Income Taxes
The components of income before income taxes and equity in income (losses) of unconsolidated joint ventures are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (52,083 | ) | | $ | (61,226 | ) | | $ | (23,400 | ) |
Foreign | 126,630 |
| | 155,120 |
| | 138,565 |
|
| $ | 74,547 |
| | $ | 93,894 |
| | $ | 115,165 |
|
The components of the (benefit from) provision for income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 30,084 |
| | $ | 151 |
| | $ | 1,132 |
|
State | 2,607 |
| | 1,842 |
| | 1,507 |
|
Foreign | 30,601 |
| | 36,970 |
| | 30,584 |
|
Total current income tax expense | 63,292 |
| | 38,963 |
| | 33,223 |
|
Deferred: | | | | | |
Federal | (70,041 | ) | | (2,230 | ) | | (1,349 | ) |
State | (1,203 | ) | | (451 | ) | | 1,564 |
|
Foreign | (4,671 | ) | | (7,788 | ) | | (3,434 | ) |
Total deferred income tax benefit | (75,915 | ) | | (10,469 | ) | | (3,219 | ) |
Total income tax expense (benefit) | $ | (12,623 | ) | | $ | 28,494 |
| | $ | 30,004 |
|
Income taxes computed at the statutory U.S. federal income tax rate of 35.0% are reconciled to the benefit from income taxes as follows:
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Federal tax rate change | (56.0 | )% | | — | % | | — | % |
State income taxes, net of federal benefit | (5.5 | )% | | 0.3 | % | | 2.0 | % |
Tax on foreign earnings: | | | | | |
Foreign rate differential | (20.3 | )% | | (17.7 | )% | | (13.6 | )% |
Foreign earnings taxed in the U.S. | 60.7 | % | | 17.5 | % | | 7.3 | % |
Foreign dividends | 5.2 | % | | — | % | | — | % |
Non-U.S. research and development credits | (3.3 | )% | | (3.9 | )% | | (4.4 | )% |
Stock-based compensation | (39.9 | )% | | 1.9 | % | | 0.2 | % |
Nondeductible contingent consideration | 35.4 | % | | — | % | | — | % |
Valuation allowance | (28.0 | )% | | — | % | | — | % |
Change in liability for uncertain tax positions | (3.2 | )% | | — | % | | (0.6 | )% |
Nondeductible expenses | 2.2 | % | | 0.1 | % | | 0.3 | % |
Other | 0.8 | % | | (2.9 | )% | | (0.1 | )% |
Effective income tax rate | (16.9 | )% | | 30.3 | % | | 26.1 | % |
Components of the deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Net operating loss carryforwards | $ | 48,603 |
| | $ | 29,470 |
|
Accruals and reserves | 15,943 |
| | 12,986 |
|
Equity based compensation | 7,447 |
| | 17,392 |
|
Prepaid expenses and other | 13,492 |
| | 25,232 |
|
Deferred and unbilled revenue | 24,937 |
| | 25,718 |
|
Tax credits | 15,111 |
| | 5,295 |
|
| 125,533 |
| | 116,093 |
|
Valuation allowance | (25,226 | ) | | (21,689 | ) |
Total deferred tax assets (net of valuation allowance) | 100,307 |
| | 94,404 |
|
Identified intangibles | (190,115 | ) | | (148,576 | ) |
Depreciable, amortizable and other property | (13,434 | ) | | (12,963 | ) |
Deferred tax liabilities | (203,549 | ) | | (161,539 | ) |
Net deferred tax liability | $ | (103,242 | ) | | $ | (67,135 | ) |
Long-term deferred tax asset | $ | 8,939 |
| | $ | 6,568 |
|
Long-term deferred tax liability | $ | (112,181 | ) | | $ | (73,703 | ) |
The Company’s foreign subsidiaries are taxed separately in their respective jurisdictions. As of December 31, 2017, the Company has cumulative foreign net operating loss carryforwards of approximately $7.4 million. In addition, the Company has federal net operating loss carryforwards of approximately $165.6 million and state net operating loss carryforwards of approximately $506.8 million.
The carryforward periods for the Company’s net operating losses vary from five years to an indefinite number of years depending on the jurisdiction. The Company’s ability to offset future taxable income with net operating loss carryforwards may be limited in certain instances, including changes in ownership.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance under SAB 118 available as of the date of this filing and as a result has recorded $0.2 million as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets, deferred tax liabilities, and U.S. uncertain tax positions, based on the rates at which they are expected to reverse in the future, was a benefit of $41.7 million. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $77.6 million based on cumulative foreign earnings of $392.5 million. The Company also recorded a provisional tax benefit of $35.7 million related to the utilization of foreign tax credits against the one-time transition tax. In addition, the Company has recorded a valuation allowance against an estimated $12.8 million of excess foreign tax credits related to the transition tax inclusion. The Company is continuing to analyze the overall impact of the transition tax inclusion, including its foreign tax credit limitation position and will update the provisional estimate as it completes its analysis during the measurement period. Due to the complexity of the new law, the Company is still in the process of investigating the related accounting implications. Specifically, for the Global Intangible Low Tax Income (“GILTI”) tax the Company intends to make an accounting policy decision around whether to account for GILTI as a period cost in the relevant period, or to record deferred taxes related to the basis in the Company’s foreign subsidiaries once additional guidance is available for assessment.
The Company also has federal and state income tax credit carryforwards available to potentially offset future federal and state income tax of $12.8 million and $1.9 million, respectively. The federal credits expiring in ten years. The state credits begin expiring in 2022. The Company has provided a full valuation allowance against the benefits of these credits.
In determining the extent to which a valuation allowance for deferred tax assets is required, the Company evaluates all available evidence including projections of future taxable income, carry back opportunities, reversal of certain deferred tax liabilities, and other tax‑planning strategies. The valuation allowance at December 31, 2017 relates to the U.S. foreign tax credit carryforwards, certain foreign net operating losses, state net operating losses and state tax credit carryforwards. As of December 31, 2017, the Company has a U.S. net federal deferred tax liability. The Company has concluded that it no longer requires a valuation allowance that existed at the beginning of the year on its net federal deferred tax assets. As such, the valuation allowance of $21.2 million has been released during the year ended December 31, 2017.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 12,432 |
| | $ | 11,729 |
| | $ | 16,207 |
|
Additions based on tax positions related to current year | 1,641 |
| | 1,196 |
| | 1,333 |
|
Additions for income tax positions of prior years | 400 |
| | 542 |
| | 95 |
|
Impact of changes in exchange rates | 427 |
| | (127 | ) | | (594 | ) |
Impact of change in federal tax rate | (3,536 | ) | | — |
| | — |
|
Settlements with tax authorities | (108 | ) | | (559 | ) | | — |
|
Reductions for income tax positions for prior years | (3,174 | ) | | (349 | ) | | (4,308 | ) |
Reductions due to lapse of applicable statute of limitations | (171 | ) | | — |
| | (1,004 | ) |
Ending balance | $ | 7,911 |
| | $ | 12,432 |
| | $ | 11,729 |
|
As of December 31, 2017, 2016, and 2015, the total gross unrecognized tax benefits were $7.9 million, $12.4 million, and $11.7 million, respectively. As of December 31, 2017, the total amount of gross unrecognized tax benefits which, if recognized, would impact the Company’s effective tax rate is $7.9 million. The Company anticipates changes in total unrecognized tax benefits due to the expiration of statute of limitations within the next 12 months and an income tax audit resolution. Specifically, adjustments related to transfer pricing and foreign tax exposures are expected to be resolved in various jurisdictions. A reasonable estimate of the change in the total gross unrecognized tax benefit expected to be recognized as a result is $0.5 million as of the balance sheet date.
The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense. The Company recorded a decrease of $0.8 million, an increase of $0.1 million, and a decrease of $0.1 million during the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, the Company has a total of $1.6 million recognized on uncertain tax positions. To the extent interest and penalties are not incurred with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction in income tax expense.
The Company has analyzed filing positions in all of the significant federal, state and foreign jurisdictions where the Company is required to file income tax returns. The only periods subject to examination by the major tax jurisdictions where the Company does business are the 2009 through 2016 tax years.
As of December 31, 2017, there are no untaxed undistributed earnings of its foreign subsidiaries. This is due to the U.S. Tax Cuts and Jobs Act enacted December 22, 2017 that requires all untaxed foreign earnings to be currently taxed in the 2017 U.S. federal income tax return. With respect to the previously taxed income, as of December 31, 2017, an asset of $1.0 million was recorded for the effect of repatriating a portion of those foreign earnings. Aside from the portion expected to be actually repatriated in future years the Company has not provided for U.S. federal and foreign withholding taxes on those previously taxed earnings of its foreign subsidiaries. The Company is in the process of evaluating the impact of the new U.S. tax law on its permanent reinvestment assertion. No additional U.S. federal income taxes or foreign withholding taxes have been provided on accumulated earnings of foreign subsidiaries deemed to have been repatriated as part of the one-time transition tax. The Company's evaluation of the impact of the new U.S. tax law on its permanent reinvestment assertion is expected to be completed within the one-year measurement period as allowed by SAB 118.
A rollforward of the deferred tax asset valuation allowance accounts is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 21,689 |
| | $ | 23,205 |
| | $ | 16,142 |
|
Additions - excess benefit offset to NOL change | 12,623 |
| | — |
| | — |
|
Additions - purchase accounting | 219 |
| | — |
| | — |
|
Additions - other comprehensive income | — |
| | — |
| | 3,892 |
|
Additions - charged to expense | 12,863 |
| | 3,421 |
| | 3,770 |
|
Additions - U.S. federal tax rate change | 1,330 |
| | — |
| | — |
|
Deductions - charged to expense (including translation adjustments) | (23,498 | ) | | (4,937 | ) | | (599 | ) |
Ending balance | $ | 25,226 |
| | $ | 21,689 |
| | $ | 23,205 |
|
The valuation allowance at December 31, 2017 is primarily related to U.S. foreign tax credit carryforwards, state loss carryforwards, state credit carryforwards, and loss carryforwards in various foreign jurisdictions.