufacture new products to customers’ specifications, acceptance of new products, customer concentrations, technological change and the competitive environment which
may
impact the Company’s ability to generate taxable income and, in turn, realize the value of the deferred tax assets. For the year ended
December 31 2015,
the Company used the tax law ordering approach of intraperiod allocation to allocate the benefit of windfall tax benefits based on provisions in the tax law that identify the sequence in which those amounts are utilized for tax purposes. The Company early adopted the guidance on accounting for share-based payments to employees at the beginning of
2016.
Additionally, when determining whether uncertain tax positions are a source of income for valuation allowance purposes, the Company applies the tax law ordering approach to determine how these liabilities will ultimately be satisfied.
At
December 31, 2015
and
2016,
a full valuation allowance was recorded on the deferred tax assets of U.S. and certain foreign subsidiaries. At
December 31, 2017,
the Company has a full valuation allowance recorded against the deferred tax assets of Canada
, United Kingdom, and the U.S., with the exception of the federal refundable AMT credit. The Company has a partial valuation allowance against the deferred tax assets of Taiwan.
The valuation allowance increased (decreased)
$39,907,
$5,064
and (
$6,115
) in the years ended
December 31, 2017,
2016
and
2015,
respectively.
The net increase of
$39,907
in the valuation allowance for the year ended
December 31, 2017
is comprised of
$134
increase charged to other comprehensive income,
$158
decrease charged to goodwill, and
$39,931
increase charged to income tax provision. The valuation allowance charged to income tax provision included an income tax benefit from the partial release of the federal and state valuation allowance
. The net increase of
$5,064
in the valuation allowance for the year ended
December 31, 2016
is comprised of
$16,044
decrease charged to additional paid-in capital, offset by
$305
increase charged to other comprehensive income,
$3,088
increase charged to goodwill,
$7,068
increase charged to retained earnings, and
$10,647
increase charged to income tax provision. The net decrease of
$6,115
in the valuation allowance for the year ended
December 31, 2015
is comprised of
$18,383
decrease charged to additional paid-in capital,
$2,168
decrease charged to other comprehensive income, offset by
$767
increase charged to goodwill, and
$13,669
increase charged to income tax provision.
General Income Tax Disclosures
The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $
206,996
and
$88,680,
respectively at
December
31,
2017,
that will begin to expire in
2022
for federal income tax purposes and in
2026
for state income tax purposes. At
December 31, 2017,
the Company has NOL carryforwards of
$2,790
for its Taiwan subsidiary which begin to expire in
2020,
and NOL carryforwards of
$7,038
for the United Kingdom subsidiary, which does
not
expire. A full valuation allowance has been provided on U.S. NOL and United Kingdom NOL, and a partial valuation allowance has been provided on Taiwan NOL.
At
December
31,
2017,
the Company has federal and state research and development (“R&D”) tax credit carryforwards of
$40,118
and
$42,248,
respectively. The federal tax credits will begin to expire in
2024.
Some state tax credits will begin to expire in
2021
and some do
not
expire. At
December 31, 2017,
the Company has Canadian tax credits and research expenditure claim carryforwards for its Canadian subsidiary of
$9,457
and
$3,060,
respectively. The tax credits will begin to expire in
2027,
and the research expenditure claim carryforwards do
not
expire. A full valuation allowance has been provided on R&D tax credit and research expenditure claim carryforwards.
Pursuant to Internal Revenue Code sections
382
and
383,
use of the Company
’s NOL and R&D credits generated prior to
June 2004
are subject to an annual limitation due to a cumulative ownership percentage change that occurred in that period. The Company has had
two
changes in ownership,
one
in
December 2000
and the
second
in
June 2004,
that resulted in an annual limitation on NOL and R&D credit utilization. The NOL and R&D credit carryover of Cortina, are also subject to annual limitation under Internal Revenue Code sections
382
and
383.
The acquisition of Cortina caused an ownership change that resulted in an annual limitation, as well as Cortina’s legacy annual limitation amount from ownership changes prior to acquisition. The NOL and R&D credit carryforward which will expire unused due to annual limitation is
not
recognized for financial statement purposes and is
not
reflected in the above carryover amounts.
The Company
’s NOL carryforwards include Cortina’s federal and state pre-acquisition NOL of
$49,152
and
$3,919,
respectively. These NOL carryforwards will begin to expire in
2024
for federal and
2026
for state. The Company’s NOL carryforwards also include ClariPhy’s federal and state pre-acquisition NOL of
$46,601
and
$68,177,
respectively. These NOL carryforwards will begin to expire in
2032
for federal and
2028
for state. The Company’s R&D credit carryforwards included Cortina’s federal and state pre-acquisition credits of
$6,033
and
$7,977,
respectively. The federal R&D credit carryforward will begin to expire in
2027.
While some state tax credits will begin to expire in
2021,
most do
not
expire. The utilization of Cortina and ClariPhy’s pre-acquisition tax attributes is subject to certain annual limitations under Internal Revenue Code sections
382
and
383.
No
benefit for Cortina’s tax attributes was recorded upon the close of the acquisition, as the benefit from these tax attributes did
not
meet the "more-likely-than-
not"
standard.
The Company operates under tax holiday in Singapore
. The Singapore tax holiday allows for a reduced income tax rate of
5%
effective through
May 2020,
and the Company is pursuing a renewal of the reduced tax rate subsequent to the current holiday period. The Singapore statutory rate is
17%.
The tax holiday is conditional upon meeting certain employment, activities and investment thresholds. As of
December 31, 2017,
the Company believes it has met all of the required thresholds. The Company qualified for a tax incentive program in Argentina that reduced the income tax rate to
14%
through
December 31, 2019,
with a return to the full statutory rate of
35%
for periods thereafter. As a result of these reduced tax rates, foreign taxes increased (decreased) by
$7,412
and (
$6,216
) for the years ended
December 31, 2017
and
2016,
respectively. There was
no
difference in foreign taxes for the year ended
December 31, 2015
as the Company had a full valuation allowance in Singapore and did
not
have operations in Argentina. The effect of the tax holidays on diluted earnings per share was $
0.18
and ($
0.14
) for the years ended
December 31, 2017
and
2016,
respectively.
The following table summarizes the changes in gross unrecognized tax benefits:
| | | | |
| | | | | | | | | | |
| | | $ | 56,503 | | | $ | 46,453 | | | $ | 44,081 | |
| Increases based on tax positions related to the current year | | | 4,656 | | | | 5,450 | | | | 4,459 | |
| Decreases based on tax positions of prior year | | | (13,452 | ) | | | (1,766 | ) | | | (1,923 | ) |
| Gross increases for acquired unrecognized tax benefits | | | — | | | | 6,585 | | | | — | |
| Statute of limitation expirations | | | (101 | ) | | | (219 | ) | | | (164 | ) |
Balance as of December 31 | | $ | 47,606 | | | $ | 56,503 | | | $ | 46,453 | |
As of
December
31,
2017,
the Company had approximately
$575
of unrecognized tax benefits that if recognized would affect the effective income tax rate. The Company believes that before the end of next year, it is reasonably possible that the gross unrecognized tax benefit
may
decrease by approximately
$119
due to statute of limitation expiration in foreign jurisdictions.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recorded $
16
and
$119
interest in the years ended
December 31, 2017
and
2016,
respectively. The Company had
$113,
$222
and
$163
of interest and penalties accrued as of
December 31, 2017,
2016
and
2015,
respectively.
The Company files income tax returns in the U.S. federal jurisdiction, various states and certain foreign jurisdictions. The Company is
no
longer subject to U.S. federal income tax examinations for tax years ended on or before
December
31,
2011
or to California state income tax examinations for tax years ended on or before
December
31,
2010.
However, to the extent allowed by law, the tax authorities
may
have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward.
The Tax Reform Act imposes a
one
-time mandatory transition
federal income tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distribution. As a result, all previously deferred earnings of the foreign subsidiaries in the amount of
$54,784
have been subject to U.S. tax in
2017.
The Company’s deemed repatriated foreign earnings were fully offset by the U.S. net operating loss and resulted in
no
current tax liability. The Company intends to continue to reinvest these earnings indefinitely outside the U.S.
The Company is currently under examination by the Inland Revenue Authority of Singapore (“IRAS”) for the years
2010,
2011
and
2012.
The IRAS made an adjustment to the timing of deducting certain intercompany payments, the effect of which has been reflected in the provision
and did
not
result in a material impact to the consolidated financial statements. As of the report date, the examination is ongoing.
As discussed in Note
1,
the Company early adopted ASU
2016
-
16,
Intra-Entity Transfers of Assets Other Than Inventory
, at the beginning of
2017.
As a result of the adoption, the Company wrote off the unamortized deferred tax charge balance to retained earnings. At the same time, the Company recorded deferred tax asset on the difference between tax basis and financial reporting carrying value in the consolidated financial statements related to the intercompany transfer of an asset in prior years. The effect of the adoption resulted in a charge of
$1,217
on the beginning balance of retained earnings.