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Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Taxes
S.    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:
 
 
  
2020
 
 
2019
 
 
2018
 
 
  
(in thousands)
 
Income before income taxes:
  
      
 
      
 
      
U.S.
  
$
312,153
 
 
$
192,442
 
 
$
189,691
 
Non-U.S.
  
 
588,862
 
 
 
333,330
 
 
 
278,110
 
    
 
 
    
 
 
    
 
 
  
 
  
$
901,015
 
 
$
525,772
 
 
$
467,801
 
    
 
 
    
 
 
    
 
 
  
Provision (benefit) for income taxes:
  
      
 
      
 
      
Current:
  
      
 
      
 
      
U.S. Federal
  
$
58,678
 
 
$
19,297
 
 
$
(59,122
) 
Non-U.S.
  
 
75,193
 
 
 
52,810
 
 
 
45,083
 
State
  
 
(1,315
) 
 
 
(4,347
) 
 
 
1,721
 
    
 
 
    
 
 
    
 
 
  
 
  
 
132,556
 
 
 
67,760
 
 
 
(12,318
) 
    
 
 
    
 
 
    
 
 
  
Deferred:
  
      
 
      
 
      
U.S. Federal
  
 
(12,604
) 
 
 
(4,522
) 
 
 
29,252
 
Non-U.S.
  
 
(5,127
) 
 
 
(8,007
) 
 
 
(1,243
) 
State
  
 
2,043
 
 
 
3,073
 
 
 
331
 
    
 
 
    
 
 
    
 
 
  
 
  
 
(15,688
) 
 
 
(9,456
) 
 
 
28,340
 
    
 
 
    
 
 
    
 
 
  
Total provision for income taxes:
  
$
116,868
 
 
$
58,304
 
 
$
16,022
 
    
 
 
    
 
 
    
 
 
  
Income tax expense for 2020, 2019 and 2018 totaled $116.9 million, $58.3 million, and $16.0 million, respectively. The effective tax rate for 2020, 2019 and 2018 was 13.0%, 11.1% and 3.4%, 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. 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 could not be calculated with precision until further clarification and guidance was 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 recorded $186.0 million of additional income tax expense in the fourth quarter of 2017 which represented 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 that date. The $186.0 million was 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. In accordance with the requirements of SAB 118, in the fourth quarter of 2018, Teradyne completed its analysis of the effect of the Tax Reform Act based on the application of the most recently available guidance as of December 31, 2018 and recorded $49.5
 
million of net income tax benefit. The net benefit consisted of $51.7 million of benefit resulting from a reduction in the estimate of the one-time transition tax on the mandatory deemed repatriation of foreign earnings and an expense of $2.2 million associated with the impact of correlative adjustments on uncertain tax positions.
Teradyne has made an accounting policy election to account for global intangible low-taxed income (“GILTI”) as a component of tax expense in the period in which Teradyne is subject to the rules and therefore did not provide any deferred tax impacts of GILTI in its consolidated financial statements.
The increase in the effective tax rate from 2019 to 2020 is primarily attributable to a reduction in the benefit from releases of reserves for uncertain tax positions and a reduction in the benefit from foreign tax credits. These increases in expense were partially offset by a decrease in the transition tax on the mandatory deemed repatriation of foreign earnings and shift in the geographic distribution of income, which increases the income subject to taxation in lower tax rate jurisdictions relative to higher tax rate jurisdictions.
On July 27, 2015, in Altera Corp. (“Altera”) v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS appealed the decision in June 2016. On July 24, 2018, the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) issued a decision that was subsequently withdrawn and a reconstituted panel conferred on the appeal. On June 7, 2019, the Ninth Circuit upheld the cost-sharing regulations. On November 12, 2019 the Ninth Circuit denied Altera’s petition for rehearing of its case. Altera’s application for certiorari to the Supreme Court was declined on June 22, 2020. In the fourth quarter of 2019 and 2020, Teradyne recognized tax expense of approximately $6.3 million and $2.3 million, respectively, related to the inclusion of stock-based compensation in its intercompany cost-sharing arrangement.
The increase in the effective tax rate from 2018 to 2019 is primarily attributable to increases in expense associated with GILTI and the transition tax on the mandatory deemed repatriation of foreign earnings. These increases in expense were partially offset by increased benefit from the U.S. foreign derived intangible income deduction, foreign tax credits and a net reduction of reserves for uncertain tax positions.
A reconciliation of the effective tax rate for the years 2020, 2019 and 2018 is as follows:
 
 
  
2020
 
 
2019
 
 
2018
 
U.S. statutory federal tax rate
  
 
21.0
% 
 
 
21.0
% 
 
 
21.0
% 
U.S. global intangible low-taxed income
  
 
5.7
 
 
 
6.2
 
 
 
0.3
 
State income taxes, net of federal tax benefit
  
 
0.3
 
 
 
0.5
 
 
 
0.1
 
Foreign taxes
  
 
(5.6
) 
 
 
(4.0
) 
 
 
(2.0
) 
Foreign tax credits
  
 
(4.8
) 
 
 
(5.9
) 
 
 
(2.2
) 
U.S. foreign derived intangible income
  
 
(2.2
) 
 
 
(2.6
) 
 
 
(1.8
) 
U.S. research and development credit
  
 
(1.3
) 
 
 
(1.8
) 
 
 
(2.2
) 
Equity compensation
  
 
(0.6
) 
 
 
(0.7
) 
 
 
(1.2
) 
Uncertain tax positions
  
 
(0.1
) 
 
 
(4.3
) 
 
 
1.0
 
U.S. transition tax
  
 
—
 
 
 
 
 
1.9
 
 
 
(10.5
) 
Impact of rate change on deferred taxes
  
 
—
  
 
 
 
—
 
 
 
 
 
0.3
 
Other, net
  
 
0.6
 
 
 
0.8
 
 
 
0.6
 
    
 
 
    
 
 
    
 
 
  
 
  
 
13.0
% 
 
 
11.1
% 
 
 
3.4
% 
    
 
 
    
 
 
    
 
 
  
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 Singapore tax holiday for the years ended December 31, 2020, 2019 and 2018 were $29.9 million or $0.16 per diluted share, $15.1 million or $0.08 per diluted share and $11.9 million or $0.06 per diluted share, respectively. In November 2020, Teradyne entered into an agreement with the Singapore Economic Development Board which extended our Singapore tax holiday under substantially similar terms to the agreement which expired on December 31, 2020. The new tax holiday is scheduled to expire on December 31, 2025.
Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2020 and 2019 were as follows:
 
 
  
2020
 
 
2019
 
 
  
(in thousands)
 
Deferred tax assets:
  
      
 
      
Tax credits
  
$
87,595
 
 
$
79,480
 
Accruals
  
 
33,156
 
 
 
25,424
 
Pension liabilities
  
 
28,348
 
 
 
24,459
 
Inventory valuations
  
 
18,427
 
 
 
18,572
 
Lease liability
  
 
12,627
 
 
 
13,093
 
Deferred revenue
  
 
9,235
 
 
 
7,622
 
Equity compensation
  
 
6,543
 
 
 
7,042
 
Vacation accrual
  
 
5,890
 
 
 
4,768
 
Investment impairment
  
 
3,292
 
 
 
3,292
 
Net operating loss carryforwards
  
 
1,823
 
 
 
2,705
 
Other
  
 
626
 
 
 
187
 
    
 
 
    
 
 
  
Gross deferred tax assets
  
 
207,562
 
 
 
186,644
 
Less: valuation allowance
  
 
(84,962
) 
 
 
(77,177
) 
    
 
 
    
 
 
  
Total deferred tax assets
  
$
122,600
 
 
$
109,467
 
    
 
 
    
 
 
  
Deferred tax liabilities:
  
      
 
      
Depreciation
  
$
(14,525
) 
 
$
(18,238
) 
Intangible assets
  
 
(12,726
) 
 
 
(16,705
) 
Right of use assets
  
 
(10,688
) 
 
 
(11,197
) 
Contingent consideration
  
 
(3,515
 )
 
 
 
 — 
 
Marketable securities
  
 
(3,344
) 
 
 
(1,601
) 
Other
  
 
(710
) 
 
 
(611
) 
    
 
 
    
 
 
  
Total deferred tax liabilities
  
$
(45,508
) 
 
$
(48,352
) 
    
 
 
    
 
 
  
Net deferred assets
  
$
77,092
 
 
$
61,115
 
    
 
 
    
 
 
  
As of December 31, 2020 and 2019, Teradyne evaluated the likelihood that it would realize 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, 2020 and 2019, Teradyne maintained a valuation allowance for certain deferred tax assets of $85.0 million and $77.2 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, 2020, Teradyne had operating loss carryforwards that expire in the following years:
 
 
  
State

Operating Loss

Carryforwards
 
  
Foreign

Operating Loss

Carryforwards
 
 
  
(in thousands)
 
2021
  
$
333
 
  
$
 —  
 
2022
  
 
2,203
 
  
 
 —  
 
2023
  
 
3,368
 
  
 
 —  
 
2024
  
 
812
 
  
 
 —  
 
2025
  
 
191
 
  
 
 —  
 
2026-2030
  
 
7,452
 
  
 
 —  
 
2031-2035
  
 
2,147
 
  
 
68
 
Beyond 2035
  
 
73
 
  
 
 —  
 
Non-expiring
  
 
870
 
  
 
3,923
 
    
 
 
     
 
 
  
Total
  
$
17,449
 
  
$
3,991
 
    
 
 
     
 
 
  
Teradyne has approximately $116.3 million of tax credit carryforwards including federal business tax credits of approximately $1.9 million which expire in 2028 through 2030, and state tax credits of $114.3 million, of which $63.8 million do not expire and the remainder expires in the years 2021 through 2040.
Teradyne’s gross unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 were as follows:
 
 
  
2020
 
 
2019
 
 
2018
 
 
  
(in thousands)
 
Beginning balance as of January 1
  
$
21,180
 
 
$
43,395
 
 
$
36,263
 
Additions:
  
      
 
      
 
      
Tax positions for current year
  
 
1,082
 
 
 
1,322
 
 
 
4,716
 
Tax positions for prior years
  
 
66
 
 
 
8,043
 
 
 
2,626
 
Reductions:
  
      
 
      
 
      
Tax positions for prior years
  
 
(2,989
) 
 
 
(31,397
) 
 
 
(153
) 
Expiration of statutes
  
 
(1,436
) 
 
 
(183
) 
 
 
(57
) 
    
 
 
    
 
 
    
 
 
  
Ending balance as of December 31
  
$
17,903
 
 
$
21,180
 
 
$
43,395
 
    
 
 
    
 
 
    
 
 
  
Current year additions relate to federal and state research credits. Prior year additions primarily relate to stock-based compensation. Prior year reductions are primarily composed of federal and state reserves related to transfer pricing and research credits and resulted from the completion of the 2015 U.S. federal audit in the first quarter of 2019.
Of the $17.9 million of unrecognized tax benefits as of December 31, 2020, $12.0 million would impact the consolidated income tax rate if ultimately recognized. The remaining $5.9 million would impact deferred taxes if recognized.
As of December 31, 2020, Teradyne estimates that it is reasonably possible that the balance of unrecognized tax benefits may decrease approximately $1.6 million in the next twelve months as a result of a lapse of statutes of limitation. The estimated decrease relates to loss carryforwards, research credits and U.S. manufacturing activities deductions.
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, 2020 and 2019 amounted to $1.2
million and $1.4 million, respectively. For the years ended December 31, 2020, 2019 and 2018, benefit of $0.2 million, expense of $1.1 million and benefit of $0.1 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, 2020, all material state and local income tax matters have been concluded through 2015, all material federal income tax matters have been concluded through 2016 and all material foreign income tax matters have been concluded through 2012. 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, 2020, Teradyne is not permanently reinvested with respect to the unremitted earnings of non-U.S. subsidiaries to the extent that those earnings exceed local statutory and operational requirements. Remittance of those earnings is not expected to result in material income tax.