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Income Taxes | 12 Months Ended
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Sep. 30, 2013
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Our income (loss) before income taxes consisted of the following:
| Year ended September 30,
| 2014 |  | 2013 |  | 2012
| (in thousands)
Domestic | $ | 17,038 |  |  | $ | 6,112 |  |  | $ | (11,422 | )
Foreign | 169,074 |  |  | 120,122 |  |  | 132,158 |
Total income before income taxes | $ | 186,112 |  |  | $ | 126,234 |  |  | $ | 120,736 |
Our (benefit) provision for income taxes consisted of the following:
| Year ended September 30,
| 2014 |  | 2013 |  | 2012
| (in thousands)
Current: |  |  |  |  |
Federal | $ | 12,792 |  |  | $ | 7,081 |  |  | $ | 8,534 |
State | 2,062 |  |  | 1,512 |  |  | 1,733 |
Foreign | 31,010 |  |  | 13,586 |  |  | 41,101 |
| 45,864 |  |  | 22,179 |  |  | 51,368 |
Deferred: |  |  |  |  |
Federal | (13,200 | ) |  | (38,224 | ) |  | 106,041 |
State | (2,085 | ) |  | (4,718 | ) |  | 7,706 |
Foreign | (4,661 | ) |  | 3,228 |  |  | (8,981 | )
| (19,946 | ) |  | (39,714 | ) |  | 104,766 |
Total provision (benefit) for income taxes | $ | 25,918 |  |  | $ | (17,535 | ) |  | $ | 156,134 |
The reconciliation between the statutory federal income tax rate and our effective income tax rate is shown below:
| Year ended September 30,
| 2014 |  | 2013 |  | 2012
Statutory federal income tax rate | 35 | % |  | 35 | % |  | 35 | %
Change in valuation allowance | (11 | )% |  | (32 | )% |  | 103 | %
State income taxes, net of federal tax benefit | 1 | % |  | 1 | % |  | — | %
Federal and state research and development credits | — | % |  | (1 | )% |  | (1 | )%
Tax audit and examination settlements | — | % |  | (1 | )% |  | 1 | %
Foreign rate differences | (19 | )% |  | (26 | )% |  | (16 | )%
Foreign withholding tax | 3 | % |  | 5 | % |  | 3 | %
Subsidiary reorganization | — | % |  | — | % |  | 3 | %
Other, net | 5 | % |  | 5 | % |  | 1 | %
Effective income tax rate | 14 | % |  | (14 | )% |  | 129 | %
In 2014, our effective tax rate was a provision of 14% on pre-tax income of $186.1 million. Our effective tax rate was lower than the 35% statutory federal income tax rate due, in large part, to the reversal of a portion of the valuation allowance against U.S. deferred tax assets. We recorded benefits resulting from 2014 acquisitions as described below. Other factors impacting the effective tax rate include: our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. rate, foreign withholding taxes of $5.1 million and the establishment of a valuation allowance totaling $3.5 million in two foreign subsidiaries. In 2013, our effective tax rate was a benefit of 14% on pre-tax income of $126.2 million. Our effective tax rate was lower than the 35% statutory federal income tax rate due, in large part, to the reversal of a portion of the valuation allowance against deferred tax assets (primarily the U.S.). We recorded benefits resulting from 2013 acquisitions as described below, and a benefit of $7.9 million related to the release of a valuation allowance as a result of a pension gain recorded in accumulated other comprehensive income in equity. Additionally, our 2013 tax provision reflects a $2.0 million provision related to a research and development (R&D) cost sharing prepayment by a foreign subsidiary to the U.S. A similar prepayment was made in 2012 resulting in a $7.8 million provision in that year. This impact is included in foreign rate differences in our effective tax rate reconciliation above. This impact was offset by a corresponding increase in our valuation allowance in the U.S. Other factors impacting the rate include: our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. rate, foreign withholding taxes of $6.0 million and non-cash tax benefits of $5.3 million, included in foreign rate differences, recorded as a result of the conclusion of tax audits in several foreign jurisdictions. Acquisitions in 2014 and 2013 were accounted for as business combinations. Assets acquired, including the fair value of acquired tangible assets, intangible assets and assumed liabilities were recorded, and we recorded net deferred tax liabilities of $21.6 million and $38.7 million in 2014 and 2013, respectively, primarily related to the tax effect of the acquired intangible assets that are not deductible for income tax purposes. These deferred tax liabilities reduced our net deferred tax asset balance and resulted in a tax benefit of $18.1 million and $36.7 million in 2014 and 2013, respectively, to decrease our valuation allowance in jurisdictions where we have recorded a valuation allowance (primarily the U.S.). As these decreases in the valuation allowance are not part of the accounting for business combinations (the fair value of the assets acquired and liabilities assumed), they were recorded as an income tax benefit. In 2012, our effective tax rate was higher than the 35% statutory federal income tax rate due primarily to the recording of a $124.5 million charge to the income tax provision related to the establishment of a valuation allowance on U.S. net deferred tax assets. This increase was offset in part as a result of our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. rate. Our 2012 provision included $4.2 million related to the restructuring of our Canadian operations that resulted in a change in the tax status of the foreign legal entity and a discrete non-cash charge of $1.4 million related to the impact of a Japanese legislative change on our Japan entities' deferred tax assets. Additionally, our 2012 tax provision reflects a $7.8 million provision related to a research and development cost sharing prepayment by a foreign subsidiary to the U.S. We made a comparable prepayment in 2011. Foreign rate differences in our effective tax rate reconciliation above include the effect of the current year deferred charges associated with intercompany transactions. At September 30, 2014 and 2013, income taxes payable and income tax accruals recorded in accrued income taxes, other current liabilities, and other liabilities on the accompanying consolidated balance sheets were $17.7 million ($9.3 million in accrued income taxes, $1.3 million in other current liabilities and $7.1 million in other liabilities) and $14.4 million ($7.1 million in accrued income taxes, $2.1 million in other current liabilities and $5.2 million in other liabilities), respectively. At September 30, 2014 and 2013, prepaid taxes recorded in prepaid expenses on the accompanying consolidated balance sheets were $6.3 million and $11.5 million, respectively. We made net income tax payments of $25.5 million, $35.4 million and $53.0 million in 2014, 2013 and 2012, respectively. The significant temporary differences that created deferred tax assets and liabilities are shown below:
| September 30,
| 2014 |  | 2013
| (in thousands)
Deferred tax assets: |  |  |
Net operating loss carryforwards | $ | 65,640 |  |  | $ | 47,770 |
Foreign tax credits | 9,022 |  |  | 5,994 |
Capitalized research and development expense | 41,720 |  |  | 51,237 |
Pension benefits | 39,063 |  |  | 30,870 |
Deferred revenue | 67,433 |  |  | 63,976 |
Stock-based compensation | 16,744 |  |  | 18,045 |
Other reserves not currently deductible | 25,258 |  |  | 19,343 |
Amortization of intangible assets | 9,302 |  |  | 5,772 |
Other tax credits | 30,982 |  |  | 31,263 |
Depreciation | 3,157 |  |  | 3,077 |
Other | 8,218 |  |  | 4,396 |
Gross deferred tax assets | 316,539 |  |  | 281,743 |
Valuation allowance | (177,541 | ) |  | (156,547 | )
Total deferred tax assets | 138,998 |  |  | 125,196 |
Deferred tax liabilities: |  |  |
Acquired intangible assets not deductible | (110,003 | ) |  | (88,134 | )
Pension prepayments | (20,263 | ) |  | (15,607 | )
Deferred revenue | (1,446 | ) |  | (12,592 | )
Other | (4,484 | ) |  | (4,463 | )
Total deferred tax liabilities | (136,196 | ) |  | (120,796 | )
Net deferred tax assets | $ | 2,802 |  |  | $ | 4,400 |
In the fourth quarter of 2012, we recorded a $124.5 million non-cash charge to the income tax provision to establish a valuation allowance against substantially all of our U.S. net deferred tax assets. We weighed all available evidence, both positive and negative, and concluded that it was more likely than not (a likelihood of more than 50 percent) that substantially all of our U.S. deferred tax assets will not be realized. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends on the existence of sufficient taxable income of the same character during the carryback or carryforward period. We considered all sources of taxable income available to realize the deferred tax assets, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies. For U.S. tax return purposes, net operating loss (NOL) carryforwards and tax credits are generally available to be carried forward to future years, subject to certain limitations. At September 30, 2014, we had U.S. federal NOL carryforwards of $97.2 million that expire in 2019 to 2034. These include NOL carryforwards from acquisitions of $82.7 million, consisting of $63.5 million from Axeda and Atego and $19.2 million from prior acquisitions. The utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382. NOL's totaling $21.0 million relate to windfall tax benefits that have not been recognized, the impact of which will be recorded in APIC when realized. As of September 30, 2014, we had Federal R&D credit carryforwards of $17.7 million, which expire beginning in 2026 and ending in 2034, and Massachusetts R&D credit carryforwards of $21.3 million, which expire beginning in 2015 and ending in 2029. We also had foreign tax credits of $9.0 million, which expire beginning in 2023 and ending in 2024. A full valuation allowance is recorded against these carryforwards. We also have NOL carryforwards in non-U.S. jurisdictions totaling $187.3 million, the majority of which do not expire. We also have non-U.S. tax credit carryforwards of $7.4 million that expire beginning in 2026 and ending in 2033. There are limitations imposed on the utilization of such NOLs that could restrict the recognition of any tax benefits. As of September 30, 2014, we have a valuation allowance of $144.0 million against net deferred tax assets in the U.S. and a remaining valuation allowance of $33.5 million against net deferred tax assets in certain foreign jurisdictions. The valuation allowance recorded against net deferred tax assets of certain foreign jurisdictions is established primarily for our net operating loss carryforwards, the majority of which do not expire. There are limitations imposed on the utilization of such net operating losses that could restrict the recognition of any tax benefits. The changes to the valuation allowance were primarily due to:
| Year ended September 30,
| 2014 |  | 2013 |  | 2012
| (in millions)
Valuation allowance beginning of year | $ | 156.5 |  |  | $ | 170.4 |  |  | $ | 38.6 |
Net release of valuation allowance (1) | (18.1 | ) |  | (44.6 | ) |  | — |
Establish valuation allowance in the U.S. | — |  |  | — |  |  | 124.5 |
Net increase/decrease in deferred tax assets for foreign jurisdictions with a full valuation allowance | (5.2 | ) |  | 1.9 |  |  | (2.1 | )
Establish valuation allowance for acquired businesses | 21.5 |  |  | 12.1 |  |  | — |
Establish valuation allowance in foreign jurisdictions | 3.5 |  |  | — |  |  | 0.6 |
Adjust deferred tax asset and valuation allowance | 19.3 |  |  | 16.7 |  |  | 8.8 |
Valuation allowance end of year | $ | 177.5 |  |  | $ | 156.5 |  |  | $ | 170.4 |
(1) | In 2014 and 2013, this is attributable to recognition of deferred tax liabilities recorded in connection with accounting for acquisitions and in 2013 a reduction in deferred tax assets associated with our U.S. pension plan, both of which are described above.
Our policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of our income tax provision. In both 2014 and 2012 we recorded interest expense of $0.3 million. In 2013, we recorded a net benefit of $1.2 million. We recorded penalty expense of $0.1 million in 2012. In 2014 and 2013, we had no tax penalty expense in our income tax provision. As of September 30, 2014 and 2013, we had accrued $1.4 million and $1.1 million, respectively, of net estimated interest expense related to income tax accruals. We had $0.1 million of accrued tax penalties as of September 30, 2013, and no accrued tax penalties as of September 30, 2014.
| Year ended September 30,
Unrecognized tax benefits | 2014 |  | 2013 |  | 2012
| (in millions)
Unrecognized tax benefit beginning of year | $ | 13.7 |  |  | $ | 19.1 |  |  | $ | 16.2 |
Tax positions related to current year: |  |  |  |  |
Additions | 2.2 |  |  | 1.0 |  |  | 3.4 |
Tax positions related to prior years: |  |  |  |  |
Additions | 0.3 |  |  | 1.8 |  |  | 1.4 |
Reductions | (0.1 | ) |  | (6.3 | ) |  | (0.5 | )
Settlements | (0.6 | ) |  | (0.7 | ) |  | — |
Statute expirations | (0.5 | ) |  | (1.2 | ) |  | (1.4 | )
Unrecognized tax benefit end of year | $ | 15.0 |  |  | $ | 13.7 |  |  | $ | 19.1 |
If all of our unrecognized tax benefits as of September 30, 2014 were to become recognizable in the future, we would record a benefit to the income tax provision of $13.8 million (which would be partially offset by an increase in the U.S. valuation allowance of $7.6 million) and a credit to additional paid-in capital (APIC) of $1.2 million. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We anticipate the settlement of tax audits may be finalized within the next twelve months and could result in a decrease in our unrecognized tax benefits of up to $2 million. In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. As of September 30, 2014, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction |  | Open Years
United States |  | 2011 through 2014
Germany |  | 2011 through 2014
France |  | 2013 through 2014
Japan |  | 2009 through 2014
Ireland |  | 2010 through 2014
We incurred expenses related to stock-based compensation in 2014, 2013 and 2012 of $50.9 million, $48.8 million and $51.3 million, respectively. Accounting for the tax effects of stock-based awards requires that we establish a deferred tax asset as the compensation is recognized for financial reporting prior to recognizing the tax deductions. The tax benefit recognized in the consolidated statement of operations related to stock-based compensation totaled $0.7 million, $2.7 million and $3.9 million in 2014, 2013 and 2012, respectively. Upon the settlement of the stock-based awards (i.e., exercise, vesting, forfeiture or cancellation), the actual tax deduction is compared with the cumulative financial reporting compensation cost and any excess tax deduction is considered a windfall tax benefit and is tracked in a “windfall tax benefit pool” to offset any future tax deduction shortfalls and will be recorded as increases to APIC in the period when the tax deduction reduces income taxes payable. In 2014, 2013 and 2012, we recorded windfall tax benefits of $10.4 million, $0.3 million and $1.1 million to APIC, respectively. We follow the with-and-without approach for the direct effects of windfall tax deductions to determine the timing of the recognition of benefits for windfall tax deductions. We follow the direct method for indirect effects. As of September 30, 2014, the tax effect of windfall tax deductions which had not yet reduced taxes payable was $21 million. We have not provided for U.S. income taxes or foreign withholding taxes on foreign unrepatriated earnings as it is our current intention to permanently reinvest these earnings outside the U.S. unless it can be done with no significant tax cost. If we decide to change this assertion in the future to repatriate any additional non-U.S. earnings, we may be required to establish a deferred tax liability on such earnings. The cumulative amount of undistributed earnings of our subsidiaries for which U.S. income taxes have not been provided totaled approximately $642 million and $378 million as of September 30, 2014 and 2013, respectively. The amount of unrecognized deferred tax liability on the undistributed earnings cannot be practicably determined at this time.

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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 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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