Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.1
Income Taxes
 12 Months Ended
Dec. 31, 2018
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,
 
2018
 
2017
 
2016
United States
$
(239,989
)
 
$
(336,278
)
 
$
(119,549
)
Foreign
6,458

 
(25,723
)
 
(38,294
)
Loss before income taxes
$
(233,531
)
 
$
(362,001
)
 
$
(157,843
)


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

 
Year Ended December 31,
 
2018
 
2017
 
2016
Current provision (benefit):
 
 
 
 
 
Federal
$
289

 
$
(323
)
 
$
47

State
211

 
(136
)
 
227

Foreign
10,473

 
12,485

 
15,184

Total current provision
$
10,973

 
$
12,026

 
$
15,458

Deferred benefit:
 
 
 
 
 
Federal
$
(6,924
)
 
$
(9,173
)
 
$
(53,395
)
State
(331
)
 
(60
)
 
(2,070
)
Foreign
(650
)
 
(7,680
)
 
(4,904
)
Total deferred benefit
(7,905
)
 
(16,913
)
 
(60,369
)
Total income tax provision (benefit)
$
3,068

 
$
(4,887
)
 
$
(44,911
)


Income taxes differ from the amounts computed by applying the federal income tax rate of 21% for 2018 and 35% for 2017 and 2016. A reconciliation of this difference is as follows (in thousands):

 
Year Ended December 31,
 
2018
 
2017
 
2016
Income tax benefit at federal statutory rate
$
(49,042
)
 
$
(126,700
)
 
$
(55,245
)
State income tax, net of federal benefit
(185
)
 
(272
)
 
(1,898
)
Permanent items
633

 
3,623

 
1,781

Loss on distribution in kind
(23,755
)
 
—

 
—

Change in fair value of financial instruments
(4
)
 
(1,102
)
 
(8,836
)
Goodwill impairment
—

 
55,016

 
12,321

Sound-recording settlements
—

 
—

 
8,556

Stock-based compensation
2,700

 
2,660

 
229

Tax credits
(106
)
 
(116
)
 
(590
)
Other
(12,636
)
 
1,608

 
2,977

Uncertain tax positions
107

 
(420
)
 
3,858

Withholding taxes
9,137

 
5,090

 
4,732

Rate differential
6,657

 
(12,187
)
 
(2,158
)
Change in enacted tax rate
54

 
28,431

 
173

Change in valuation allowance
69,508

 
39,482

 
(10,811
)
Income tax provision (benefit)
$
3,068

 
$
(4,887
)
 
$
(44,911
)


Significant factors impacting the effective tax rate include foreign withholding taxes 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,
 
2018
 
2017
Deferred tax assets:
 
 
 
Goodwill
$
6,734

 
$
15,272

Allowances and reserves
1,469

 
3,973

Accrued liabilities
3,908

 
5,135

Inventories
1,839

 
1,307

Stock-based compensation
4,363

 
5,043

Interest expense carryover
23,877

 
—

Tax credits
2,225

 
3,393

Net operating losses
144,010

 
98,249

Other
448

 
1,893

Total deferred tax assets
188,873

 
134,265

Less: valuation allowance
(161,511
)
 
(85,393
)
Net deferred tax assets
$
27,362

 
$
48,872

 
 
 
 
Deferred tax liabilities:
 
 
 
Property, plant and equipment
$
(8,737
)
 
$
(11,345
)
Intangible assets
(7,149
)
 
(21,170
)
Investments in affiliates
(17,253
)
 
(28,530
)
Debt costs
(2,550
)
 
(2,696
)
Other
—

 
(1,378
)
Total deferred tax liabilities
(35,689
)
 
(65,119
)
Net deferred tax liabilities
$
(8,327
)
 
$
(16,247
)


The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As of December 31, 2018, the Company’s tax years for 2012 through 2018 are subject to examination by the tax authorities. With certain exceptions, as of December 31, 2018, the Company’s tax returns for these 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, 2018, the Company has recorded a valuation allowance of $104.1 million and $57.4 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, 2017, the valuation allowance on domestic and foreign deferred tax assets were $59.4 million and $26.0 million, respectively.

As of December 31, 2018, and 2017, the Company had federal NOL carry-forwards of $374.5 million and $283.5 million, respectively, and in addition, the Company had state NOL carry-forwards of $161.2 million and $146.2 million, respectively. In addition, the Company had foreign NOL carry-forward from various jurisdictions of $220.1 million and $124.0 million as of December 31, 2018 and 2017, respectively. The Company’s federal, state and foreign NOLs will begin to expire during the fiscal years ending in December 31, 2019, 2024, and 2019 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 asserted that the $18.5 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, 2018, and 2017, the liability for income taxes associated with uncertain tax positions was $7.9 million and $8.7 million, respectively.

The net decrease in the liabilities during the year 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 $7.8 million and $8.2 million as of December 31, 2018 and 2017, 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, 2018, 2017 and 2016 (in thousands):

 
2018
 
2017
 
2016
Balance at beginning of year
$
8,728

 
$
11,048

 
$
4,637

Additions from business combinations
—

 
—

 
3,492

Increase to prior year positions
—

 
—

 
(34
)
Reversal of prior tax positions
(786
)
 
(3,045
)
 
(147
)
Additions based on tax positions related to current year
—

 
725

 
3,100

Balance at end of year
$
7,942

 
$
8,728

 
$
11,048



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, 2018, 2017 and 2016, the Company had accrued $6.3 million, $6.5 million, and $6.1 million, respectively, of interest and penalties related to uncertain tax positions, which are not included in the table above.
 
The following table summarizes the changes in the valuation allowance balance for the years ended December 31, 2018, 2017 and 2016 (in thousands):

 
Amount
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

Increase in valuation allowance
$
76,118

Balance at December 31, 2018
$
161,511