Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2017
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,
 
2017
 
2016
 
2015
United States
$
(336,278
)
 
$
(119,549
)
 
$
(9,949
)
Foreign
(25,723
)
 
(38,294
)
 
9,444

Loss before income taxes
$
(362,001
)
 
$
(157,843
)
 
$
(505
)


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

 
Year Ended December 31,
 
2017
 
2016
 
2015
Current provision:
 
 
 
 
 
Federal
$
(323
)
 
$
47

 
$
932

State
(136
)
 
227

 
355

Foreign
12,485

 
15,184

 
6,786

Total current provision
$
12,026

 
$
15,458

 
$
8,073

Deferred provision (benefit):
 
 
 
 
 
Federal
$
(9,173
)
 
$
(53,395
)
 
$
(2,691
)
State
(60
)
 
(2,070
)
 
—

Foreign
(7,680
)
 
(4,904
)
 
(3,761
)
Total deferred provision (benefit)
(16,913
)
 
(60,369
)
 
(6,452
)
Total income tax provision (benefit)
$
(4,887
)
 
$
(44,911
)
 
$
1,621



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,
 
2017
 
2016
 
2015
Income tax benefit at federal statutory rate
$
(126,700
)
 
$
(55,245
)
 
$
(177
)
State income tax, net of federal benefit
(272
)
 
(1,898
)
 
418

Permanent items
3,623

 
1,781

 
9,123

Change in fair value of financial instruments
(1,102
)
 
(8,836
)
 
(3,847
)
Goodwill impairment
55,016

 
12,321

 
—

Sound-recording settlements
—

 
8,556

 
—

Stock-based compensation
2,660

 
229

 
375

Tax credits
(116
)
 
(590
)
 
(586
)
Other
1,608

 
2,977

 
746

Uncertain tax positions
(420
)
 
3,858

 
708

Withholding taxes
5,090

 
4,732

 
3,431

Rate differential
(12,187
)
 
(2,158
)
 
(3,200
)
Change in enacted tax rate
28,431

 
173

 
(1,371
)
Change in valuation allowance
39,482

 
(10,811
)
 
(3,999
)
Income tax provision (benefit)
$
(4,887
)
 
$
(44,911
)
 
$
1,621



Significant factors impacting the 2017 effective tax rate include goodwill impairment on non-tax deductible goodwill, the reduction of the U.S. federal corporate tax rate from 35% to 21% for future tax years, and valuation allowance on deferred tax assets.
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,
 
2017
 
2016
Deferred tax assets:
 
 
 
Intangible assets and goodwill
$
15,272

 
$
20,196

Allowances and reserves
3,973

 
5,816

Accrued liabilities
5,135

 
8,793

Inventories
1,307

 
1,066

Investments in affiliates
—

 
—

Stock-based compensation
5,043

 
6,977

Tax credits
3,393

 
4,006

Net operating losses
98,249

 
68,489

Other
1,893

 
3,304

Total deferred tax assets
134,265

 
118,647

Less: valuation allowance
(85,393
)
 
(43,269
)
Net deferred tax assets
$
48,872

 
$
75,378

 
 
 
 
Deferred tax liabilities:
 
 
 
Property, plant and equipment
$
(11,345
)
 
$
(14,972
)
Intangible assets
(21,170
)
 
(37,590
)
Investments in affiliates
(28,530
)
 
(50,831
)
Debt costs
(2,696
)
 
(4,288
)
Other
(1,378
)
 
(854
)
Total deferred tax liabilities
(65,119
)
 
(108,535
)
Net deferred tax liabilities
$
(16,247
)
 
$
(33,157
)


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 adopted the provisions of this ASU effective January 1, 2017. The new standard eliminates the requirement that excess tax benefits be realized through a reduction in income taxes payable before a company can recognize them. As a result, the Company recorded a deferred tax asset of $1.7 million which was fully offset by a corresponding valuation allowance.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2017, the Company’s tax years for 2013 through 2016 are subject to examination by the tax authorities. With certain exceptions, as of December 31, 2017, 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, 2017, the Company has recorded a valuation allowance of $59.4 million and $26.0 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, 2016, the valuation allowance on domestic and foreign deferred tax assets were $33.1 million and $10.2 million, respectively.

As of December 31, 2017 and 2016, the Company had federal NOL carry-forwards of $283.5 million and $152.7 million, respectively, and in addition, the Company had State NOL carry-forwards of $146.2 million and $84.9 million, respectively. In addition, the Company had foreign NOL carry-forward from various jurisdictions of $124.0 million and $56.4 million as of December 31, 2017 and 2016, respectively. The Company’s federal, State and foreign NOLs will begin to expire during the fiscal years ending in December 31, 2019, 2027, 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.

Prior to the Tax Act, U.S. taxes were not provided for on cumulative earnings of the Company’s foreign subsidiaries as the Company had intended to invest the undistributed earnings indefinitely. However, as a result of the Tax Act, all of the accumulated earnings of its foreign subsidiaries were taxed for U.S. federal purposes. The Company has provisionally asserted that the $105.2 million earnings of its foreign subsidiaries will continue to be indefinitely reinvested. 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 provisions for U.S. states not conforming to the federal Tax Act and foreign withholding taxes may be required. It is not practical 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, 2017 and 2016, the liability for income taxes associated with uncertain tax positions was $8.7 million and $11.0 million, respectively.

The net decrease in the liabilities during 2017 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. The net amounts of $8.2 million and $10.7 million as of December 31, 2017 and 2016, 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, 2017, 2016 and 2015 (in thousands):

 
2017
 
2016
 
2015
Balance at beginning of year
$
11,048

 
$
4,637

 
$
4,237

Additions from business combinations
—

 
3,492

 
—

Increase to prior year positions
—

 
(34
)
 
—

Reversal of prior tax positions
(3,045
)
 
(147
)
 
—

Additions based on tax positions related to current year
725

 
3,100

 
400

Balance at end of year
$
8,728

 
$
11,048

 
$
4,637



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, 2017, 2016 and 2015, the Company had accrued $6.5 million, $6.1 million and $1.4 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, 2017, 2016 and 2015 (in thousands):

 
Amount
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

Increase in valuation allowance
42,124

Balance at December 31, 2017
$
85,393