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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Taxes | Q. INCOME TAXES The components of income (loss) before income taxes and the provision (benefit) for income taxes as shown in the consolidated statements of operations were as follows:
|  | 2017 |  |  | 2016 |  |  | 2015 |
|  | (in thousands) |
Income (loss) before income taxes: |  |  |  |  |  |  |  |  |  |  |  |
U.S. |  | $ | 76,699 |  |  | $ | (341,018 | ) |  | $ | 56,270 |
Non-U.S. |  |  | 447,713 |  |  |  | 285,958 |  |  |  | 196,854 |
|  | $ | 524,412 |  |  | $ | (55,060 | ) |  | $ | 253,124 |
Provision (benefit) for income taxes: |  |  |  |  |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  | $ | 162,679 |  |  | $ | 7,750 |  |  | $ | 16,635 |
Non-U.S. |  |  | 64,313 |  |  |  | 41,579 |  |  |  | 35,707 |
State |  |  | 2,623 |  |  |  | 1,968 |  |  |  | 1,429 |
|  |  | 229,615 |  |  |  | 51,297 |  |  |  | 53,771 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Federal |  |  | 43,687 |  |  |  | (51,482 | ) |  |  | (574 | )
Non-U.S. |  |  | (6,476 | ) |  |  | (9,240 | ) |  |  | (7,761 | )
State |  |  | (106 | ) |  |  | (2,214 | ) |  |  | 1,211 |
|  |  | 37,105 |  |  |  | (62,936 | ) |  |  | (7,124 | )
Total provision (benefit) for income taxes: |  | $ | 266,720 |  |  | $ | (11,639 | ) |  | $ | 46,647 |
Income tax expense for 2017 totaled $266.7 million. Income tax benefit for 2016 totaled $11.6 million. Income tax expense for 2015 totaled $46.6 million. The effective tax rate for 2017, 2016, and 2015 was 50.9%, 21.1%, and 18.4% respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), making significant changes to the Internal Revenue Code. Among other changes, the Tax Reform Act permanently reduces the corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, shifts the U.S. tax regime from a worldwide system to a modified territorial tax system and requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Tax Reform Act has significant direct and indirect implications for accounting for income taxes under ASC 740 “Accounting for Income Taxes” some of which cannot be calculated with precision until further clarification and guidance is made available from tax authorities, regulatory bodies or the FASB. In light of this uncertainty, on December 22, 2017 the SEC issued Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” to address uncertainty in the application of U.S. GAAP when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with SAB 118, Teradyne has recorded a provisional amount of $186.0 million of additional income tax expense in the fourth quarter of 2017 which represents Teradyne’s best estimate of the impact of the Tax Reform Act in accordance with Teradyne’s understanding of the Tax Reform Act and available guidance as of the date of this filing. The $186.0 million is primarily composed of expense of $161.0 million related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings, $33.6 million of expense related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, and a benefit of $10.3 million associated with the impact of correlative adjustments on uncertain tax positions. Additional work is necessary to do a more detailed analysis of foreign earnings, potential correlative adjustments and the impact of future guidance from tax authorities on the calculations. Any subsequent adjustment to these amounts will be recorded in 2018 when the analysis is complete. In addition to the introduction of a modified territorial tax system, the Tax Reform Act includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions impose taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. Teradyne has made an accounting policy election to account for GILTI as a component of tax expense in the period in which Teradyne is subject to the rules and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017. The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. This provision is not effective for Teradyne until the 2018 calendar year. Teradyne does not presently expect that it will be subject to this tax. The increase in the effective tax rate from 2016 to 2017 is primarily attributable to the effect of changes in U.S Federal tax law which resulted in one-time charges for the U.S. transition tax and the impact of the reduction in the U.S. Federal corporate tax rate on Teradyne’s net U.S. deferred tax assets and uncertain tax positions. The change in the effective rate was also impacted by the U.S. non-deductible goodwill impairment charge recorded in 2016, a shift in the geographic distribution of income which increased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, decreases in the discrete benefits from tax reserve releases, increases in discrete expense from non-taxable foreign exchange gains and losses and an increase in the discrete benefit from stock-based compensation. The increase in the effective tax rate from 2015 to 2016 resulted from a shift in the geographic distribution of income which decreased income subject to taxation in the U.S. relative to lower tax rate jurisdictions, reductions in uncertain tax positions resulting from the expiration of statutes and the settlement of an audit, and an increase in non-taxable foreign exchange gains. These increases in the effective tax rate were partially offset by the effect of the non-deductible goodwill impairment charge, which reduced the benefit of the loss before income taxes in the U.S. A reconciliation of the effective tax rate for the years 2017, 2016, and 2015 is as follows:
|  | 2017 |  |  | 2016 |  |  | 2015 |
U.S. statutory federal tax rate |  |  | 35.0 | % |  |  | 35.0 | % |  |  | 35.0 | %
U.S. transition tax |  |  | 28.7 |  |  |  | — |  |  |  | — |
Impact of rate change on deferred tax |  |  | 6.4 |  |  |  | — |  |  |  | — |
Uncertain tax positions |  |  | 1.7 |  |  |  | (2.6 | ) |  |  | 2.2 |
Foreign taxes |  |  | (16.3 | ) |  |  | 78.0 |  |  |  | (13.8 | )
Foreign tax credits |  |  | (2.2 | ) |  |  | 49.1 |  |  |  | (2.7 | )
U.S. research and development credit |  |  | (1.6 | ) |  |  | 15.8 |  |  |  | (3.0 | )
Equity compensation |  |  | (0.8 | ) |  |  | (2.7 | ) |  |  | 0.6 |
Domestic production activities deduction |  |  | (0.3 | ) |  |  | 2.3 |  |  |  | (1.0 | )
State income taxes, net of federal tax benefit |  |  | — |  |  |  | 2.3 |  |  |  | 0.4 |
Goodwill impairment |  |  | — |  |  |  | (162.1 | ) |  |  | — |
U.S. alternative minimum tax credit |  |  | — |  |  |  | 3.7 |  |  |  | — |
Inventory cost capitalization |  |  | — |  |  |  | 1.8 |  |  |  | — |
Other, net |  |  | 0.3 |  |  |  | 0.5 |  |  |  | 0.7 |
|  |  | 50.9 | % |  |  | 21.1 | % |  |  | 18.4 | %
Teradyne qualifies for a tax holiday in Singapore by fulfilling the requirements of an agreement with the Singapore Economic Development Board under which certain headcount and spending requirements must be met. The tax savings attributable to the tax holiday for the years ended December 31, 2017, 2016, and 2015 were $24.8 million or $0.12 per diluted share, $17.0 million or $0.08 per diluted share, and $11.5 million or $0.05 per diluted share, respectively. The tax holiday is scheduled to expire on December 31, 2020. Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2017 and 2016 were as follows:
|  | 2017 |  |  | 2016 |
|  | (in thousands) |
Deferred tax assets: |  |  |  |  |  |  |  |
Tax credits |  | $ | 76,083 |  |  | $ | 57,313 |
Accruals |  |  | 27,508 |  |  |  | 27,247 |
Pension liabilities |  |  | 22,602 |  |  |  | 31,581 |
Inventory valuations |  |  | 17,793 |  |  |  | 31,227 |
Deferred revenue |  |  | 9,016 |  |  |  | 12,806 |
Equity compensation |  |  | 6,861 |  |  |  | 9,922 |
Net operating loss carryforwards |  |  | 5,440 |  |  |  | 5,244 |
Vacation accrual |  |  | 4,747 |  |  |  | 7,874 |
Other |  |  | 713 |  |  |  | 630 |
Gross deferred tax assets |  |  | 170,763 |  |  |  | 183,844 |
Less: valuation allowance |  |  | (63,919 | ) |  |  | (48,369 | )
Total deferred tax assets |  | $ | 106,844 |  |  | $ | 135,475 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Intangible assets |  | $ | (16,120 | ) |  | $ | (22,887 | )
Depreciation |  |  | (12,293 | ) |  |  | (17,117 | )
Marketable securities |  |  | (1,125 | ) |  |  | (210 | )
Total deferred tax liabilities |  | $ | (29,538 | ) |  | $ | (40,214 | )
Net deferred assets |  | $ | 77,306 |  |  | $ | 95,261 |
During 2017, Teradyne’s valuation allowance increased by $15.6 million, of which $11.3 million resulted from the effect of the reduction in the U.S. Federal corporate tax rate on the valuation allowance associated with state credits and net operating losses. The remaining change is primarily due to an increase in the deferred tax assets related to state tax credits generated in 2017. As of December 31, 2017 and 2016, Teradyne evaluated the likelihood that it would realize the deferred income taxes to offset future taxable income and concluded that it is more likely than not that a substantial majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. At December 31, 2017 and 2016, Teradyne maintained a valuation allowance for certain deferred tax assets of $63.9 million and $48.4 million, respectively, primarily related to state net operating losses and state tax credit carryforwards, due to the uncertainty regarding their realization. Adjustments could be required in the future if Teradyne estimates that the amount of deferred tax assets to be realized is more or less than the net amount recorded. At December 31, 2017, Teradyne had operating loss carryforwards that expire in the following years:
|  | U.S. Federal Operating Loss Carryforwards |  |  | State Operating Loss Carryforwards |  |  | Foreign Operating Loss Carryforwards |
|  | (in thousands) |
2018 |  | $ | — |  |  | $ | 9,943 |  |  | $ | — |
2019 |  |  | — |  |  |  | 174 |  |  |  | — |
2020 |  |  | — |  |  |  | 130 |  |  |  | — |
2021 |  |  | — |  |  |  | 2,919 |  |  |  | — |
2022 |  |  | — |  |  |  | 6,362 |  |  |  | — |
2023-2027 |  |  | — |  |  |  | 12,296 |  |  |  | — |
2028-2032 |  |  | — |  |  |  | 34,963 |  |  |  | — |
Beyond 2032 |  |  | — |  |  |  | 4,516 |  |  |  | 130 |
Non-expiring |  |  | — |  |  |  | — |  |  |  | 7,012 |
Total |  | $ | — |  |  | $ | 71,303 |  |  | $ | 7,142 |
Teradyne has approximately $123.5 million of tax credit carryforwards including federal business tax credits of approximately $28.3 million which expire in the years 2018 through 2037, alternative minimum tax credits of approximately $6.6 million which do not expire, and state tax credits of $88.6 million, of which $51.4 million do not expire and the remainder expires in the years 2018 through 2037. Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 were as follows:
|  | 2017 |  |  | 2016 |  |  | 2015 |
|  | (in thousands) |
Beginning balance, as of January 1 |  | $ | 38,958 |  |  | $ | 36,792 |  |  | $ | 30,418 |
Additions: |  |  |  |  |  |  |  |  |  |  |  |
Tax positions for current year |  |  | 8,208 |  |  |  | 9,766 |  |  |  | 6,626 |
Tax positions for prior years |  |  | 199 |  |  |  | 187 |  |  |  | 792 |
Reductions: |  |  |  |  |  |  |  |  |  |  |  |
Tax positions for prior years |  |  | (10,573 | ) |  |  | (1,960 | ) |  |  | (708 | )
Expiration of statutes |  |  | (325 | ) |  |  | (3,532 | ) |  |  | — |
Settlements with tax authorities |  |  | (204 | ) |  |  | (2,295 | ) |  |  | (336 | )
Ending balance as of December 31 |  | $ | 36,263 |  |  | $ | 38,958 |  |  | $ | 36,792 |
Current year and prior year additions include assessment of potential transfer pricing issues worldwide, federal and state tax credits and incentives, capitalization rules, and domestic production activities deductions. Reductions for tax positions for prior years primarily relates to the transition tax charge recorded in the fourth quarter of 2017. Of the $36.3 million of unrecognized tax benefits as of December 31, 2017, $24.8 million would impact the consolidated income tax rate if ultimately recognized. The remaining $11.5 million would impact deferred taxes if recognized. Given the potential outcome of the current examination as well as the impact of the current examination on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. However, an estimate of the range of reasonably possible adjustments cannot presently be made. Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items at December 31, 2017 and 2016 amounted to $0.3 million and $0.4 million, respectively. For the years ended December 31, 2017, 2016, and 2015, benefit of $0.1 million, $0.1 million, and $0.2 million, respectively, was recorded for interest and penalties related to income tax items. Teradyne is subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. As of December 31, 2017, all material state and local income tax matters have been concluded through 2012, all material federal income tax matters have been concluded through 2013 and all material foreign income tax matters have been concluded through 2011. However, in some jurisdictions, including the United States, operating losses and tax credits may be subject to adjustment until such time as they are utilized and the year of utilization is closed to adjustment. As of December 31, 2017, Teradyne expects to remit the earnings of non-U.S. subsidiaries to the U.S. to the extent that those earnings exceed local statutory and operational requirements. U.S. income taxes for earnings retained in non-U.S. subsidiaries to address local statutory and operational requirements have been included in the provisional transition tax included in income tax expense for the year ended December 31, 2017. Remittance of these earnings is not expected to result in material non-U.S. income tax.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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