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Income Taxes | 12 Months Ended
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Sep. 30, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Our income (loss) before income taxes consisted of the following:
| Year ended September 30,
| 2017 |  | 2016 |  | 2015
| (in thousands)
Domestic | $ | (140,150 | ) |  | $ | (156,166 | ) |  | $ | (110,867 | )
Foreign | 138,744 |  |  | 88,974 |  |  | 137,392 |
Total income (loss) before income taxes | $ | (1,406 | ) |  | $ | (67,192 | ) |  | $ | 26,525 |
Our (benefit) provision for income taxes consisted of the following:
| Year ended September 30,
| 2017 |  | 2016 |  | 2015
| (in thousands)
Current: |  |  |  |  |
Federal | $ | 2,423 |  |  | $ | 2,417 |  |  | $ | 3,907 |
State | 340 |  |  | 571 |  |  | 599 |
Foreign | 17,881 |  |  | 28,467 |  |  | 23,823 |
| 20,644 |  |  | 31,455 |  |  | 28,329 |
Deferred: |  |  |  |  |
Federal | 4,911 |  |  | 965 |  |  | (20,809 | )
State | 877 |  |  | 515 |  |  | (566 | )
Foreign | (34,077 | ) |  | (45,662 | ) |  | (27,986 | )
| (28,289 | ) |  | (44,182 | ) |  | (49,361 | )
Total provision (benefit) for income taxes | $ | (7,645 | ) |  | $ | (12,727 | ) |  | $ | (21,032 | )
Taxes computed at the statutory federal income tax rates are reconciled to the provision (benefit) for income taxes as follows (in thousands):
| Year ended September 30,
| 2017 |  | 2016 |  | 2015
Statutory federal income tax rate | $ | (492 | ) |  | (35 | )% |  | $ | (23,517 | ) |  | (35 | )% |  | $ | 9,284 |  |  | 35 | %
Change in valuation allowance | 17,334 |  |  | 1,233 | % |  | 37,996 |  |  | 57 | % |  | 16,718 |  |  | 63 | %
State income taxes, net of federal tax benefit | 627 |  |  | 45 | % |  | (82 | ) |  | — | % |  | 1,788 |  |  | 7 | %
Federal research and development credits | (2,182 | ) |  | (155 | )% |  | (5,981 | ) |  | (9 | )% |  | (2,097 | ) |  | (8 | )%
Resolution of uncertain tax positions | (3,840 | ) |  | (273 | )% |  | — |  |  | — | % |  | (2,991 | ) |  | (11 | )%
Foreign rate differences | (27,932 | ) |  | (1,987 | )% |  | (27,513 | ) |  | (41 | )% |  | (56,375 | ) |  | (213 | )%
Foreign tax on U.S. provision | 2,737 |  |  | 195 | % |  | 1,987 |  |  | 3 | % |  | 3,764 |  |  | 14 | %
U.S. permanent items | 6,030 |  |  | 429 | % |  | 2,886 |  |  | 4 | % |  | 9,062 |  |  | 34 | %
Other, net | 73 |  |  | 4 | % |  | 1,497 |  |  | 2 | % |  | (185 | ) |  | — | %
Benefit for income taxes | $ | (7,645 | ) |  | (544 | )% |  | $ | (12,727 | ) |  | (19 | )% |  | $ | (21,032 | ) |  | (79 | )%
In 2017 and 2016, our effective tax rate was materially impacted by 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. In 2017, 2016 and 2015, the foreign rate differential predominantly relates to these Irish earnings. Additionally, we have a full valuation allowance against deferred tax assets in the U.S., primarily related to net operating loss and tax credit carry forwards. As a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2017, 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 2017 and 2016, this realignment resulted in a tax benefit of approximately $28 million in each year and a benefit of $24 million in 2015. In 2017 and 2016, the change in valuation allowance primarily relates to U.S. losses not benefitted, partially offset by the release of valuation allowances in foreign subsidiaries of $9.0 million and $3.1 million, respectively. Also, in 2017, we recorded a tax benefit of $3.5 million related to the release of a tax reserve upon completion of a favorable agreement with tax authorities in a foreign jurisdiction. In 2017 and 2016, we recorded foreign withholding taxes, an obligation of the U.S. parent, of $2.0 million, respectively. Additionally, in 2017 and 2016, our provision reflects a tax benefit related to U.S. research and development tax credits which were offset by corresponding provisions to increase our U.S. valuation allowance of $2.2 million and $6.0 million, respectively. 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 in 2015 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. At September 30, 2017 and 2016, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $16.2 million ($5.7 million in accrued income taxes, $2.3 million in other current liabilities and $8.2 million in other liabilities) and $18.7 million ($6.3 million in accrued income taxes, $5.5 million in other current liabilities and $6.9 million in other liabilities), respectively. At September 30, 2017 and 2016, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $7.1 million and $9.9 million, respectively. We made net income tax payments of $35.4 million, $25.5 million and $30.1 million in 2017, 2016 and 2015, respectively. The significant temporary differences that created deferred tax assets and liabilities are shown below:
| September 30,
| 2017 |  | 2016
| (in thousands)
Deferred tax assets: |  |  |
Net operating loss carryforwards | $ | 143,793 |  |  | $ | 100,033 |
Foreign tax credits | 21,099 |  |  | 18,041 |
Capitalized research and development expense | 13,044 |  |  | 22,504 |
Pension benefits | 12,107 |  |  | 14,348 |
Deferred revenue | 59,022 |  |  | 65,145 |
Stock-based compensation | 25,360 |  |  | 19,846 |
Other reserves not currently deductible | 16,905 |  |  | 25,993 |
Amortization of intangible assets | 78,351 |  |  | 54,069 |
Other tax credits | 42,652 |  |  | 41,381 |
Depreciation | 3,095 |  |  | 3,002 |
Capital loss carryforward | 33,535 |  |  | 8,019 |
Deferred interest | 11,666 |  |  | 7,622 |
Other | 15,849 |  |  | 14,778 |
Gross deferred tax assets | 476,478 |  |  | 394,781 |
Valuation allowance | (279,683 | ) |  | (235,503 | )
Total deferred tax assets | 196,795 |  |  | 159,278 |
Deferred tax liabilities: |  |  |
Acquired intangible assets not deductible | (70,570 | ) |  | (78,663 | )
Pension prepayments | (2,093 | ) |  | (542 | )
Deferred revenue | (6,214 | ) |  | (2,039 | )
U.S taxes on unremitted foreign earnings | (11,440 | ) |  | (67 | )
Other | (1,192 | ) |  | (2,025 | )
Total deferred tax liabilities | (91,509 | ) |  | (83,336 | )
Net deferred tax assets | $ | 105,286 |  |  | $ | 75,942 |
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 our valuation allowance requirements 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, 2017, we had U.S. federal NOL carryforwards of $383.0 million that expire in 2018 to 2037. 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 $61.4 million relate to windfall tax benefits that have not been recognized. The deferred tax asset associated with this benefit will be recorded to retained earnings in the first quarter of 2018, as a result of the adoption of ASU 2016-09. This benefit will be offset in full by an increase to the valuation allowance. See Note B. Summary of Significant Accounting Policies. As of September 30, 2017, we had Federal R&D credit carryforwards of $27.4 million, which expire beginning in 2021 and ending in 2037, and Massachusetts R&D credit carryforwards of $23.5 million, which expire beginning in 2018 and ending in 2032. We also had foreign tax credits of $20.8 million, which expire beginning in 2023 and ending in 2027. A full valuation allowance is recorded against these carryforwards. Federal R&D credits totaling $13.4 million relate to windfall tax benefits that have not been recorded as a deferred tax asset as of September 30, 2017. The deferred tax asset associated with this benefit will be recorded to retained earnings in the first quarter of 2018, as a result of the adoption of ASU 2016-09. This benefit will be offset in full by an increase to the valuation allowance. See Note B. Summary of Significant Accounting Policies. We also have NOL carryforwards in non-U.S. jurisdictions totaling $90.2 million, the majority of which do not expire. We also have non-U.S. tax credit carryforwards of $5.4 million that expire beginning in 2029 and ending in 2035. Additionally, we have interest and amortization carryforwards of $93.3 million and $535.6 million, respectively in a foreign jurisdiction. There are limitations imposed on the utilization of such NOLs that could restrict the recognition of any tax benefits. As of September 30, 2017, we have a valuation allowance of $239.3 million against net deferred tax assets in the U.S. and a valuation allowance of $40.4 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. However, 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 the following:
| Year ended September 30,
| 2017 |  | 2016 |  | 2015
| (in millions)
Valuation allowance beginning of year | $ | 235.5 |  |  | $ | 198.2 |  |  | $ | 177.5 |
Net release of valuation allowance (1) | (9.1 | ) |  | (3.1 | ) |  | (18.7 | )
Net increase/decrease in deferred tax assets with a full valuation allowance | 53.3 |  |  | 39.8 |  |  | 39.4 |
Establish valuation allowance in foreign jurisdictions | — |  |  | 0.6 |  |  | — |
Valuation allowance end of year | $ | 279.7 |  |  | $ | 235.5 |  |  | $ | 198.2 |
(1) | In 2017 and 2016, this is attributable to the release in foreign jurisdictions. In 2015, this is attributable to a reduction in deferred tax assets associated with our U.S. pension plan.
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 2017, we reduced interest expense by $0.9 million and in 2016 and 2015, we recorded interest expense of $0.5 million and $0.1 million, respectively. In 2017, 2016 and 2015, we had no tax penalty expense in our income tax provision. As of September 30, 2017 and 2016, we had accrued $1.1 million and $2.0 million, respectively, of net estimated interest expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2017, 2016 or 2015.
| Year ended September 30,
Unrecognized tax benefits | 2017 |  | 2016 |  | 2015
| (in millions)
Unrecognized tax benefit beginning of year | $ | 15.5 |  |  | $ | 14.1 |  |  | $ | 15.0 |
Tax positions related to current year: |  |  |  |  |
Additions | 0.9 |  |  | 1.0 |  |  | 1.3 |
Tax positions related to prior years: |  |  |  |  |
Additions | 1.0 |  |  | 0.4 |  |  | 0.8 |
Reductions | (1.6 | ) |  | — |  |  | (3 | )
Settlements | (1.0 | ) |  | — |  |  | — |
Statute expirations | — |  |  | — |  |  | — |
Unrecognized tax benefit end of year | $ | 14.8 |  |  | $ | 15.5 |  |  | $ | 14.1 |
If all of our unrecognized tax benefits as of September 30, 2017 were to become recognizable in the future, we would record a benefit to the income tax provision of $14.8 million (which would be partially offset by an increase in the U.S. valuation allowance of $5.1 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 believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $6 million as audits close and statutes of limitations expire. In the fourth quarter of 2016, we received an assessment of approximately $12 million from the tax authorities in Korea related to a tax audit. The assessment relates to various tax matters but primarily to foreign withholding taxes. We have appealed 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 and have recorded the amount in other assets, pending resolution of the appeal. In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in material changes in our estimates. As of September 30, 2017, 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 2017
Germany |  | 2011 through 2017
France |  | 2014 through 2017
Japan |  | 2012 through 2017
Ireland |  | 2013 through 2017
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 2017, 2016 and 2015 of $76.7 million, $66.0 million and $50.2 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 $1.3 million, $0.7 million and $0.7 million in 2017, 2016 and 2015, respectively. Upon the settlement of the stock-based awards (i.e., exercise or vesting), 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 2017, 2016 and 2015, we recorded windfall tax benefits of $0.6 million, $0.1 million and $0.0 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, 2017, the tax effect of windfall tax deductions which had not yet reduced taxes payable was $38.3 million. In the first quarter of 2018, the company will adopt ASU 2016-09. See Note B. Note B. Summary of Significant Accounting Policies. 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 repatriation can be done with no significant tax cost, with the exception of a foreign holding company formed in 2014 and our Taiwan subsidiary. In 2017, we established a deferred tax liability of $11 million to provide for taxes on these unremitted earnings. This liability was offset by a corresponding release in valuation allowance. 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 repatriate any additional non-U.S. earnings in the future, 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 $882 million and $789 million as of September 30, 2017 and 2016, 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 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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