INCOME AND OTHER TAXES
The Company’s effective income tax rate for the fiscal years ended February 2, 2018, February 3, 2017, and January 29, 2016 was as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years Ended |
| | February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| | | | | | |
Loss before income taxes | | $ | (85,780 | ) | | $ | (63,477 | ) | | $ | (112,577 | ) |
Income tax benefit | | $ | (57,703 | ) | | $ | (25,264 | ) | | $ | (40,196 | ) |
Effective tax rate | | 67.3 | % | | 39.8 | % | | 35.7 | % |
The change in the Company's effective income tax rate for the fiscal year ended February 2, 2018 over the effective income tax rate for the fiscal year ended February 3, 2017 was primarily driven by the one-time provisional impacts from the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform” or the “Act”) that was enacted in December 2017. Among other provisions, U.S. Tax Reform lowers the U.S. corporate income tax rate to 21% from 35%. GAAP requires the effect of a change in tax laws to be recognized in the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of U.S. Tax Reform, SEC Staff Accounting Bulletin No. 118 (“SAB 118”) allows companies to record provisional amounts in earnings for the first year following the Act's enactment, with those provisional amounts required to be finalized by the end of that year. In accordance with GAAP, and SAB 118, the Company recognized a provisional tax benefit in the fourth quarter of the fiscal year ended February 2, 2018 of $27.0 million related to U.S. Tax Reform, primarily attributable to the remeasurement of deferred tax assets and liabilities. The Company’s provisional amounts are based on its initial analysis using available information and estimates, and may be adjusted in accordance with SAB 118. The change in the Company's effective income tax rate for the fiscal year ended February 3, 2017 over the effective income tax rate for the fiscal year ended January 29, 2016 was primarily attributable to the recognition of tax benefits relating to research and development tax credits during the fiscal year ended February 3, 2017.
During the periods presented in the accompanying Consolidated Financial Statements, Secureworks did not file separate federal tax returns, as the Company generally was included in the tax grouping of other Dell entities within the respective entity’s tax jurisdiction. The income tax benefit has been calculated using the separate return method modified to apply the benefits-for-loss approach. Under the benefits-for-loss approach, net operating losses or other tax attributes are characterized as realized by Secureworks when those attributes are utilized by other members of the Dell consolidated group.
A reconciliation of the Company's income tax provision to the statutory U.S. federal tax rate is as follows:
|
| | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| |
U.S. federal statutory rate | 33.7 | % | | 35.0 | % | | 35.0 | % |
Foreign income taxed at different rates | 0.4 |
| | (0.3 | ) | | (0.9 | ) |
State income taxes, net of federal tax benefit | 2.2 |
| | 3.2 |
| | 1.9 |
|
Research and development credits | 1.8 |
| | 3.1 |
| | 0.5 |
|
Nondeductible/nontaxable items | (1.8 | ) | | (1.2 | ) | | (0.8 | ) |
U.S. Tax Reform | 31.5 |
| | — |
| | — |
|
Stock-based compensation | (0.5 | ) | | — |
| | — |
|
Total | 67.3 | % | | 39.8 | % | | 35.7 | % |
The benefit for income taxes consists of the following:
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| (in thousands) |
Current: | | | |
| | |
|
Federal | $ | (20,288 | ) | | $ | (22,470 | ) | | $ | (12,519 | ) |
State/Local | (886 | ) | | 657 |
| | (1,517 | ) |
Foreign | 80 |
| | 1,379 |
| | (1,366 | ) |
Current | (21,094 | ) | | (20,434 | ) | | (15,402 | ) |
Deferred: | | | | | |
|
Federal | (37,191 | ) | | (3,620 | ) | | (24,472 | ) |
State/Local | (141 | ) | | (471 | ) | | 330 |
|
Foreign | 723 |
| | (739 | ) | | (652 | ) |
Deferred | (36,609 | ) | | (4,830 | ) | | (24,794 | ) |
Income tax benefit | $ | (57,703 | ) | | $ | (25,264 | ) | | $ | (40,196 | ) |
Loss before provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| Fiscal Years Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| (in thousands) |
Domestic | $ | (88,546 | ) | | $ | (64,542 | ) | | $ | (103,061 | ) |
Foreign | 2,766 |
| | 1,065 |
| | (9,516 | ) |
Loss before income taxes | $ | (85,780 | ) | | $ | (63,477 | ) | | $ | (112,577 | ) |
The components of the Company's net deferred tax balances are as follows:
|
| | | | | | | |
| February 2, 2018 | | February 3, 2017 |
| (in thousands) |
Deferred tax assets: | | | |
|
Deferred revenue | $ | 3,441 |
| | $ | 6,232 |
|
Provision for doubtful accounts | 1,883 |
| | 2,377 |
|
Loss carryforwards | 3,966 |
| | 2,806 |
|
Stock-based and deferred compensation | 5,701 |
| | 9,568 |
|
Other | 2,803 |
| | — |
|
Deferred tax assets | 17,794 |
| | 20,983 |
|
Valuation allowance | (3,966 | ) | | (2,806 | ) |
Deferred tax assets, net of valuation allowance | 13,828 |
| | 18,177 |
|
Deferred tax liabilities: | | | |
Property and equipment | (1,347 | ) | | (1,367 | ) |
Purchased intangible assets | (56,590 | ) | | (97,836 | ) |
Operating and compensation related accruals | (3,777 | ) | | (3,933 | ) |
Other | (14 | ) | | (29 | ) |
Deferred tax liabilities | (61,728 | ) | | (103,165 | ) |
Net deferred tax liabilities | $ | (47,900 | ) | | $ | (84,988 | ) |
Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Consolidated Statements of Financial Position.
As of February 2, 2018 and February 3, 2017, Secureworks had $4.0 million and $2.8 million of deferred tax assets, respectively, related to net operating loss carryforwards for state tax returns that are not included with those of other Dell entities. These net operating loss carryforwards began expiring in the fiscal year ended February 2, 2018. Due to the uncertainty surrounding the realization of these net operating loss carryforwards, the Company has provided valuation allowances for the full amount as of February 2, 2018 and February 3, 2017. Because the Company is included in the tax filings of certain other Dell entities, management has determined that it will be able to realize the remainder of its deferred tax assets. If the Company’s tax provision had been prepared using the separate return method, the unaudited pro forma pre-tax loss, tax benefit and net loss for the fiscal year ended February 2, 2018 would have been $85.8 million, $42.4 million and $43.4 million, respectively, as a result of the recognition of a valuation allowance that would be recorded on certain deferred tax assets.
As of February 2, 2018, the Company has cumulative undistributed foreign earnings that would incur some amount of local withholding and state taxes if the earnings are distributed back to the United States. U.S. Tax Reform fundamentally changes the U.S. approach to taxation of foreign earnings and the Company is currently still evaluating its intentions with respect to the indefinite reinvestment of its foreign earnings. The Company had $0.8 million of unrecognized tax benefits as of February 2, 2018 and $0.6 million unrecognized tax benefits as of February 3, 2017. The Company is no longer subject to tax examinations for years prior to fiscal 2012.