(17) Income Taxes
The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and includes a variety of other changes. As of December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Act; however, in certain cases, we have made a reasonable estimate of the effects on our existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to the enactment. The Company has recorded $13.2 million as an additional income tax benefit associated with the remeasurement of its deferred tax assets and liabilities due to the tax rate change. The Company did not record a provision related to the one-time transition tax on mandatory repatriation of undistributed foreign earnings and profits per the Act, since a preliminary analysis has determined that there is no accumulated earnings and profits.
On December 22, 2017, the FASB Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $13.2 million income tax benefit recorded in connection with the re-measurement of certain deferred tax assets and liabilities and its assessment of the one-time transition tax on undistributed foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017 and a preliminary review of the Act. We will recognize any changes to the provisional amounts as we refine the estimates of our cumulative temporary differences, finalize the calculation of the total post-1986 earnings and profits of our foreign subsidiaries and complete our interpretations of the applications of the Act.
The domestic and foreign components of (loss) income before income taxes were as follows:
|
(In thousands) |
|
Year ended December 31, 2017 |
|
|
Year ended December 31, 2016 |
|
|
Year ended December 31, 2015 |
|
|||
|
Domestic |
|
$ |
(172,560 |
) |
|
$ |
(36,454 |
) |
|
$ |
16,284 |
|
|
Foreign |
|
|
(79,325 |
) |
|
|
(5,814 |
) |
|
|
3,085 |
|
|
Total |
|
$ |
(251,885 |
) |
|
$ |
(42,268 |
) |
|
$ |
19,369 |
|
The benefit from (provision for) income taxes in 2017, 2016 and 2015 consists of current and deferred federal, state and foreign taxes as follows:
|
(In thousands) |
|
Year ended December 31, 2017 |
|
|
Year ended December 31, 2016 |
|
|
Year ended December 31, 2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(11,948 |
) |
|
$ |
(852 |
) |
|
$ |
(603 |
) |
|
State |
|
|
(12,653 |
) |
|
|
(4,517 |
) |
|
|
(2,773 |
) |
|
Foreign |
|
|
(91 |
) |
|
|
781 |
|
|
|
(960 |
) |
|
|
|
|
(24,692 |
) |
|
|
(4,588 |
) |
|
|
(4,336 |
) |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
42,322 |
|
|
|
9,465 |
|
|
|
(2,960 |
) |
|
State |
|
|
5,377 |
|
|
|
1,788 |
|
|
|
(1,015 |
) |
|
Foreign |
|
|
5,519 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
53,218 |
|
|
|
11,253 |
|
|
|
(3,975 |
) |
|
Total benefit from (provision for) income taxes |
|
$ |
28,526 |
|
|
$ |
6,665 |
|
|
$ |
(8,311 |
) |
As of December 31, 2017, Acorda’s U.S. consolidated Tax Group had utilized all of its available Federal net operating loss (NOL) carryforwards to offset its consolidated U.S. federal taxable income. The NOL carryforward that remains, approximately $144.4 million as of December 31, 2017 represents the NOL’s in a separate company federal income tax return and are offset entirely by a valuation allowance. These federal losses are expected to begin to expire in 2027.
In connection with the adoption of Accounting Standards Update 2016-09, “Compensation – Stock Compensation.” in the first quarter of 2017, the Company recorded an adjustment to accumulated deficit of $12.1 million to recognize net operating loss carryforwards, attributable to excess tax benefits on stock compensation that was not previously recognized in additional paid in capital.
After utilization of certain tax credits, the company expects to pay regular cash taxes on U.S. federal taxable income. The Company’s research and development and orphan drug credit carry-forwards of $34.5 million and $39.0 million as of December 31, 2017 and 2016, respectively, begin to expire in 2031. The Company expects to pay cash taxes in various U.S. states and Puerto Rico where it has operations and NOL carryforwards are not available or are limited.
The Company was subject to the alternative minimum tax during 2016 and 2015. The alternative minimum tax credit carryforwards of $4.8 million at December 31, 2017 and 2016 can be used to offset future regular income tax liability. Under the Act, any unused credits will become refundable over the next four years.
As of December 31, 2017, the Company had available state NOL carryforwards of approximately $167.9 million and $170.9 million as of December 31, 2017 and 2016, respectively. The state losses are expected to begin to expire in 2027, although not all states conform to the federal carryforward period and occasionally limit the use of net operating losses for a period of time.
The Company is no longer subject to federal income tax audits for tax years prior to 2014 however, such net operating losses utilized by the Company in years subsequent to 2002 is subject to review. In 2016, the company completed an IRS exam for the 2013 tax year. The Internal Revenue Service commenced an examination of the Company’s U.S. income tax return for 2015 in the third quarter of 2017. There have been no proposed adjustments at this stage of the examination.
The Internal Revenue Code of 1986 contains certain provisions that can limit a taxpayer's ability to utilize net operating loss and tax credit carryforwards in any given year resulting from cumulative changes in ownership interests in excess of 50 percent over a three-year period. These provisions were unchanged by the Act. The Company has determined that these limiting provisions were triggered during a prior year for both Acorda Therapeutics, Inc. and Neuronex, Inc., its wholly owned subsidiary. An additional limitation was triggered in 2014 for Civitas Therapeutics, Inc. and in 2016 for Biotie Therapies, Inc., both wholly owned subsidiaries of Acorda Therapeutics, Inc. The Company believes that such limitations are not expected to result in the expiration or loss of any of its federal net operating loss carryforwards and income tax credit carryforwards for Acorda and the Neuronex, Inc. and Civitas Therapeutics, Inc. acquisitions. However, the limitation triggered by the acquisition of Biotie Therapeutics, Inc. will result in an estimated $15.6 million of unused federal net operating loss carryforwards and $5.1 million of unused federal credit carryforwards expiring before they can be utilized. Future ownership changes may further limit the use of these carryforwards. Under the Act, U.S. net operating losses generated after December 31, 2017 can be carried forward indefinitely.
The Company has $65.3 million of net operating loss carryforwards outside of the U.S. as of December 31, 2017, that begin to expire in 2018 all of which are fully reserved with a valuation allowance.
The temporary differences between the book and tax treatment of income and expenses results in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that any portion of the deferred tax asset will not be recoverable, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted. The Company continued to maintain a full valuation allowance against its net U.S. and net foreign deferred tax assets of Biotie and recorded additional expense of $8.8 million and $28.5 million in each jurisdiction respectively, exclusive of the impact of Tax Reform but inclusive of the foreign rate differential of $15.1 million. Additionally, the Company recorded an additional $24.8 million valuation allowance against certain U.S. federal and state deferred taxes primarily related to stock based compensation. Due primarily to the impairments recorded during 2017, the deferred tax liabilities related to indefinite lived intangibles (i.e. naked credits) in Biotie US and Biotie Switzerland were reversed and tax benefit of $83.7 million and $5.4 million were recognized, respectively.
The reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
Year ended December 31, 2017 |
|
|
Year ended December 31, 2016 |
|
|
Year ended December 31, 2015 |
|
|||
|
U.S. federal statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State and local income taxes |
|
|
(0.1 |
)% |
|
|
(3.8 |
)% |
|
|
13.3 |
% |
|
Non-deductible payment to prior shareholders |
|
|
— |
|
|
|
— |
|
|
|
15.8 |
% |
|
Foreign income tax |
|
|
— |
|
|
|
1.2 |
% |
|
|
3.2 |
% |
|
Stock option compensation |
|
|
(0.5 |
)% |
|
|
(3.8 |
)% |
|
|
10.4 |
% |
|
Stock option shortfall |
|
|
(1.5 |
)% |
|
|
(6.5 |
)% |
|
|
— |
|
|
Research and development and orphan drug credits |
|
|
1.2 |
% |
|
|
28.9 |
% |
|
|
(42.9 |
)% |
|
Increase to Uncertain Tax Positions |
|
|
(0.3 |
)% |
|
|
(4.8 |
)% |
|
|
7.1 |
% |
|
Other nondeductible and permanent differences |
|
|
(0.4 |
)% |
|
|
(1.1 |
)% |
|
|
1.9 |
% |
|
Valuation allowance, net of foreign tax rate differential |
|
|
(19.8 |
)% |
|
|
(31.6 |
)% |
|
|
(0.9 |
)% |
|
Transaction cost |
|
|
— |
|
|
|
(5.9 |
)% |
|
|
— |
|
|
Gain or loss on hedging |
|
|
— |
|
|
|
8.2 |
% |
|
|
— |
|
|
Tax reform |
|
|
(2.3 |
)% |
|
|
— |
|
|
|
— |
|
|
Effective income tax rate |
|
|
11.3 |
% |
|
|
15.8 |
% |
|
|
42.9 |
% |
The Company’s overall effective tax rate is affected primarily by Biotie U.S. and foreign losses for which no benefit has been recognized and the related foreign tax rate differential offset by the reversal of the deferred tax liability related to indefinite lived intangibles, the generation of fewer research and development credits and revaluing of net deferred tax liabilities to the lower U.S. tax rate of 21% as a result of the Act. The effective tax rate related to state taxes is primarily driven by Acorda’s state tax return filings as a stand-alone entity, without the benefit of Civitas and Biotie’s losses. The state taxes reflect the deferred impact of customary state tax law and apportionment changes that occurred during the year; the state effective tax rate is not necessarily indicative of the company’s expected state tax rate for the foreseeable future. U.S. income taxes are not provided for unremitted earnings of international subsidiaries and affiliates where our intention is to reinvest these earnings permanently. In conjunction with the Act the Company is evaluating its unrepatriated earnings of its subsidiaries.
Provisions have been made for deferred taxes based on the differences between the basis of the assets and liabilities for financial statement purposes and the basis of the assets and liabilities for tax purposes using currently enacted tax rates and regulations that will be in effect when the differences are expected to be recovered or settled. The components of the deferred tax assets and liabilities are as follows:
|
(In thousands) |
|
December 31, 2017 |
|
|
December 31, 2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss and other carryforwards |
|
$ |
53,632 |
|
|
$ |
97,391 |
|
|
Tax credits |
|
|
31,699 |
|
|
|
35,489 |
|
|
Deferred revenue |
|
|
5,597 |
|
|
|
11,672 |
|
|
Stock based compensation |
|
|
24,531 |
|
|
|
34,700 |
|
|
Contingent consideration |
|
|
26,041 |
|
|
|
26,543 |
|
|
Employee compensation |
|
|
3,212 |
|
|
|
6,116 |
|
|
Legal reserve |
|
|
— |
|
|
|
2,707 |
|
|
Rebate and returns reserve |
|
|
8,215 |
|
|
|
7,582 |
|
|
Capitalized R&D |
|
|
11,295 |
|
|
|
10,025 |
|
|
Other |
|
|
12,368 |
|
|
|
4,096 |
|
|
Total deferred tax assets |
|
$ |
176,590 |
|
|
$ |
236,321 |
|
|
Valuation allowance |
|
$ |
(98,609 |
) |
|
$ |
(63,225 |
) |
|
Total deferred tax assets net of valuation allowance |
|
$ |
77,981 |
|
|
$ |
173,096 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(91,991 |
) |
|
|
(245,500 |
) |
|
Convertible debt |
|
|
(8,449 |
) |
|
|
(16,003 |
) |
|
Total deferred tax liabilities |
|
$ |
(100,440 |
) |
|
$ |
(261,503 |
) |
|
Net deferred tax liability |
|
$ |
(22,459 |
) |
|
$ |
(88,407 |
) |
The Company follows authoritative guidance regarding accounting for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The beginning and ending amounts of unrecognized tax benefits reconciles as follows:
|
(In thousands) |
|
Year ended December 31, 2017 |
|
|
Year ended December 31, 2016 |
|
|
Year ended December 31, 2015 |
|
|||
|
Beginning of period balance |
|
$ |
6,856 |
|
|
$ |
4,835 |
|
|
$ |
3,295 |
|
|
Increases for tax positions taken during a prior period |
|
|
687 |
|
|
|
570 |
|
|
|
308 |
|
|
Decreases for tax positions taken during a prior period |
|
|
(146 |
) |
|
|
— |
|
|
|
— |
|
|
Increases for tax positions taken during the current period |
|
|
— |
|
|
|
1,451 |
|
|
|
1,232 |
|
|
Reduction as a result of a lapse of statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
$ |
7,397 |
|
|
$ |
6,856 |
|
|
$ |
4,835 |
|
Due to the amount of the Company’s tax credit carryforwards, it has not accrued interest relating to these unrecognized tax benefits. Accrued interest and penalties, however, would be disclosed within the related liabilities lines in the consolidated balance sheet and recorded as a component of income tax expense. All of its unrecognized tax benefits, if recognized, would impact the effective tax rate.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. The Company has operations in the United States, Puerto Rico, Finland, Switzerland and Germany. Typically, the period for the statute of limitations ranges from 3 to 5 years, however, this could be extended due to the Company’s NOL carryforward position in a number of its jurisdictions. The tax authorities generally have the ability to review income tax returns for periods where the statute of limitations has previously expired and can subsequently adjust the NOL carryforward or tax credit amounts. Accordingly, the Company does not expect to reverse any portion of the unrecognized tax benefits within the next year.