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Income Taxes | 12 Months Ended
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Sep. 30, 2016
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Our income (loss) before income taxes consisted of the following:
| Year ended September 30,
| 2016 |  | 2015 |  | 2014
| (in thousands)
Domestic | $ | (156,166 | ) |  | $ | (110,867 | ) |  | $ | 17,038 |
Foreign | 88,974 |  |  | 137,392 |  |  | 169,074 |
Total income before income taxes | $ | (67,192 | ) |  | $ | 26,525 |  |  | $ | 186,112 |
Our (benefit) provision for income taxes consisted of the following:
| Year ended September 30,
| 2016 |  | 2015 |  | 2014
| (in thousands)
Current: |  |  |  |  |
Federal | $ | 2,417 |  |  | $ | 3,907 |  |  | $ | 12,792 |
State | 571 |  |  | 599 |  |  | 2,062 |
Foreign | 28,467 |  |  | 23,823 |  |  | 31,010 |
| 31,455 |  |  | 28,329 |  |  | 45,864 |
Deferred: |  |  |  |  |
Federal | 965 |  |  | (20,809 | ) |  | (13,200 | )
State | 515 |  |  | (566 | ) |  | (2,085 | )
Foreign | (45,662 | ) |  | (27,986 | ) |  | (4,661 | )
| (44,182 | ) |  | (49,361 | ) |  | (19,946 | )
Total provision (benefit) for income taxes | $ | (12,727 | ) |  | $ | (21,032 | ) |  | $ | 25,918 |
The reconciliation between the statutory federal income tax rate and our effective income tax rate is shown below:
| Year ended September 30,
| 2016 |  | 2015 |  | 2014
Statutory federal income tax rate | (35 | )% |  | 35 | % |  | 35 | %
Change in valuation allowance | 57 | % |  | 63 | % |  | (11 | )%
State income taxes, net of federal tax benefit | — | % |  | 7 | % |  | 1 | %
Federal and state research and development credits | (9 | )% |  | (8 | )% |  | — | %
Resolution of uncertain tax positions | — | % |  | (11 | )% |  | — | %
Foreign rate differences | (41 | )% |  | (213 | )% |  | (19 | )%
Foreign withholding tax | 3 | % |  | 14 | % |  | 3 | %
U.S. permanent items | 4 | % |  | 34 | % |  | 4 | %
Other, net | 2 | % |  | — | % |  | 1 | %
Effective income tax rate | (19 | )% |  | (79 | )% |  | 14 | %
In 2016 and 2015, our effective tax rate was lower than the 35% statutory federal income tax rate due, in large part, to our corporate structure in which our foreign taxes are at an effective tax rate lower than the U.S. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and in 2016, 2015 and 2014, the foreign rate differential predominantly relates to these Irish earnings. Our foreign rate differential in 2016 and 2015 includes the continuing rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to European customers. In 2016 and 2015, this realignment resulted in a tax benefit of approximately $28 million and $24 million, respectively. In 2016 the change in valuation allowance primarily relates to U.S. losses not benefitted and the release of valuation allowance totaling $3.1 million in two foreign subsidiaries. Additionally, our provision reflects a $6.0 million tax benefit related to a U.S. research and development tax credit which was offset by a corresponding provision to increase our U.S. valuation allowance. Additionally, in 2015, U.S. permanent items include the tax effect of a $14.5 million expense related to a pending legal settlement. Other factors impacting the effective tax rate include: the release of a valuation allowance totaling $18.7 million relating to the U.S. pension plan termination, foreign withholding taxes of $3.8 million, a tax benefit of $3.1 million relating to the reassessment of our reserve requirements and a benefit of $1.4 million in conjunction with the reorganization of our Atego U.S. subsidiaries. Additionally, our provision reflects a $2.1 million tax benefit related to a retroactive extension of the U.S. research and development tax credit enacted in the first quarter of 2015. This benefit was offset by a corresponding provision to increase our U.S. valuation allowance. In 2014, 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. Acquisitions in 2014 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 in 2014, 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 in 2014, 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. At September 30, 2016 and 2015, 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 $18.7 million ($6.3 million in accrued income taxes, $5.5 million in other current liabilities and $6.9 million in other liabilities) and $14.7 million ($4.0 million in accrued income taxes, $2.2 million in other current liabilities and $8.5 million in other liabilities), respectively. At September 30, 2016 and 2015, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $9.9 million and $8.2 million, respectively. We made net income tax payments of $25.5 million, $30.1 million and $25.5 million in 2016, 2015 and 2014, respectively. The significant temporary differences that created deferred tax assets and liabilities are shown below:
| September 30,
| 2016 |  | 2015
| (in thousands)
Deferred tax assets (1): |  |  |
Net operating loss carryforwards | $ | 100,033 |  |  | $ | 71,533 |
Foreign tax credits | 18,041 |  |  | 15,962 |
Capitalized research and development expense | 22,504 |  |  | 31,690 |
Pension benefits | 14,348 |  |  | 11,009 |
Deferred revenue | 65,145 |  |  | 71,399 |
Stock-based compensation | 19,846 |  |  | 16,777 |
Other reserves not currently deductible | 25,993 |  |  | 21,940 |
Amortization of intangible assets | 54,069 |  |  | 62,227 |
Other tax credits | 41,381 |  |  | 37,270 |
Depreciation | 3,002 |  |  | 3,465 |
Capital loss carryforward | 8,019 |  |  | 8,040 |
Deferred interest | 7,622 |  |  | 3,557 |
Other | 14,778 |  |  | 6,559 |
Gross deferred tax assets | 394,781 |  |  | 361,428 |
Valuation allowance | (235,503 | ) |  | (198,168 | )
Total deferred tax assets | 159,278 |  |  | 163,260 |
Deferred tax liabilities (1): |  |  |
Acquired intangible assets not deductible | (78,663 | ) |  | (124,401 | )
Pension prepayments | (542 | ) |  | (395 | )
Deferred revenue | (2,039 | ) |  | (3,110 | )
Other | (2,092 | ) |  | (3,598 | )
Total deferred tax liabilities | (83,336 | ) |  | (131,504 | )
Net deferred tax assets | $ | 75,942 |  |  | $ | 31,756 |
(1) See Note B. Recent Accounting Pronouncements-Deferred Taxes regarding a change in the balance sheet classification of our deferred taxes. We have concluded, based on the weight of available evidence, that a full valuation allowance continues to be required against our U.S. net deferred tax assets as they are not more likely than not to be realized in the future. We will continue to reassess whether a valuation allowance is required each financial reporting period. 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, 2016, we had U.S. federal NOL carryforwards of $247.1 million that expire in 2018 to 2036. These include NOL carryforwards from acquisitions of $82.2 million. 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 $45.1 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, 2016, we had Federal R&D credit carryforwards of $25.2 million, which expire beginning in 2021 and ending in 2036, and Massachusetts R&D credit carryforwards of $24.8 million, which expire beginning in 2017 and ending in 2031. We also had foreign tax credits of $18.0 million, which expire beginning in 2023 and ending in 2026. A full valuation allowance is recorded against these carryforwards. Federal R&D credits totaling $14.0 million relate to windfall tax benefits that have not been recognized, the impact of which will be recorded in APIC when realized. We also have NOL carryforwards in non-U.S. jurisdictions totaling $102.4 million, the majority of which do not expire. We also have non-U.S. tax credit carryforwards of $7.5 million that expire beginning in 2027 and ending in 2035. There are limitations imposed on the utilization of such NOLs that could restrict the recognition of any tax benefits. As of September 30, 2016, we have a valuation allowance of $209.0 million against net deferred tax assets in the U.S. and a valuation allowance of $26.5 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,
| 2016 |  | 2015 |  | 2014
| (in millions)
Valuation allowance beginning of year | $ | 198.2 |  |  | $ | 177.5 |  |  | $ | 156.5 |
Net release of valuation allowance (1) | (3.1 | ) |  | (18.7 | ) |  | (18.1 | )
Net increase/decrease in deferred tax assets with a full valuation allowance | 39.8 |  |  | 39.4 |  |  | 14.1 |
Establish valuation allowance for acquired businesses | — |  |  | — |  |  | 21.5 |
Establish valuation allowance in foreign jurisdictions | 0.6 |  |  | — |  |  | 3.5 |
Valuation allowance end of year | $ | 235.5 |  |  | $ | 198.2 |  |  | $ | 177.5 |
(1) | In 2016, this is attributable to the release in two foreign jurisdictions. In 2015, this is attributable to a reduction in deferred tax assets associated with our U.S. pension plan, both of which are described above and in 2014 the recognition of deferred tax liabilities recorded in connection with accounting for acquisitions.
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 2016, 2015 and 2014, we recorded interest expense of $0.5 million, $0.1 million and $0.3 million, respectively. In 2016, 2015 and 2014, we had no tax penalty expense in our income tax provision. As of September 30, 2016 and 2015, we had accrued $2.0 million and $1.5 million, respectively, of net estimated interest expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2016, 2015 or 2014.
| Year ended September 30,
Unrecognized tax benefits | 2016 |  | 2015 |  | 2014
| (in millions)
Unrecognized tax benefit beginning of year | $ | 14.1 |  |  | $ | 15.0 |  |  | $ | 13.7 |
Tax positions related to current year: |  |  |  |  |
Additions | 1.0 |  |  | 1.3 |  |  | 2.2 |
Tax positions related to prior years: |  |  |  |  |
Additions | 0.4 |  |  | 0.8 |  |  | 0.3 |
Reductions | — |  |  | (3.0 | ) |  | (0.1 | )
Settlements | — |  |  | — |  |  | (0.6 | )
Statute expirations | — |  |  | — |  |  | (0.5 | )
Unrecognized tax benefit end of year | $ | 15.5 |  |  | $ | 14.1 |  |  | $ | 15.0 |
If all of our unrecognized tax benefits as of September 30, 2016 were to become recognizable in the future, we would record a benefit to the income tax provision of $13.9 million (which would be partially offset by an increase in the U.S. valuation allowance of $4.8 million) and a credit to additional paid-in capital (APIC) of $1.6 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 $8.0 million. In the fourth quarter of 2016, we received an assessment from the tax authorities in Korea related to an ongoing tax audit of approximately $12 million. The assessment relates to various tax issues but primarily to foreign withholding taxes. We intend to appeal and will vigorously defend our positions. We believe that it is more likely than not that our positions will be sustained upon appeal. Accordingly, we have not recorded a tax reserve for this matter. We paid this assessment in the first quarter of 2017. 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, 2016, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction |  | Open Years
United States |  | 2014 through 2016
Germany |  | 2011 through 2016
France |  | 2013 through 2016
Japan |  | 2011 through 2016
Ireland |  | 2012 through 2016
Additionally, net operating loss and tax credit carryforwards from certain earlier periods in these jurisdictions may be subject to examination to the extent they are utilized in later periods. We incurred expenses related to stock-based compensation in 2016, 2015 and 2014 of $66.0 million, $50.2 million and $50.9 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 Statements of Operations related to stock-based compensation totaled $0.7 million, $0.7 million and $0.7 million in 2016, 2015 and 2014, 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 2016, 2015 and 2014, we recorded windfall tax benefits of $0.1 million, $0.0 million and $10.4 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, 2016, the tax effect of windfall tax deductions which had not yet reduced taxes payable was $33.4 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, with the exception of a foreign holding company formed in 2014. In 2016, we incurred U.S. tax expense of $12 million on the repatriation of the 2016 earnings of this foreign holding company. This expense was offset by a change in the valuation allowance. 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 basis difference associated with the undistributed earnings of our subsidiaries totaled approximately $789 million and $684 million as of September 30, 2016 and 2015, 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 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 2: 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 Reference 3: 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 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 + Details
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