INCOME TAXES
Income Tax Expense
The components of (loss) income before provision (benefit) for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (30,030 | ) | | $ | 4,305 |
| | $ | 38,719 |
|
Foreign | 70,333 |
| | 110,316 |
| | 1,086 |
|
Total | $ | 40,303 |
| | $ | 114,621 |
| | $ | 39,805 |
|
The components of the provision (benefit) for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current income tax provision (benefit) | |
| | |
| | |
|
Federal | $ | 18,174 |
| | $ | (8,090 | ) | | $ | 10,074 |
|
State | 52 |
| | 53 |
| | 265 |
|
Foreign | 1,849 |
| | 3,414 |
| | 135 |
|
Total current income tax provision (benefit) | $ | 20,075 |
| | $ | (4,623 | ) | | $ | 10,474 |
|
Deferred income tax benefit | |
| | |
| | |
|
Federal | (14,108 | ) | | (5,797 | ) | | (5,861 | ) |
State | (4,083 | ) | | (6,168 | ) | | (5,328 | ) |
Foreign | (89 | ) | | (368 | ) | | — |
|
Total deferred income tax benefit | (18,280 | ) | | (12,333 | ) | | (11,189 | ) |
Total income tax provision (benefit) | $ | 1,795 |
| | $ | (16,956 | ) | | $ | (715 | ) |
The U.S. Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Among other changes, this legislation: (1) reduces the U.S. federal corporate tax rate from 35% to 21%; (2) requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax-deferred; (3) creates new taxes on certain foreign sourced earnings; (4) provides a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) includes a new provision designed to currently tax certain global intangible low-taxed income (“GILTI”) of controlled foreign corporations, which allows for the possibility of using foreign tax credits (“FTCs”) and a deduction of up to 50 percent to reduce this income tax liability (subject to some limitations); (6) provides limitations on the use of FTCs to reduce the U.S. income tax liability from GILTI; and (7) provides limitations on net operating losses generated in the taxable years beginning after December 31, 2017, to 80 percent of taxable income. Accounting Standard Codification (“ASC”) 740 requires filers to record the effect of tax law changes in the period enacted. However, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment.
As of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of this legislation; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances, the one-time transition tax and provisional state taxes on future repatriations. For the items for which the Company was able to determine a reasonable estimate, the Company recognized a provisional amount of $31.4 million under SAB 118, which is included as a component of income tax expense from continuing operations.
The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) for which the Company has previously deferred from U.S. income taxes. For the Company’s one-time transition tax liability, it recorded a provisional tax expense of $23.3 million for its foreign subsidiaries. The Company has not yet completed its calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and the amounts held in cash or other specified assets.
As a result of the “deemed distributions” under the Act, the impact of GILTI on the Company’s future foreign earnings and lack of certain foreign governments’ withholding tax imposed on dividends, the Company no longer takes the position that most of its foreign earnings are permanently reinvested. For all other foreign operating subsidiaries, the Company continues to take the position that earnings are permanently reinvested. The Company recorded a provisional tax expense of $0.9 million for state taxes related to the repatriation of earnings which are no longer considered permanently reinvested. The Company has not yet completed its calculation of the total post-1986 foreign E&P for these foreign subsidiaries. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. As of December 31, 2017, there was $7.3 million of cumulative foreign earnings for which U.S. income taxes have not been provided.
The Company also re-measured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of the Company’s deferred tax balance was a tax expense of $7.3 million.
Deferred Tax Assets and Liabilities
Significant components of the Company’s net deferred tax assets at December 31, 2017 and 2016, are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Accrued expenses | $ | 4,129 |
| | $ | 3,726 |
|
Net operating loss carryforwards | 12,962 |
| | 5,472 |
|
Credit carryforwards | 23,249 |
| | 11,461 |
|
Stock-based compensation | 3,360 |
| | 3,950 |
|
Depreciation | 171 |
| | — |
|
Other | 332 |
| | 880 |
|
Total deferred tax assets | $ | 44,203 |
| | $ | 25,489 |
|
Deferred tax liabilities: | |
| | |
|
Depreciation | — |
| | (1,142 | ) |
Stock-based compensation | — |
| | — |
|
Other | (886 | ) | | (80 | ) |
Total deferred tax liabilities | (886 | ) | | (1,222 | ) |
Valuation allowance | (1,416 | ) | | (734 | ) |
Net deferred tax assets | $ | 41,901 |
| | $ | 23,533 |
|
The Company accounts for deferred taxes under ASC Topic 740, Income Taxes (“ASC 740”) which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. The Company evaluated its ability to realize the benefit of its net deferred tax assets and weighed all available positive and negative evidence both objective and subjective in nature. In determining the need for a valuation allowance, the weight given to positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Consideration was given to negative evidence such as the duration and severity of losses, as well as the expiration and limitation of tax attributes in various jurisdictions.
As of December 31, 2017, positive evidence included consolidated three-year cumulative profitability of $194.7 million ($13.0 million for the United States only). Additionally, after implementing a corporate restructuring of its international business in 2015 and determining that sufficient forecasted taxable income of appropriate character is expected to continue in future years, the Company believes the weight of the objectively verifiable positive evidence coupled with the subjective positive evidence from forecasted operating plans is sufficient to overcome the weight of any negative evidence. During the year ended December 31, 2017, the Company concluded it is more likely than not that it will realize the benefit of $41.9 million of the Company’s net deferred tax assets. As a result, the Company continues to maintain a partial valuation allowance of $1.4 million against its U.S. deferred tax assets, which include federal net operating loss and credit carryforwards limited under IRC Section 382 as well as state and foreign credits accumulated in jurisdictions in which management does not anticipate sufficient taxable income to utilize the credits. Management will continue to assess the applicability of a valuation allowance at each reporting period.
As of December 31, 2016, positive evidence included consolidated three-year cumulative profitability of $170.9 million ($59.5 million for the United States only). Additionally, the Company’s objectively verifiable positive evidence coupled with the subjective positive evidence from forecasted operating plans was sufficient to overcome the weight of any negative evidence. During the year ended December 31, 2016, the Company concluded it is more likely than not that it will realize the benefit of $23.5 million of the Company’s net deferred tax assets. As a result, the Company maintained a partial valuation allowance of $0.7 million against its U.S. deferred tax assets, which included federal net operating loss and credit carryforwards limited under IRC Section 382 as well as state credits accumulated in jurisdictions in which management does not anticipate sufficient taxable income to utilize the credits.
As of December 31, 2015, based on its assessment of the realizability of its deferred tax assets, the Company released substantially all of the valuation allowance maintained against its net U.S. deferred tax assets at the time, which resulted in a tax benefit of $9.9 million and a partial valuation allowance of $0.6 million as of December 31, 2015.
The table below summarizes changes in the deferred tax asset valuation allowance (in thousands):
|
| | | | | | | | | | | | | | |
Year Ended December 31, | | Beginning Balance | | Additions | | Reductions | | Ending Balance |
2015 | | $ | 10,461 |
| | — |
| | (9,907 | ) | | $ | 554 |
|
2016 | | $ | 554 |
| | 180 |
| | — |
| | $ | 734 |
|
2017 | | $ | 734 |
| | 682 |
| | — |
| | $ | 1,416 |
|
Tax Rate
A reconciliation of the provision (benefit) for income taxes computed at the statutory federal income tax rate to the provision (benefit) for income taxes as reflected in the consolidated financial statements is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Provision for income taxes at statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
(Decreases) increases resulting from: | |
| | |
| | |
|
Federal tax credits | (15.3 | ) | | (4.1 | ) | | (9.5 | ) |
Change in valuation allowance | 1.7 |
| | 0.2 |
| | (24.9 | ) |
State tax expense, net of federal benefit | (8.0 | ) | | (3.8 | ) | | (5.3 | ) |
Meals and entertainment | 0.4 |
| | 0.1 |
| | 0.2 |
|
Stock-based compensation expense | (32.9 | ) | | (18.0 | ) | | 0.6 |
|
Change in fair value of preferred stock warrants | — |
| | 1.0 |
| | 1.9 |
|
Non-deductible interest | — |
| | — |
| | 0.1 |
|
Domestic production activity deduction | — |
| | — |
| | (2.2 | ) |
Change in uncertain tax positions | 3.5 |
| | 1.9 |
| | 2.4 |
|
Change in federal rate due to tax reform | 18.0 |
| | — |
| | — |
|
Transition tax | 57.7 |
| | — |
| | — |
|
Foreign rate differential | (55.5 | ) | | (31.8 | ) | | 0.6 |
|
Foreign rate inclusion | 2.9 |
| | 4.5 |
| | 0.2 |
|
Other | (3.0 | ) | | 0.2 |
| | (0.9 | ) |
Effective income tax rate | 4.5 | % | | (14.8 | )% | | (1.8 | )% |
For the year ended December 31, 2017, the Company recorded an income tax provision of $1.8 million, representing an effective tax rate of 4.5%. The effective tax rate differs from the U.S. statutory tax rate primarily as a result of the jurisdictional mix of earnings and losses generated because of state income taxes and certain permanent expenses that are not deductible, stock-based compensation excess tax benefits, federal and state research and development credits and the impact of the Act.
Tax Attributes
As of December 31, 2017, the Company had $41.8 million and $65.2 million of federal and state net operating loss carryforwards, respectively, that expire at various dates through 2037. As of December 31, 2017, the Company had $15.9 million and $11.9 million of federal and state research and development and other credit carryforwards, respectively, that expire at various dates through 2037.
Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Utilization of some of the net operating loss carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations will result in the expiration of $0.8 million of the federal net operating loss carryforwards before utilization. The Company performed an Internal Revenue Code Section 382 study and determined that utilization of its annual net operating losses are limited to approximately $4.8 million per year through 2017, $2.3 million in 2018 and $1.4 million in years thereafter in connection with changes in control in 2009 and 2013.
Accounting for Uncertainty in Income Taxes
The Company recognizes, in its consolidated financial statements, the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The aggregate changes in gross unrecognized tax benefits during the years ended December 31, 2017 and 2016 were as follows (in thousands):
|
| | | |
Balance at December 31, 2015 | $ | 940 |
|
Increases for the tax positions taken during the year | 2,138 |
|
Balance at December 31, 2016 | $ | 3,078 |
|
Increases for the tax positions taken during the year | 1,426 |
|
Balance at December 31, 2017 | $ | 4,504 |
|
The Company had $4.5 million and $3.1 million of uncertain tax positions during the years ended December 31, 2017 and 2016, respectively. Included in the balance of unrecognized tax benefits as of December 31, 2017 and 2016 are $2.3 million and $1.5 million of tax benefits, respectively, that, if recognized, would impact the effective tax rate. There are no material amounts of interest or penalties recognized in the consolidated income statement or accrued on the consolidated balance sheet for any period presented. The Company does not expect any material changes in these uncertain tax benefits within the next 12 months.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. In the normal course of business, the Company is potentially subject to examination by tax authorities throughout the United States and other foreign jurisdictions in which the Company operates. All tax years since inception remain open to examination by major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in prior period tax years may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they have or will be used in a future period. The Company also files foreign tax returns in the foreign jurisdictions in which it operates when required. There are currently no federal, state or foreign examinations in process.