Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

United States and foreign income (loss) from operations before income taxes was as follows (in thousands):

 
Year Ended December 31,
 
2016
 
2015
 
2014
United States
$
(119,549
)
 
$
(9,949
)
 
$
(51,809
)
Foreign
(38,294
)
 
9,444

 
5,189

Loss before income taxes
$
(157,843
)
 
$
(505
)
 
$
(46,620
)


The income tax provision based on the income (loss) from operations was as follows (in thousands):

 
Year Ended December 31,
 
2016
 
2015
 
2014
Current provision:
 
 
 
 
 
Federal
$
47

 
$
932

 
$
2,724

State
227

 
355

 
114

Foreign
15,184

 
6,786

 
12,804

Total current provision
15,458

 
8,073

 
15,642

Deferred provision (benefit):
 
 
 
 
 
Federal
(53,395
)
 
(2,691
)
 
(451
)
State
(2,070
)
 
—

 
37

Foreign
(4,904
)
 
(3,761
)
 
(4,654
)
Total deferred provision (benefit)
(60,369
)
 
(6,452
)
 
(5,068
)
Total income tax provision (benefit)
$
(44,911
)
 
$
1,621

 
$
10,574



Income taxes differ from the amounts computed by applying the federal income tax rate of 35%. A reconciliation of this difference is as follows (in thousands):

 
Year Ended December 31,
 
2016
 
2015
 
2014
Income tax benefit at federal statutory rate
$
(55,245
)
 
$
(177
)
 
$
(16,317
)
State income tax, net of federal benefit
(1,898
)
 
418

 
4

Permanent items
1,781

 
9,123

 
(153
)
Change in fair value of financial instruments
(8,836
)
 
(3,847
)
 
3,374

Goodwill impairment
12,321

 
—

 
—

Sound-recording settlements
8,556

 
—

 
—

Stock-based compensation
229

 
375

 
1,575

Tax credits
(590
)
 
(586
)
 
(626
)
Other
2,977

 
746

 
(1,376
)
Uncertain tax positions
3,858

 
708

 
2,597

Withholding taxes
4,732

 
3,431

 
3,386

Rate differential
(2,158
)
 
(3,200
)
 
(2,050
)
Change in enacted tax rate
173

 
(1,371
)
 
—

Change in valuation allowance
(10,811
)
 
(3,999
)
 
20,160

Income tax provision (benefit)
$
(44,911
)
 
$
1,621

 
$
10,574



The differences in the effective tax rates for years ended December 31, 2016, 2015 and 2014 were primarily due to foreign income taxes resulting from the Company’s foreign subsidiaries’ contribution to pretax income, changes in the ratio of permanent differences to income before income taxes and withholding taxes. The 2016 rate includes a nonrecurring benefit for the release of valuation allowances previously provided against certain US deferred tax asset resulting from the EMC Acquisition on July 27, 2016.

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 amounts used for income tax purposes. Significant components of the deferred income taxes are as follows (in thousands):

 
 December 31,
 
2016
 
2015
Deferred tax assets:
 
 
 
Intangible assets and goodwill
$
20,196

 
$
7,624

Allowances and reserves
5,816

 
2,925

Accrued liabilities
8,793

 
8,398

Inventories
1,066

 
567

Investments in affiliates
—

 
443

Stock-based compensation
6,977

 
4,527

Tax credits
4,006

 
4,714

Net operating losses
68,489

 
38,923

Other
3,304

 
2,589

Total deferred tax assets
118,647

 
70,710

Less: valuation allowance
(43,269
)
 
(53,199
)
Net deferred tax assets
$
75,378

 
$
17,511

 
 
 
 
Deferred tax liabilities:
 
 
 
Property, plant and equipment
$
(14,972
)
 
$
(2,756
)
Intangible assets
(37,590
)
 
(28,240
)
Investments in affiliates
(50,831
)
 
—

Debt costs
(4,288
)
 
(4,421
)
Other
(854
)
 
(3,715
)
Total deferred tax liabilities
(108,535
)
 
(39,132
)
Net deferred tax liabilities
$
(33,157
)
 
$
(21,621
)


The Company has excluded excess windfall tax benefits resulting from stock option exercises as components of the Company’s gross deferred tax assets and corresponding valuation allowance disclosures, as tax attributes related to such windfall tax benefits should not be recognized until they result in a reduction of taxes payable. The tax effected amount of gross unrealized net operating loss (“NOL”) carryforwards, and their corresponding valuation allowances resulting from stock option exercises was $1.7 million at December 31, 2016; the corresponding gross amount is $4.8 million. When realized, excess windfall tax benefits are credited to additional paid-in capital.

In March 2016, the FASB issued ASU 2016-09 to update several aspects of the accounting for share-based payment transactions, including the income tax consequences and classification of awards. The Company expects to adopt the provisions of this ASU beginning in its first quarter of fiscal 2017. As required under the update, the Company will prospectively adopt the provisions of this guidance related to the recognition of the excess tax benefits or deficiencies in the Consolidated Statement of Operations. Management is currently evaluating the impact of this standard on its consolidated financial statements.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2016, the Company’s tax years for 2012 through 2015 are subject to examination by the tax authorities. With certain exceptions, as of December 31, 2016, the Company’s tax returns for certain past years are still subject to examination by taxing authorities and the use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.

The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

As of December 31, 2016, the Company has recorded a valuation allowance of $33.1 million and $10.2 million against its domestic and certain foreign deferred tax assets, respectively, due to the uncertainties over its ability to realize future taxable income in those jurisdictions. As of December 31, 2015, the valuation allowance on domestic and foreign deferred tax assets were $49.5 million and $3.7 million, respectively.

As of December 31, 2016 and 2015, the Company had federal NOL carry-forwards of $152.7 million and $91.9 million, respectively, and in addition, the Company had State NOL carry-forwards of $84.9 million and $40.5 million, respectively. In addition, the Company had foreign NOL carry-forward from various jurisdictions of $56.4 million and $44.9 million as of December 31, 2016 and 2015, respectively. The Company’s federal, State and foreign NOLs will begin to expire during the fiscal years ending in December 31, 2026, 2017, and 2033 respectively. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable.

The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382. The Company has determined that $2.7 million of its net operating losses will expire because of the annual limitation.

As of December 31, 2016, U.S. taxes were not provided for on $145.3 million of cumulative earnings of the Company’s foreign subsidiaries as the Company has invested or expects to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. It is not practicable to calculate the deferred taxes associated with these earnings because of the variability of multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax credits may be available to reduce federal income taxes in the event of distribution.

As of December 31, 2016 and 2015, the liability for income taxes associated with uncertain tax positions was $11.0 million and $4.6 million, respectively.

The net increase in the liabilities during 2016 is primarily attributable to activity related to ongoing examinations by the Canada Revenue Agency regarding the taxability and presence of the subsidiary’s locations in Dubai and whether income derived from Dubai would have constituted taxable earnings subject to Canadian income tax. In addition, EMC had uncertain tax positions regarding taxable presence in non-US jurisdictions and may be subject to income tax to the extent it exceeded withholding tax, when applicable. The amount of $10.7 million and $4.5 million as of December 31, 2016 and 2015, respectively, if recognized, would favorably affect the Company’s effective tax rate.

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
2016
 
2015
 
2014
Balance at beginning of year
$
4,637

 
$
4,237

 
$
2,831

Additions from business combinations
3,492

 
—

 
—

Increase to prior year positions
(34
)
 
—

 
—

Reversal of prior tax positions
(147
)
 
—

 
(1,795
)
Additions based on tax positions related to current year
3,100

 
400

 
3,201

Balance at end of year
$
11,048

 
$
4,637

 
$
4,237



The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2016, 2015 and 2014, the Company had accrued $6.1 million, $1.4 million and $1.0 million, respectively, of interest and penalties related to uncertain tax positions.
 
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly decrease within the next 12 months as a result of the ongoing audits.
 
The following table summarizes the changes in the valuation allowance balance for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
Amount
Balance at December 31, 2013
$
50,782

Increase in valuation allowance
22,877

Balance at December 31, 2014
73,659

Acquired valuation allowance from business combination
(1,400
)
Decrease in valuation allowance
(19,060
)
Balance at December 31, 2015
53,199

Decrease in valuation allowance
(9,930
)
Balance at December 31, 2016
$
43,269