INCOME TAXES
Income (loss) before income taxes consists of the following components (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year |
| 2017 | | 2016 | | 2015 |
United States | $ | 2,439 |
| | $ | (35,923 | ) | | $ | 127,281 |
|
Foreign | 24,866 |
| | 33,061 |
| | (6,040 | ) |
Total | $ | 27,305 |
| | $ | (2,862 | ) | | $ | 121,241 |
|
The components of the income tax provision are as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year |
| 2017 | | 2016 | | 2015 |
Current (expense) benefit: | | | | | |
Federal | $ | (23,835 | ) | | $ | (4,285 | ) | | $ | (15,862 | ) |
State | (476 | ) | | (541 | ) | | (2,871 | ) |
Foreign | (47,579 | ) | | (33,346 | ) | | (16,175 | ) |
| (71,890 | ) | | (38,172 | ) | | (34,908 | ) |
Deferred benefit (expense): | | | | | |
Federal | $ | 2,762 |
| | $ | 27,794 |
| | $ | 100,884 |
|
State (1) | 3,659 |
| | (31,229 | ) | | 3,928 |
|
Foreign | 21,606 |
| | 15,624 |
| | 5,158 |
|
| 28,027 |
| | 12,189 |
| | 109,970 |
|
Total | $ | (43,863 | ) | | $ | (25,983 | ) | | $ | 75,062 |
|
(1) In fiscal 2016, the state deferred tax expense included a $31.0 million income tax expense related to an increase in the valuation allowance for the deferred tax asset related to state net operating losses and tax credits.
A reconciliation of the (provision for) or benefit from income taxes to income tax (expense) or benefit computed by applying the statutory federal income tax rate to pre-tax income (loss) for fiscal years 2017, 2016 and 2015 is as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2017 | | 2016 | | 2015 |
| Amount | Percentage | | Amount | Percentage | | Amount | Percentage |
Income tax (expense) benefit at statutory federal rate | $ | (9,557 | ) | 35.00 | % | | $ | 1,002 |
| 35.00 | % | | $ | (42,434 | ) | 35.00 | % |
(Increase) decrease resulting from: | | | | | | | | |
State benefit (provision), net of federal (provision) benefit | (662 | ) | 2.42 |
| | (1,320 | ) | (46.14 | ) | | (6,710 | ) | 5.53 |
|
Tax credits | 15,352 |
| (56.22 | ) | | 15,459 |
| 540.21 |
| | 3,538 |
| (2.92 | ) |
Effect of changes in income tax rate applied to net deferred tax assets | 1,163 |
| (4.26 | ) | | (2,716 | ) | (94.92 | ) | | (20 | ) | 0.02 |
|
Foreign tax rate difference | (11,298 | ) | 41.38 |
| | 4,114 |
| 143.77 |
| | (13,342 | ) | 11.00 |
|
Foreign permanent differences | (8,432 | ) | 30.88 |
| | (1,700 | ) | (59.40 | ) | | — |
| — |
|
Change in valuation allowance | 1,363 |
| (4.99 | ) | | (25,120 | ) | (877.84 | ) | | 135,812 |
| (112.02 | ) |
Stock-based compensation | (3,228 | ) | 11.82 |
| | (5,362 | ) | (187.37 | ) | | (1,309 | ) | 1.08 |
|
Tax reserve adjustments | (21,789 | ) | 79.80 |
| | (8,699 | ) | (303.99 | ) | | (3,928 | ) | 3.24 |
|
Deemed dividend | (6,989 | ) | 25.60 |
| | (3,984 | ) | (139.21 | ) | | (2,751 | ) | 2.27 |
|
Domestic production activities deduction | — |
| — |
| | — |
| — |
| | 2,620 |
| (2.16 | ) |
Other income tax (expense) benefit | 214 |
| (0.79 | ) | | 2,343 |
| 81.89 |
| | 3,586 |
| (2.95 | ) |
| $ | (43,863 | ) | 160.64 | % | | $ | (25,983 | ) | (908.00 | )% | | $ | 75,062 |
| (61.91 | )% |
| | | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the basis used for income tax purposes. The deferred income tax assets and liabilities are measured in each taxing jurisdiction using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Significant components of the Company’s net deferred income taxes are as follows (in thousands):
|
| | | | | | | |
| Fiscal Year |
| 2017 | | 2016 |
Deferred income tax assets: | | | |
Inventory reserve | $ | 15,599 |
| | $ | 19,588 |
|
Equity compensation | 83,333 |
| | 93,340 |
|
Accumulated depreciation/basis difference | — |
| | 11,512 |
|
Net operating loss carry-forwards | 40,575 |
| | 52,050 |
|
Research and other credits | 92,793 |
| | 85,782 |
|
Employee benefits | 13,247 |
| | 12,659 |
|
Other deferred assets | 23,355 |
| | 19,876 |
|
Total deferred income tax assets | 268,902 |
| | 294,807 |
|
Valuation allowance | (33,104 | ) | | (34,682 | ) |
Total deferred income tax assets, net of valuation allowance | $ | 235,798 |
| | $ | 260,125 |
|
| | | |
Deferred income tax liabilities: | | | |
Amortization and purchase accounting basis difference | $ | (258,422 | ) | | $ | (322,578 | ) |
Accumulated depreciation/basis difference | (91,337 | ) | | (70,140 | ) |
Deferred gain | — |
| | (1,227 | ) |
Total deferred income tax liabilities | (349,759 | ) | | (393,945 | ) |
Net deferred income tax liabilities | $ | (113,961 | ) | | $ | (133,820 | ) |
| | | |
Amounts included in the Consolidated Balance Sheets: | | | |
Non-current assets | 17,550 |
| | 18,340 |
|
Non-current liabilities | (131,511 | ) | | (152,160 | ) |
| | | |
Net deferred income tax liabilities | $ | (113,961 | ) | | $ | (133,820 | ) |
The Company has recorded a $33.1 million and a $34.7 million valuation allowance against the U.S. deferred tax assets and deferred tax assets at foreign subsidiaries as of April 1, 2017 and April 2, 2016, respectively. These valuation allowances were established based upon management's opinion that it is more likely than not (a likelihood of more than 50 percent) that the benefit of these deferred tax assets may not be realized. Realization is dependent upon generating future income in the taxing jurisdictions in which the operating loss carryovers, credit carryovers, depreciable tax basis and other tax deferred assets exist. Management reevaluates the ability to realize the benefit of the deferred tax assets of the Company on a quarterly basis.
The valuation allowance against deferred tax assets decreased by $1.6 million in fiscal 2017. The decrease was comprised of a $5.2 million decrease in the valuation allowance for foreign deferred tax assets primarily resulting from the removal of the valuation allowance at a China manufacturing subsidiary as management has determined it is more likely than not that the related deferred tax assets will be realized. This decrease was offset by a $2.8 million increase in the valuation allowance for federal deferred tax assets for foreign tax credits and state deferred tax assets for net operating losses and tax credits and a $0.8 million increase for deferred tax assets for net operating losses at other foreign subsidiaries. At the end of fiscal 2017, a $0.8 million valuation allowance remained against deferred tax assets at other foreign subsidiaries and a $32.3 million valuation allowance remained against domestic deferred tax assets as management has determined it is more likely than not that the related deferred tax assets will not be realized.
During fiscal 2017 the China manufacturing subsidiary, which operates as a cost plus manufacturer for another Qorvo subsidiary, exited its start-up operational phase and generated sufficient income to substantially offset the losses earned in prior years. The balance of the cumulative pre-tax book loss is expected to be offset by income in the first half of fiscal 2018 as production at the assembly and test facility continues to increase as the Company continues to reduce its dependence on outside assembly and test subcontractors. After evaluating the positive and negative evidence, management determined that it was more likely than not that the deferred tax assets of this China manufacturing subsidiary would be realized and a valuation allowance would not be provided as of the end of fiscal 2017.
The valuation allowance against deferred tax assets increased by $20.9 million in fiscal 2016. The increase was comprised of a $20.2 million increase in the valuation allowance for state deferred tax assets for net operating losses and tax credits, a $5.0 million increase in the valuation allowance for foreign net operating loss deferred tax assets, and a $4.3 million decrease in the valuation allowance related to a deferred tax asset recorded in the initial purchase price accounting for the Business Combination. The Business Combination adjustment related to a deferred tax asset which was recorded during fiscal 2015 in the initial purchase price accounting with a full valuation allowance, but which deferred tax asset was determined in fiscal 2016 to not exist as of the acquisition date. Accordingly, in fiscal 2016, that deferred tax asset was removed along with the offsetting deferred tax asset valuation allowance. At the end of fiscal 2016, a $5.2 million valuation allowance remained against foreign deferred tax assets and a $29.5 million valuation allowance remained against domestic deferred tax assets as management has determined it is more likely than not that the related deferred tax assets will not be realized, effectively increasing the domestic net deferred tax liabilities.
During fiscal 2016, North Carolina enacted legislation to reduce the corporate income tax rate from 5% to 4% and phase-in over a three-year period a move to a single sales factor apportionment methodology. In addition, the Company underwent operational changes to leverage existing resources and capabilities of its Singapore subsidiary and consolidate operations and responsibilities associated with its foreign back-end manufacturing operations and foreign customers in that Singapore subsidiary. Together these changes result in a significant decrease in the amount of future taxable income expected to be allocated to North Carolina and other states in which the net operating loss and tax credit carryovers existed. As a result, it was no longer more likely than not that the deferred tax assets related to those state net operating loss and tax credit carryovers for which a valuation allowance was being provided will be used before they expire. The deferred tax asset for foreign net operating losses primarily relates to the China subsidiary which owns the internal assembly and test facility that became operational during fiscal 2016 and had incurred losses since inception.
The valuation allowance against deferred tax assets decreased by $129.5 million in fiscal 2015. The decrease was comprised of $135.7 million related to domestic deferred tax assets for which realization became more likely than not with the increase in domestic deferred tax liabilities related to domestic amortizable intangible assets arising in connection with the Business Combination and other changes in the net deferred tax assets for foreign subsidiaries during the fiscal year, offset by an increase of $6.2 million related to deferred tax assets acquired in the Business Combination that were not more likely than not of being realized. As of the end of fiscal 2015, a $0.2 million valuation allowance remained against foreign deferred tax assets and a $13.6 million valuation allowance remained against domestic deferred tax assets as it was more likely than not that the related deferred tax assets would not be realized, effectively increasing the domestic net deferred tax liabilities.
As of April 1, 2017, the Company had federal loss carryovers of approximately $202.6 million that expire in fiscal years 2020 to 2036 if unused and state losses of approximately $209.3 million that expire in fiscal years 2018 to 2036 if unused. Federal research credits of $104.8 million, federal foreign tax credits of $5.0 million, and state credits of $57.4 million may expire in fiscal years 2018 to 2037, 2018 to 2027, and 2018 to 2032, respectively. Federal alternative minimum tax credits of $3.2 million will carry forward indefinitely. Foreign losses in China of approximately $3.3 million and in the Netherlands of approximately $55.4 million expire in fiscal 2021 and fiscal years 2018 to 2026, respectively. Included in the amounts above are certain net operating losses and other tax attribute assets acquired in conjunction with acquisitions in the current and prior years. The utilization of acquired domestic assets is subject to certain annual limitations as required under Internal Revenue Code Section 382 and similar state income tax provisions.
The Company has continued to expand its operations and increase its investments in numerous international jurisdictions. These activities expose the Company to taxation in multiple foreign jurisdictions. It is management's opinion that current and future undistributed foreign earnings will be permanently reinvested. Accordingly, no provision for U.S. federal and state income taxes has been made thereon. It is not practical to estimate the additional tax that would be incurred, if any, if the permanently reinvested earnings were repatriated. At April 1, 2017, the Company has not provided U.S. taxes on approximately $993.0 million of undistributed earnings of foreign subsidiaries that have been indefinitely reinvested outside the U.S.
In the Business Combination, the Company acquired foreign subsidiaries with tax holiday agreements in Costa Rica and Singapore. These tax holiday agreements have varying rates and expire in March 2024 and December 2021, respectively. In February 2017, Singapore enacted legislation that will exclude from the Company's existing Development and Expansion Incentive grant the benefit of the reduced tax rate for intellectual property income earned after June 30, 2021. Incentives from these countries are subject to the Company meeting certain employment and investment requirements. Income tax expense decreased by $2.7 million (approximately $0.02 per basic and diluted share impact) in fiscal 2017 and $8.3 million (approximately $0.06 per basic and diluted share impact) in fiscal 2016 as a result of these agreements.
The Company’s gross unrecognized tax benefits totaled $90.6 million as of April 1, 2017, $69.1 million as of April 2, 2016, and $59.4 million as of March 28, 2015. Of these amounts, $84.4 million (net of federal benefit of state taxes), $64.2 million (net of federal benefit of state taxes), and $55.0 million (net of federal benefit of state taxes) as of April 1, 2017, April 2, 2016, and March 28, 2015, respectively, represent the amounts of unrecognized tax benefits that, if recognized, would impact the effective tax rate in each of the fiscal years.
A reconciliation of fiscal 2015 through fiscal 2017 beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| Fiscal Year |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 69,052 |
| | $ | 59,397 |
| | $ | 39,423 |
|
Additions based on positions related to current year | 20,036 |
| | 9,374 |
| | 1,246 |
|
Additions for tax positions in prior years | 1,878 |
| | 2,723 |
| | 23,986 |
|
Reductions for tax positions in prior years | (29 | ) | | (1,973 | ) | | (5,258 | ) |
Expiration of statute of limitations | (322 | ) | | (469 | ) | | — |
|
Ending balance | $ | 90,615 |
| | $ | 69,052 |
| | $ | 59,397 |
|
Of the fiscal 2015 additions to tax positions in prior years, $17.1 million was assumed by the Company in the Business Combination and relates to positions taken on tax returns for pre-acquisition periods.
It is the Company’s policy to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. During fiscal years 2017, 2016 and 2015, the Company recognized $2.1 million, $1.6 million, and $1.2 million, respectively, of interest and penalties related to uncertain tax positions. Accrued interest and penalties related to unrecognized tax benefits totaled $7.1 million, $5.0 million, and $3.4 million as of April 1, 2017, April 2, 2016 and March 28, 2015, respectively.
The unrecognized tax benefits of $90.6 million and accrued interest and penalties of $7.1 million at the end of fiscal 2017 are recorded on the balance sheet as a $16.6 million long-term liability, with the balance reducing the carrying value of the gross deferred tax assets.
Within the next 12 months, the Company believes it is reasonably possible that only a minimal amount of gross unrecognized tax benefits will be reduced as a result of reductions for tax positions taken in prior years where the only uncertainty was related to the timing of the tax deduction.
Income taxes payable of $31.7 million and $29.9 million as of April 1, 2017 and April 2, 2016, respectively, are included in "Other current liabilities" in the Consolidated Balance Sheets.
RFMD's and TriQuint's federal, North Carolina, and California tax returns for fiscal 2014 and calendar 2013, respectively, and subsequent tax years remain open for examination. The federal tax return for the short period ended January 1, 2015 for RFMD is currently under examination by the Internal Revenue Service and the Singapore tax return for calendar year 2012 is currently under examination by the Singapore tax authorities. The Company's China subsidiary in Beijing received notice in April 2017 for an audit of its calendar year 2013 through 2015 tax returns. An examination by the German taxing authorities of the returns for calendar years 2013 through 2015 was completed during fiscal 2017 with minimal adjustments and returns for subsequent fiscal tax years remain open for examination. The other material jurisdiction that is subject to examination by tax authorities is the U.K. (fiscal 2016 through present). Tax attributes (including net operating loss and credit carryovers) arising in earlier fiscal years remain open to adjustment.