Income Tax
Income (loss) before income tax benefit (provision) consisted of the following (in thousands):
|
| | | | | | | | | |
| Fiscal Year Ended |
| December 31, 2016 | December 26, 2015 | December 27, 2014 |
United States | $ | 27,936 |
| $ | 10,326 |
| $ | (20,682 | ) |
Foreign | 2,710 |
| 1,538 |
| 1,026 |
|
Total income (loss) before income tax benefit (provision) | $ | 30,646 |
| $ | 11,864 |
| $ | (19,656 | ) |
The income tax benefit (provision) consisted of the following (in thousands):
|
| | | | | | | | | |
| Fiscal Year Ended |
| December 31, 2016 | December 26, 2015 | December 27, 2014 |
Federal: | |
Current | $ | (12,166 | ) | $ | (4,162 | ) | — |
|
Deferred | 30,482 |
| — |
| (19,504 | ) |
State: | | | |
Current | (1,225 | ) | (926 | ) | (24 | ) |
Deferred | 2,610 |
| — |
| (1,373 | ) |
Foreign: | | | |
Current | (780 | ) | (661 | ) | (285 | ) |
Deferred | (135 | ) | 71 |
| 52 |
|
Total income tax benefit (provision) | $ | 18,786 |
| $ | (5,678 | ) | $ | (21,134 | ) |
The items accounting for the difference between income taxes computed at the federal statutory income tax rate and the income tax benefit (provision) consisted of the following (dollars in thousands):
|
| | | | | | | | | |
| Fiscal Year Ended |
| December 31, 2016 | December 26, 2015 | December 27, 2014 |
Federal statutory rate | 35 | % | 35 | % | 35 | % |
Effect of: | |
Tax benefit (provision) at federal statutory rate | $ | (10,728 | ) | $ | (4,153 | ) | $ | 6,881 |
|
State tax benefit (provision), net of federal tax benefit (provision) | (1,507 | ) | (405 | ) | 515 |
|
ESPP | (1,537 | ) | (723 | ) | (1,106 | ) |
Other permanent items | (861 | ) | (305 | ) | (215 | ) |
Impact of foreign operations | (122 | ) | (8 | ) | 132 |
|
Tax credits | 4,706 |
| 3,205 |
| 2,106 |
|
Change in valuation allowance | 28,835 |
| (3,289 | ) | (29,447 | ) |
Total income tax benefit (provision) | $ | 18,786 |
| $ | (5,678 | ) | (21,134 | ) |
The Company recognizes interest and penalties related to uncertain tax positions as part of the income tax provision. To date, no such interest and penalties have been accrued.
The components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | |
| As of |
| December 31, 2016 | December 26, 2015 |
Deferred tax assets: | | |
Stock-based compensation | $ | 15,050 |
| $ | 12,895 |
|
Fixed assets | 2,829 |
| 3,938 |
|
Accruals and reserves | 6,288 |
| 6,750 |
|
Deferred revenue | 7,651 |
| 4,895 |
|
Inventory reserve | 1,276 |
| 971 |
|
Credits | 4,304 |
| 3,825 |
|
Gross deferred tax assets | 37,398 |
| 33,274 |
|
Valuation allowance | (4,304 | ) | (33,139 | ) |
Total deferred tax assets | 33,094 |
| 135 |
|
Deferred tax liabilities | — |
| — |
|
Total | $ | 33,094 |
| $ | 135 |
|
As of December 31, 2016, the Company recorded an income tax benefit of $18.8 million that includes the partial release of $30.5 million of the Company's existing valuation allowance against its U.S. deferred tax assets and additional foreign income tax expense. The Company considered all available positive and negative evidence in making a determination to release a portion of its existing valuation allowance. Such evidence included, among others, the Company's history of profitability and losses, jurisdictional income recognition trends, forecasted income by jurisdiction and achievement of three years of cumulative taxable income in the U.S. federal tax jurisdiction. Therefore, the Company determined that there is sufficient positive evidence to conclude that it is more likely than not that it will utilize its U.S deferred tax assets. Included in the net deferred tax asset balance is a $4.3 million valuation allowance that relates to research and development credits in a jurisdiction with a history of credits in excess of taxable profits.
The following table presents the activity in the valuation allowance:
|
| | | | | | | | | |
| Fiscal Year Ended |
| December 31, 2016 | December 26, 2015 | December 27, 2014 |
Balance at the beginning of period | $ | 33,139 |
| $ | 27,851 |
| $ | — |
|
Additions | 1,621 |
| 5,288 |
| 27,851 |
|
Deductions | (30,456 | ) | — |
| — |
|
Balance at end of Period | $ | 4,304 |
| $ | 33,139 |
| $ | 27,851 |
|
As of December 31, 2016, the Company had federal and state net operating loss carryforwards of zero and approximately $3.3 million, respectively, available to reduce any future taxable income. If not utilized, the state net operating loss carryforwards will expire between fiscal 2033 and 2035.
The Company also has federal and state research and development tax credit carryforwards of zero and approximately $6.6 million, respectively. The federal credit will start to expire between fiscal 2033 and 2036, while the state credit will carry forward indefinitely.
Utilization of the net operating loss 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 net operating losses and credits before utilization. The Company uses the with-and-without approach described in guidance which has been incorporated into the accounting standard relating to income taxes, to determine the recognition and measurement of excess tax benefits. Accordingly, the Company has elected to recognize excess income tax benefits from share-based awards in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company. As of December 31, 2016, the amount of excess tax benefits from stock options included in federal and state net operating losses was $0.0 million and $3.3 million, respectively. The impact of this excess tax benefit is recognized as additional paid-in capital when it reduces taxes payable. In addition, the Company has elected to account for the indirect effects of share-based awards on other tax attributes, such as the research and alternative minimum tax credits, through the consolidated statement of operations.
Uncertain Income Tax Positions
The Company has adopted the accounting standard which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company's income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
As of December 31, 2016 and December 26, 2015, the Company had $5.2 million and $3.2 million of unrecognized tax benefits, respectively, which represented an increase in unrecognized tax benefits by $2.0 million during 2016. If recognized, all of these unrecognized tax benefits (net of federal benefit) would be recorded as a reduction of future income tax provision for the years ending December 31, 2016 and December 26, 2015, respectively.
A reconciliation of the beginning and ending amount of the unrecognized income tax benefits during the tax periods ended December 31, 2016 and December 26, 2015 are as follows (in thousands):
|
| | | | | | | | | |
| Fiscal Year Ended |
| December 31, 2016 | December 26, 2015 | December 27, 2014 |
Unrecognized tax benefits at the beginning of the period | $ | 3,247 |
| $ | 2,258 |
| $ | 186 |
|
Additions for tax positions related to the current year | 2,001 |
| 1,424 |
| 1,824 |
|
Additions for tax positions related to the prior year | — |
| 112 |
| 248 |
|
Reductions for tax positions related to the prior year | (7 | ) | (547 | ) | — |
|
Unrecognized tax benefits at the end of the period | $ | 5,241 |
| $ | 3,247 |
| $ | 2,258 |
|
The Company does not anticipate any material decreases in unrecognized tax benefits within the next twelve months.
The Company's policy is to account for interest and penalties related to income tax expense as income tax expense. As of December 31, 2016 and December 26, 2015, the Company had accrued no interest and penalties related to unrecognized tax benefits.
As of December 31, 2016, the Company had not recorded any tax provision for U.S. federal and state income taxes on approximately $2.6 million of undistributed earnings in foreign subsidiaries, which it expects to reinvest outside of the U.S. indefinitely. If the Company were to repatriate these earnings to the U.S., it would be subject to U.S. income taxes, an adjustment for foreign tax credits, and foreign withholding taxes. The determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.
The Company files income tax returns in the U.S. federal jurisdiction, certain U.S. states, and the United Kingdom. The Company is subject to U.S. federal income tax examination from calendar years 2013 to 2016, from 2012 to 2016 for state purposes, and 2013 to 2016 for the United Kingdom. The U.S. federal and U.S. state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes.