Note 5—Income Taxes
The sources of income before income taxes were as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. |
|
$ |
153,735 |
|
|
$ |
68,222 |
|
|
$ |
15,897 |
|
|
Foreign |
|
|
128,895 |
|
|
|
95,394 |
|
|
|
44,945 |
|
|
Income before income taxes |
|
$ |
282,630 |
|
|
$ |
163,616 |
|
|
$ |
60,842 |
|
The income tax (benefit) provision consists of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
81,116 |
|
|
$ |
47,588 |
|
|
$ |
36,345 |
|
|
Foreign |
|
|
21,343 |
|
|
|
18,953 |
|
|
|
15,204 |
|
|
State |
|
|
3,319 |
|
|
|
13,915 |
|
|
|
6,237 |
|
|
Total |
|
|
105,778 |
|
|
|
80,456 |
|
|
|
57,786 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(144,719 |
) |
|
|
(38,571 |
) |
|
|
(25,083 |
) |
|
Foreign |
|
|
(2,820 |
) |
|
|
(4,148 |
) |
|
|
(9,367 |
) |
|
State |
|
|
(4,473 |
) |
|
|
(5,117 |
) |
|
|
(5,356 |
) |
|
Total |
|
|
(152,012 |
) |
|
|
(47,836 |
) |
|
|
(39,806 |
) |
|
Total |
|
$ |
(46,234 |
) |
|
$ |
32,620 |
|
|
$ |
17,980 |
|
The reconciliation between the expected tax expense and the actual tax (benefit) provision is computed by applying the U.S. federal corporate income tax rate of 35% to income before income taxes as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Computed “expected” tax expense |
|
$ |
98,921 |
|
|
$ |
57,265 |
|
|
$ |
21,295 |
|
|
(Decrease) increase in income tax expense resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes (net of federal income tax benefit) |
|
|
7,457 |
|
|
|
5,674 |
|
|
|
2,656 |
|
|
Foreign operations |
|
|
(36,186 |
) |
|
|
(33,614 |
) |
|
|
(11,281 |
) |
|
Enacted tax law changes |
|
|
(87,960 |
) |
|
|
— |
|
|
|
(1,021 |
) |
|
Excess tax benefits on stock-based compensation |
|
|
(13,637 |
) |
|
|
— |
|
|
|
— |
|
|
Effect of valuation allowance |
|
|
(3,332 |
) |
|
|
2,076 |
|
|
|
3,242 |
|
|
Uncertain tax positions |
|
|
(8,153 |
) |
|
|
6,515 |
|
|
|
3,903 |
|
|
Tax credits |
|
|
(644 |
) |
|
|
(3,748 |
) |
|
|
(3,493 |
) |
|
Non-deductible transaction costs |
|
|
— |
|
|
|
— |
|
|
|
2,354 |
|
|
Other |
|
|
(2,700 |
) |
|
|
(1,548 |
) |
|
|
325 |
|
|
(Benefit) provision for income taxes |
|
$ |
(46,234 |
) |
|
$ |
32,620 |
|
|
$ |
17,980 |
|
On December 22, 2017, the Tax Act was enacted and introduces significant changes to U.S. federal income tax law. The Tax Act, among other things, reduces the U.S. corporate income tax rate from 35% to 21% beginning in 2018, creates a new tax on GILTI and a BEAT, eliminates certain deductions, potentially limits deductions for interest expense and executive compensation, and imposes a mandatory one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017. In accordance with SAB 118, the Company has made reasonable estimates of the effects of the Tax Act, including any state tax impacts of the Tax Act, and has recorded provisional amounts in the Company’s consolidated financial statements as of December 31, 2017. The Company recorded a provisional tax benefit for the impact of the Tax Act of approximately $88.0 million, which is primarily comprised of an income tax benefit of $121.6 million related to the remeasurement of federal net deferred tax assets and liabilities and an income tax expense of $33.6 million related to the mandatory one-time tax on the accumulated earnings of the Company’s foreign subsidiaries, which the Company plans to pay in installments over the allowable eight years. The final impact on the Company from the Tax Act may differ from the aforementioned reasonable estimate due to the complexity of the new legislation. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the reasonable estimates. Pursuant to SAB 118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the accounting of the related tax impacts. The Company will continue to calculate the impact of the Tax Act and will record any resulting tax adjustments through the provision for income taxes in the period in which the adjustments are made.
The components of deferred income taxes at December 31, 2017 and 2016 are as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
||||||||||
|
|
|
Deferred |
|
|
Deferred |
|
|
Deferred |
|
|
Deferred |
|
||||
|
|
|
Tax |
|
|
Tax |
|
|
Tax |
|
|
Tax |
|
||||
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
||||
|
Tax credit carryforwards |
|
$ |
26,271 |
|
|
$ |
— |
|
|
$ |
21,905 |
|
|
$ |
— |
|
|
Net operating loss carryforwards |
|
|
24,158 |
|
|
|
— |
|
|
|
34,666 |
|
|
|
— |
|
|
Deferred compensation |
|
|
22,457 |
|
|
|
— |
|
|
|
26,196 |
|
|
|
— |
|
|
Accrued expenses |
|
|
13,340 |
|
|
|
— |
|
|
|
8,478 |
|
|
|
— |
|
|
Other |
|
|
936 |
|
|
|
— |
|
|
|
1,699 |
|
|
|
— |
|
|
Impaired investment interest |
|
|
568 |
|
|
|
— |
|
|
|
810 |
|
|
|
— |
|
|
Customer relationships |
|
|
— |
|
|
|
220,780 |
|
|
|
— |
|
|
|
351,448 |
|
|
Other intangible assets |
|
|
— |
|
|
|
53,716 |
|
|
|
— |
|
|
|
38,728 |
|
|
Acquired technology |
|
|
— |
|
|
|
53,255 |
|
|
|
— |
|
|
|
100,691 |
|
|
Unremitted foreign earnings |
|
|
— |
|
|
|
7,192 |
|
|
|
— |
|
|
|
6,111 |
|
|
Trade names |
|
|
— |
|
|
|
6,299 |
|
|
|
— |
|
|
|
10,404 |
|
|
Property and equipment |
|
|
— |
|
|
|
6,268 |
|
|
|
— |
|
|
|
2,989 |
|
|
Deferred revenue |
|
|
— |
|
|
|
247 |
|
|
|
— |
|
|
|
3,166 |
|
|
Total |
|
|
87,730 |
|
|
|
347,757 |
|
|
|
93,754 |
|
|
|
513,537 |
|
|
Valuation allowance |
|
|
(21,106 |
) |
|
|
— |
|
|
|
(31,362 |
) |
|
|
— |
|
|
Total |
|
$ |
66,624 |
|
|
$ |
347,757 |
|
|
$ |
62,392 |
|
|
$ |
513,537 |
|
At December 31, 2017 and 2016, the Company had accrued a deferred income tax liability for foreign withholding taxes of $7.2 million and $6.1 million, respectively, on unremitted earnings of its Canadian subsidiary. The Company recorded an income tax expense of $33.6 million related to the one-time transition tax on the deemed repatriation of its cumulative foreign earnings as of December 31, 2017. While no incremental U.S. federal taxes would be imposed on the actual distribution of those earnings as a result of the Tax Act, the Company had not accrued any deferred income taxes for withholding, foreign local or U.S. state income taxes on the unremitted earnings of its other foreign subsidiaries as those earnings are permanently reinvested.
At December 31, 2017, the Company had domestic state net operating loss carryforwards of $29.7 million, which will begin to expire in 2020. At December 31, 2017, the Company had foreign net operating loss carryforwards of $85.8 million, of which $85.6 million can be carried forward indefinitely. The remaining $0.2 million will begin to expire in 2018.
At December 31, 2017, the Company had tax credit carryforwards of $26.3 million relating to domestic and foreign jurisdictions, of which $23.4 million relate to domestic tax credits that are expected to be utilized before they begin to expire in 2018, $1.6 million relate to domestic tax credits that are not expected to be utilized before they begin to expire in 2022 and $1.3 million relate to foreign jurisdictions, of which $1.2 million are minimum alternative tax credit carryforwards at the Company’s India operations that are expected to be utilized before they begin to expire in 2020.
The Company has recorded valuation allowances of $21.1 million at December 31, 2017 related to certain foreign net operating loss carryforwards and tax credit carryforwards and $31.4 million at December 31, 2016 related to certain foreign net operating loss carryforwards and tax credit carryforwards. Of the $21.1 million valuation allowance recorded at December 31, 2017, $19.4 million relates to foreign net operating losses that do not expire. The change in the valuation allowance from 2016 to 2017 is primarily due to the utilization of foreign net operating losses, against which valuation allowances were previously recorded, during 2017.
The following table summarizes the activity related to the Company’s unrecognized tax benefits for the years ended December 31, 2017 and 2016 (in thousands):
|
Balance at December 31, 2015 |
|
$ |
55,740 |
|
|
Increases related to current year tax positions |
|
|
7,567 |
|
|
Increases related to prior tax positions |
|
|
4,896 |
|
|
Increases related to acquired tax positions |
|
|
453 |
|
|
Lapse in statute of limitation |
|
|
(5,629 |
) |
|
Foreign exchange translation adjustment |
|
|
(39 |
) |
|
Balance at December 31, 2016 |
|
|
62,988 |
|
|
Increases related to current year tax positions |
|
|
7,576 |
|
|
Decreases related to prior tax positions |
|
|
(4,758 |
) |
|
Settlements |
|
|
(6,012 |
) |
|
Lapse in statute of limitation |
|
|
(2,809 |
) |
|
Foreign exchange translation adjustment |
|
|
561 |
|
|
Balance at December 31, 2017 |
|
$ |
57,546 |
|
The Company accrued potential penalties and interest on the unrecognized tax benefits of $0.5 million and $(0.3) million during 2017 and 2016, respectively, and has recorded a total liability for potential penalties and interest, including penalties and interest related to acquired unrecognized tax benefits, of $3.6 million and $3.1 million at December 31, 2017 and 2016, respectively. The Company’s unrecognized tax benefits increased from 2015 to 2016 due to increases related to current and prior tax positions, offset partially by a lapse in the statute of limitations for certain domestic tax filings. The Company’s unrecognized tax benefits decreased from 2016 to 2017 due to settlements with federal and state tax authorities, a lapse in the statute of limitations for certain domestic tax filings and decreases in prior tax positions, offset partially by increased related to current tax positions. The Company believes it is reasonably possible that the amount of unrecognized tax benefits could decrease by $6.2 million due to the closure of tax statutes within the next 12 months. The Company’s unrecognized tax benefits as of December 31, 2017 relate to domestic and foreign taxing jurisdictions and are recorded in other long-term liabilities on the Company’s Consolidated Balance Sheet at December 31, 2017.
The Company is subject to examination by tax authorities throughout the world, including such major jurisdictions as the U.S., Canada, United Kingdom, India, California, Connecticut and New York. In these major jurisdictions, the Company is no longer subject to examination by tax authorities prior to tax years ending 2010, 2013, 2014, 2015, 2012, 2012 and 2011, respectively. The Company’s U.S. federal income tax returns are currently under audit for the tax periods ended December 31, 2010 through 2012 and for the tax period ending December 31, 2015. The Company’s California state income tax returns are currently under audit for the tax periods ended December 31, 2012 through 2015. The Company’s United Kingdom tax returns are currently under audit for the tax periods ending December 31, 2014 through 2015. The Company’s New York state income tax returns are currently under audit for the tax periods ended December 31, 2012 through 2014.