ABIOMED INC

Note 10. Income Taxes

The components of the Company’s income tax provision (benefit) for the fiscal years ended March 31, 2017, 2016 and 2015 are as follows:

		2017				2016			2015
						(in $000's)
Income before provision for income taxes:
United States	$		78,172		$		54,406	$		22,243
Foreign			13,170				11,432			6,522
Income before income taxes	$		91,342		$		65,838	$		28,765

Current tax expense:
Federal	$		7,313		$		1,690	$		464
State			5,045				2,113			424
Foreign			1,066				1,592			1,283
			13,424				5,395			2,171
Deferred tax expense (benefit):
Federal			23,008				18,769			(66,140	)
State			(349	)			1,284			(13,430	)
Foreign			3,144				2,243			(7,524	)
			25,803				22,296			(87,094	)
Total income tax provision (benefit)	$		39,227		$		27,691	$		(84,923	)

The components of the Company’s net deferred taxes were as follows:

	March 31,
	2017			2016
	(in $000's)
Deferred tax assets
NOL carryforwards and tax credit carryforwards	$	8,814		$	34,305
Stock-based compensation		16,560			14,879
Nondeductible reserves and accruals		10,303			8,550
Amortizable intangibles other than goodwill		1,846			2,420
Capitalized research and development		—			442
Foreign NOL carryforwards		13,634			17,635
Deferred revenue		4,308			3,351
Depreciation		289			353
Other, net		1,308			1,802
	57,062			83,737
Deferred tax liabilities
Indefinite lived intangibles		(9,444	)		(8,480	)
In-process research and development		(4,374	)		(4,649	)
Domestic deferred tax liability on foreign NOL carryforwards		(6,836	)		(10,488	)
		(20,654	)		(23,617	)

Net deferred tax assets		36,408			60,120
Valuation allowance		(2,468	)		(2,418	)
Net deferred tax assets	$	33,940		$	57,702

Reported as:
Long-term deferred tax assets, net	$	34,723		$	58,534
Long-term deferred tax liabilities		(783	)		(832	)
Net deferred tax assets	$	33,940		$	57,702

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the fiscal years ended March 31, 2017, 2016, and 2015:

	2017				2016				2015
Statutory income tax rate		35.0		%		35.0		%		35.0		%
Increase (decrease) resulting from:
Change in valuation allowance		0.2				0.7				(342.8	)
Credits		(3.3	)			(4.1	)			(1.9	)
Foreign taxes		2.0				2.5				4.5
State taxes, net		3.8				3.7				4.0
Permanent differences		3.3				3.0				3.9
Stock based compensation		0.2				0.3				0.3
Rate differential on foreign operations		0.1				-				0.2
Other		1.7				1.0				1.6
Effective tax rate		43.0		%		42.1		%		(295.2	)	%

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluates all available positive and negative evidence, and weights the evidence based on its objectivity.

During the fiscal year ended March 31, 2015, the Company determined based on its consideration of the weight of positive and negative evidence that there was sufficient positive evidence that most of its federal, state and certain foreign deferred tax assets were more likely than not recoverable as of March 31, 2015. Accordingly, the Company recorded a $101.5 million reversal of the valuation allowance in the year ended March 31, 2015.

As of March 31, 2017 and 2016, respectively, the Company maintained a valuation allowance of $2.5 million and $2.4 million for deferred tax assets related to NOL carryforwards in certain foreign jurisdictions in which the Company has had limited or no history of profitability. Based on the review of all available evidence, the Company recorded a valuation allowance to reduce these deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2017 and 2016.

Changes in the valuation allowance for deferred tax assets during the fiscal years ended March 31, 2017, 2016 and 2015 were as follows:

		2017			2016				2015
		(in $000's)
Valuation allowance as of beginning of year	$		2,418	$		2,912		$		102,093
Decreases recorded as benefit to income tax provision			-			(1,171	)			(101,468	)
Increases due to foreign net operating loss in certain foreign jurisdictions			50			677				2,287
Valuation allowance as of end of year	$		2,468	$		2,418		$		2,912

At March 31, 2017, the Company had federal net operating loss carryforwards, or NOLs, of approximately $167.3 million which expire in varying years from fiscal 2019 through fiscal 2035. At March 31, 2017, the Company had foreign NOLs of approximately $46.9 million, primarily in Germany, U.K., and France, which do not expire. In addition, at March 31, 2017, the Company had federal and state research and development credit carryforwards of approximately $13.7 million and $7.8 million, respectively, which expire in varying years from fiscal 2017 through fiscal 2036.

The entire amount of federal NOL of $167.3 million relates to stock-based compensation tax deductions in excess of stock-based compensation expense for financial reporting purposes (“excess tax benefits”). Excess tax benefits are realized when they reduce income taxes payable, as determined using a “with and without” method, and are currently credited to additional paid-in capital rather than as a reduction of the income tax provision. During the year ended March 31, 2017, the Company realized excess tax benefits from federal and state tax deductions of $12.0 million which were credited to additional paid-in capital.

As described in Note 2 above, the Company will adopt ASU 2016-09 during the first quarter of fiscal 2018. The Company believes that the adoption of ASU 2016-09 will have a significant impact on the Company’s consolidated financial statements, most notably, the requirement to recognize certain tax benefits or shortfalls upon a restricted stock unit vesting or stock option exercises in the income tax provision in the consolidated statement of operations. Upon adoption in the first quarter of fiscal 2018, the Company expects to record a cumulative-effect adjustment, on a modified-retrospective basis, within retained earnings for excess tax benefits not previously recognized as net deferred tax assets. The Company also anticipates that ASU 2016-09 will introduce more volatility to its effective income tax rate, net income and earnings per share due to the effect of tax benefits or shortfalls related to restricted stock unit vestings or stock option exercises.

When applicable, the Company accrues for the effects of uncertain tax positions and the related potential penalties and interest through income tax expense. As of March 31, 2017 and 2016, the Company has no material uncertain tax positions and no interest and penalties were recognized during the years ended March 31, 2017, 2016 and 2015, respectively.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. Fiscal years 2012 through 2016 remain open to examination in Germany and Abiomed Europe GmbH, the Company’s main operating subsidiary in Germany is currently being audited for those years. All tax years remain subject to examination by the Internal Revenue Service and state tax authorities, because the Company has net operating loss and tax credit carryforwards which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing authorities if the carryforwards are utilized.