INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of our deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| September 29,
2017 | | September 30,
2016 |
Deferred tax assets (liabilities): | | | |
Federal and foreign net operating losses and credits | $ | 396,871 |
| | $ | 85,256 |
|
Intangible assets | (180,544 | ) | | (49,725 | ) |
Property and equipment | (1,045 | ) | | (2,730 | ) |
Other non-current deferred tax assets | 20,756 |
| | 21,855 |
|
Discontinued operations | — |
| | 9,100 |
|
Deferred compensation | 9,291 |
| | 5,545 |
|
Deferred gain | 14,853 |
| | 19,011 |
|
Valuation allowance | (274,406 | ) | | (10,471 | ) |
Total deferred tax (liability) asset | $ | (14,224 | ) | | $ | 77,841 |
|
Included in the above table are the attributes of our Japan jurisdiction which is in a net liability position of $8.8 million relating primarily to intangible assets.
In fiscal year 2016 we adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Upon adoption we included our current deferred income tax assets with our noncurrent deferred income tax assets; no adjustments were made to deferred tax liabilities.
As of September 29, 2017, we had $1,084.8 million of gross federal net operating loss (NOL) carryforwards consisting of $772.7 million relating to the AppliedMicro Acquisition, $158.9 million relating to the Mindspeed Acquisition, $26.2 million relating to the BinOptics Acquisition and $127.0 million relating to losses generated by MACOM. The federal NOL carryforwards will expire at various dates through 2036. The reported net operating loss carryforward includes any limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, which applies to an ownership change as defined under Section 382.
During the fourth quarter of fiscal year 2016, we identified and corrected a prior period error where we understated our income tax benefit during 2013 through 2015. This was a result of the incorrect recording of intercompany pretax income among a few of our operating entities and due to the fact that these entities had different statutory tax rates. The out-of-period correction resulted in a $3.9 million increase in income tax benefit in the fiscal year ended September 30, 2016 of which $1.7 million, $1.0 million and $1.2 million related to the prior fiscal years 2015, 2014 and 2013, respectively.
The domestic and foreign income (loss) from continuing operations before taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 |
United States | $ | (111,432 | ) | | $ | (46,593 | ) | | $ | (34,251 | ) |
Foreign | 61,927 |
| | 25,022 |
| | 18,851 |
|
(Loss) income from operations before income taxes | $ | (49,505 | ) | | $ | (21,571 | ) | | $ | (15,400 | ) |
The components of the provision (benefit) for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 100 |
| | $ | (5,861 | ) | | $ | (19,015 | ) |
State | 225 |
| | (766 | ) | | 688 |
|
Foreign | 7,307 |
| | 906 |
| | 1,092 |
|
Current provision (benefit) | 7,632 |
| | (5,721 | ) | | (17,235 | ) |
Deferred: | | | | | |
Federal | (42,637 | ) | | (8,163 | ) | | 10,845 |
|
State | (4,037 | ) | | (502 | ) | | (4,131 | ) |
Foreign | (466 | ) | | (2,603 | ) | | (1,302 | ) |
Change in valuation allowance | 140,419 |
| | (994 | ) | | 1,965 |
|
Deferred provision (benefit) | 93,279 |
| | (12,262 | ) | | 7,377 |
|
Total provision (benefit) | $ | 100,911 |
| | $ | (17,983 | ) | | $ | (9,858 | ) |
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making this determination, we consider available positive and negative evidence and factors that may impact the valuation of our deferred tax asset including results of recent operations, future reversals of existing taxable temporary differences, projected future taxable income, and tax-planning strategies. A significant piece of objective negative evidence evaluated was the cumulative U.S. loss incurred over the three-year period ended September 29, 2017 which we believe limited our ability to consider other subjective evidence, such as our projections for future growth. Certain transaction and integration related expenses incurred in the U.S., associated primarily with the AppliedMicro Acquisition during the three months ended March 31, 2017, resulted for the first time in significant negative objective evidence in the form of adjusted cumulative losses in the U.S. over the past three-year period. This resulted in our determination that there was not sufficient objectively verifiable positive evidence to offset this negative objective evidence and we concluded that a full valuation allowance totaling $93.5 million was required for our U.S. deferred tax assets as of September 29, 2017. In addition, a full valuation allowance was established against the U.S. deferred tax assets acquired in connection with the AppliedMicro Acquisition.
The $274.4 million of valuation allowance as of September 29, 2017 relates primarily to federal and state NOLs and tax credit carryforwards assumed in the AppliedMicro Acquisition along with an establishment of a full valuation allowance against our U.S. deferred tax assets, and UK tax credit and NOL carryforwards whose recovery is not considered more likely than not. The $10.5 million of valuation allowance as of September 30, 2016 related primarily to state NOL and tax credit carryforwards assumed in the Mindspeed Acquisition and UK tax credit and NOL carryforwards whose recovery is not considered more likely than not. The change during the year ending September 29, 2017 of $263.9 million primarily relates to state NOL and tax credit carryforwards assumed in the AppliedMicro Acquisition along with an establishment of a full valuation allowance against our U.S. deferred tax assets.
Our effective tax rates differ from the federal and statutory rate as follows:
|
| | | | | |
| Fiscal Years |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 35.0% | | 35.0% | | 35.0% |
Foreign rate differential | 31.9 | | 40.1 | | 30.5 |
State taxes net of federal benefit | 0.2 | | 1.0 | | 3.5 |
Warrant liabilities | (1.8) | | (26.7) | | (13.7) |
Change in valuation allowance | (270.0) | | 3.0 | | (6.0) |
Research and development credits | 12.8 | | 16.9 | | 16.1 |
Correction of prior period | — | | 18.3 | | — |
Provision to return adjustments | (4.0) | | 3.5 | | 9.9 |
Nondeductible compensation expense | (4.1) | | (9.2) | | (8.9) |
Nondeductible legal fees | (3.9) | | (1.8) | | (4.1) |
Other permanent differences | 0.1 | | 3.3 | | 1.6 |
Effective income tax rate | (203.8)% | | 83.4% | | 63.9% |
For fiscal years 2017, 2016 and 2015, the effective tax rates to calculate the tax benefit on $49.5 million, $21.6 million and $15.4 million, respectively, of pre-tax loss from continuing operations were (203.8)%, 83.4% and 63.9%, respectively. The effective income tax rate for fiscal years 2017, 2016 and 2015 were primarily impacted by a lower income tax rate in many foreign jurisdictions in which our foreign subsidiaries operate, research and development tax credits, and the fair market value adjustment of warrant liabilities. For fiscal year 2017, the effective tax rate was also impacted by an establishment of a full valuation allowance against our U.S. deferred tax assets. For fiscal years 2015 and 2016, the rate was impacted by a retroactive enactment of the R&D tax credit from fiscal years 2014 and 2015, respectively, and a larger shift of the revenue associated with foreign entities taxed at lower rates as part of our auto divestiture.
All earnings of foreign subsidiaries are considered indefinitely reinvested for the periods presented. Undistributed earnings of all foreign subsidiaries as of September 29, 2017 aggregated $158.6 million, with Ireland and Grand Cayman accounting for $58.3 million and $90.1 million, respectively. It is not practicable to determine the U.S. federal and state deferred tax liabilities associated with such foreign earnings.
Activity related to unrecognized tax benefits is as follows (in thousands):
|
| | | |
| Amount |
Balance - October 2, 2015 | (1,670 | ) |
Additions based on tax positions | — |
|
Reductions based on tax positions | — |
|
Balance - September 30, 2016 | $ | (1,670 | ) |
Additions based on tax positions | — |
|
Reductions based on tax positions | — |
|
Balance at September 29, 2017 | $ | (1,670 | ) |
The balance of the unrecognized tax benefit as of September 29, 2017, is included in other long-term liabilities in the accompanying consolidated balance sheets. Due to the establishment of a full valuation allowance against our U.S. deferred tax assets, only $0.3 million of the entire balance of unrecognized tax benefits, if recognized, will reduce income tax expense. It is our policy to recognize any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During fiscal year 2017, we did not make any payment of interest and penalties. There was nothing accrued in the consolidated balance sheets for the payment of interest and penalties at September 29, 2017, as the remaining unrecognized tax benefits would only serve to reduce our current federal and state NOL carryforwards, if ultimately recognized.
A summary of the fiscal tax years that remain subject to examination, as of September 29, 2017, for the Company’s significant tax jurisdictions are:
|
| |
Jurisdiction | Tax Years Subject to Examination |
United States—federal | 2013 - forward |
United States—various states | 2013 - forward |
Ireland | 2012 - forward |
Generally, we are no longer subject to federal income tax examinations for years before 2013, except to the extent of loss and tax credit carryforwards from those years.