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Income Taxes | 12 Months Ended
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Sep. 30, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Our income (loss) before income taxes consisted of the following:
| Year ended September 30,
| 2018 |  | 2017 |  | 2016
| (in thousands)
Domestic | $ | (114,591 | ) |  | $ | (140,150 | ) |  | $ | (156,166 | )
Foreign | 143,247 |  |  | 138,744 |  |  | 88,974 |
Total income (loss) before income taxes | $ | 28,656 |  |  | $ | (1,406 | ) |  | $ | (67,192 | )
Our (benefit) provision for income taxes consisted of the following:
| Year ended September 30,
| 2018 |  | 2017 |  | 2016
| (in thousands)
Current: |  |  |  |  |
Federal | $ | 3,009 |  |  | $ | 2,423 |  |  | $ | 2,417 |
State | 2,003 |  |  | 340 |  |  | 571 |
Foreign | 28,213 |  |  | 17,881 |  |  | 28,467 |
| 33,225 |  |  | 20,644 |  |  | 31,455 |
Deferred: |  |  |  |  |
Federal | (12,594 | ) |  | 4,911 |  |  | 965 |
State | (445 | ) |  | 877 |  |  | 515 |
Foreign | (43,517 | ) |  | (34,077 | ) |  | (45,662 | )
| (56,556 | ) |  | (28,289 | ) |  | (44,182 | )
Total provision (benefit) for income taxes | $ | (23,331 | ) |  | $ | (7,645 | ) |  | $ | (12,727 | )
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, (the "Tax Act"), which significantly changed existing U.S. tax laws by a reduction of the corporate tax rate, the implementation of a new system of taxation for non-U.S. earnings, the imposition of a one-time tax on the deemed repatriation of undistributed earnings of non-U.S. subsidiaries, and the expansion of the limitations on the deductibility of executive compensation and interest expense. As we have a September 30 fiscal year-end, a blended U.S. statutory federal rate of approximately 24.5% applies for our fiscal year ending September 30, 2018 and 21% for subsequent fiscal years. The Tax Act also provides that net operating losses generated in years ending after December 31, 2017 (our fiscal 2018) will be carried forward indefinitely and can no longer be carried back, and that net operating losses generated in years beginning after December 31, 2017 can only reduce taxable income by up to 80% when utilized in a future period. We have provided no federal income taxes payable as a result of the deemed repatriation of undistributed earnings as the tax will be offset by a combination of current year losses and existing attributes which had a full valuation allowance recorded against the related deferred tax assets. We recorded a state income taxes payable on the deemed repatriation of $2.1 million. We also recorded a deferred tax benefit of $14.1 million for the impact of the Tax Act on our net U.S. deferred income tax balances. This was primarily attributable to the reduction of the federal tax rate on the net deferred tax liability in the U.S., and the ability to realize net operating losses from the reversal of existing deferred tax assets which can now be carried forward indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible assets. The changes included in the Tax Act are broad and complex. The Securities Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We have finalized our accounting for the effects of the legislation with the exception of any additional guidance that may impact our provisional amounts recorded for the transition tax. We are not able to make reasonable estimates at this time of the effects of certain provisions of the Tax Act that will apply to us beginning in our fiscal year ending September 30, 2019, including the Global Intangible Low Tax Income tax (the "GILTI" tax) and any associated impact on our U.S. valuation allowance. We currently anticipate finalizing and recording any resulting adjustments in the quarter ending December 29, 2018. 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,
| 2018 |  | 2017 |  | 2016
Statutory federal income tax rate | $ | 7,021 |  |  | 25 | % |  | $ | (492 | ) |  | (35 | )% |  | $ | (23,517 | ) |  | (35 | )%
Change in valuation allowance | (181,047 | ) |  | (632 | )% |  | 17,334 |  |  | 1,233 | % |  | 37,996 |  |  | 57 | %
Transition impact of U.S. Tax Act | 126,122 |  |  | 440 | % |  | — |  |  | — |  |  | — |  |  | — |
Federal rate change | 69,648 |  |  | 243 | % |  | — |  |  | — | % |  | — |  |  | — | %
State income taxes, net of federal tax benefit | 2,401 |  |  | 8 | % |  | 627 |  |  | 45 | % |  | (82 | ) |  | — | %
Federal research and development credits | (3,058 | ) |  | (11 | )% |  | (2,182 | ) |  | (155 | )% |  | (5,981 | ) |  | (9 | )%
Resolution of uncertain tax positions | (4,646 | ) |  | (16 | )% |  | (3,840 | ) |  | (273 | )% |  | — |  |  | — | %
Foreign rate differences | (38,743 | ) |  | (135 | )% |  | (27,932 | ) |  | (1,987 | )% |  | (27,513 | ) |  | (41 | )%
Foreign tax on U.S. provision | 2,736 |  |  | 10 | % |  | 2,737 |  |  | 195 | % |  | 1,987 |  |  | 3 | %
Excess tax benefits from restricted stock | (11,641 | ) |  | (41 | )% |  | — |  |  | — |  |  | — |  |  | — |
Audits and settlements | 2,352 |  |  | 8 | % |  | — |  |  | — |  |  | — |  |  | — |
U.S. permanent items | 5,408 |  |  | 19 | % |  | 6,030 |  |  | 429 | % |  | 2,886 |  |  | 4 | %
Other, net | 116 |  |  | 1 | % |  | 73 |  |  | 4 | % |  | 1,497 |  |  | 2 | %
Benefit for income taxes | $ | (23,331 | ) |  | (81 | )% |  | $ | (7,645 | ) |  | (544 | )% |  | $ | (12,727 | ) |  | (19 | )%
In 2018 our effective tax rate was lower than the statutory federal income tax rate due to U.S. tax reform, as described above. In 2018, 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 2018, 2017 and 2016, 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, tax credit carryforwards, capitalized research and development expense and deferred revenue. As a result, we have not recorded a benefit related to ongoing U.S. losses. Our foreign rate differential in 2018 ,2017 and 2016 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 2018, this realignment resulted in a tax benefit of approximately $24 million and in 2017 and 2016, a benefit of approximately $28 million in each year. In 2017 and 2016, the change in valuation allowance primarily relates to U.S. losses not benefited, partially offset by the release of valuation allowances in foreign subsidiaries of $9.0 million and $3.1 million, respectively. We recorded foreign withholding taxes, an obligation of the U.S. parent of $2.7 million in 2018 and $2.0 million in 2017 and 2016, respectively. At September 30, 2018 and 2017, income taxes payable and income tax accruals recorded on the accompanying Consolidated Balance Sheets were $24.2 million ($18.0 million in accrued income taxes, $1.8 million in other current liabilities and $4.4 million in other liabilities) and $16.2 million ($5.7 million in accrued income taxes, $2.3 million in other current liabilities and $8.2 million in other liabilities), respectively. At September 30, 2018 and 2017, prepaid taxes recorded in prepaid expenses on the accompanying Consolidated Balance Sheets were $4.8 million and $7.1 million, respectively. We made net income tax payments of $22.6 million, $35.4 million and $25.5 million in 2018, 2017 and 2016, respectively. The significant temporary differences that created deferred tax assets and liabilities are shown below:
| September 30,
| 2018 |  | 2017
| (in thousands)
Deferred tax assets: |  |  |
Net operating loss carryforwards | $ | 31,329 |  |  | $ | 143,793 |
Foreign tax credits | 2,201 |  |  | 21,099 |
Capitalized research and development expense | 20,999 |  |  | 13,044 |
Pension benefits | 12,296 |  |  | 12,107 |
Prepaid expenses | 30,614 |  |  | 9,250 |
Deferred revenue | 33,886 |  |  | 59,022 |
Stock-based compensation | 11,622 |  |  | 25,360 |
Other reserves not currently deductible | 13,588 |  |  | 16,905 |
Amortization of intangible assets | 96,841 |  |  | 78,351 |
Other tax credits | 55,760 |  |  | 42,652 |
Depreciation | 4,364 |  |  | 3,095 |
Capital loss carryforward | 33,024 |  |  | 33,535 |
Deferred interest | 13,057 |  |  | 11,666 |
Other | 1,152 |  |  | 6,599 |
Gross deferred tax assets | 360,733 |  |  | 476,478 |
Valuation allowance | (141,950 | ) |  | (279,683 | )
Total deferred tax assets | 218,783 |  |  | 196,795 |
Deferred tax liabilities: |  |  |
Acquired intangible assets not deductible | (41,139 | ) |  | (70,570 | )
Pension prepayments | (2,362 | ) |  | (2,093 | )
Deferred revenue | (6,978 | ) |  | (6,214 | )
U.S taxes on unremitted foreign earnings | — |  |  | (11,440 | )
Deferred income | (6,641 | ) |  | — |
Other | (1,686 | ) |  | (1,192 | )
Total deferred tax liabilities | (58,806 | ) |  | (91,509 | )
Net deferred tax assets | $ | 159,977 |  |  | $ | 105,286 |
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, 2018, we had U.S. federal NOL carryforwards from acquisitions of $4.1 million that expire in 2023 to 2029. The utilization of these NOL carryforwards is limited as a result of the change in ownership rules under Internal Revenue Code Section 382. As of September 30, 2018, we had Federal R&D credit carryforwards of $30.0 million, which expire beginning in 2021 and ending in 2038, and Massachusetts R&D credit carryforwards of $22.4 million, which expire beginning in 2019 and ending in 2033. We also had foreign tax credits of $2.2 million, which expire beginning in 2026 and ending in 2027. A full valuation allowance is recorded against these carryforwards. We also have NOL carryforwards in non-U.S. jurisdictions totaling $84.2 million, the majority of which do not expire. We also have non-U.S. tax credit carryforwards of $5.0 million that expire beginning in 2029 and ending in 2035. Additionally, we have interest and amortization carryforwards of $104.5 million and $709.3 million, respectively, in a foreign jurisdiction. There are limitations imposed on the utilization of such attributes that could restrict the recognition of any tax benefits. As of September 30, 2018, we have a valuation allowance of $108.6 million against net deferred tax assets in the U.S. and a valuation allowance of $33.3 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,
| 2018 |  | 2017 |  | 2016
| (in millions)
Valuation allowance beginning of year | $ | 279.7 |  |  | $ | 235.5 |  |  | $ | 198.2 |
Net release of valuation allowance (1) | (2.8 | ) |  | (9.1 | ) |  | (3.1 | )
Net increase (decrease) in deferred tax assets with a full valuation allowance (2) | (134.9 | ) |  | 53.3 |  |  | 39.8 |
Establish valuation allowance in foreign jurisdictions | — |  |  | — |  |  | 0.6 |
Valuation allowance end of year | $ | 142.0 |  |  | $ | 279.7 |  |  | $ | 235.5 |
(1) | In 2018, 2017 and 2016, this is attributable to the release in foreign jurisdictions.
(2) | This is primarily attributable to U.S. tax reform: the utilization of tax attributes used to offset the transition tax, the revaluation of the U.S. net deferred tax assets and liabilities, the ability to realize net operating losses from the reversal of existing deferred tax assets which can now be carried forward indefinitely and can therefore be netted against deferred tax liabilities for indefinite lived intangible.
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 2018 and 2017, we reduced interest expense by $0.6 million and $0.9 million, respectively, and in 2016, we recorded interest expense of $0.5 million. In 2018, 2017 and 2016, we had no tax penalty expense in our income tax provision. As of September 30, 2018 and 2017, we had accrued $0.5 million and $1.1 million, respectively, of net estimated interest expense related to income tax accruals. We had no accrued tax penalties as of September 30, 2018, 2017 or 2016.
| Year ended September 30,
Unrecognized tax benefits | 2018 |  | 2017 |  | 2016
| (in millions)
Unrecognized tax benefit beginning of year | $ | 14.8 |  |  | $ | 15.5 |  |  | $ | 14.1 |
Tax positions related to current year: |  |  |  |  |
Additions | 1.5 |  |  | 0.9 |  |  | 1.0 |
Tax positions related to prior years: |  |  |  |  |
Additions | — |  |  | 1.0 |  |  | 0.4 |
Reductions | (4.7 | ) |  | (1.6 | ) |  | — |
Settlements | — |  |  | (1 | ) |  | — |
Statute expirations | (1.8 | ) |  | — |  |  | — |
Unrecognized tax benefit end of year | $ | 9.8 |  |  | $ | 14.8 |  |  | $ | 15.5 |
If all of our unrecognized tax benefits as of September 30, 2018 were to become recognizable in the future, we would record a benefit to the income tax provision of $9.8 million (which would be partially offset by an increase in the U.S. valuation allowance of $3.7 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 $2 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. The assessment relates to various tax issues, primarily foreign withholding taxes. We have appealed and intend to vigorously defend our positions. We believe that upon completion of a multi-level appeal process it is more likely than not that our positions will be sustained. 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 process. 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, 2018, we remained subject to examination in the following major tax jurisdictions for the tax years indicated:
Major Tax Jurisdiction |  | Open Years
United States |  | 2015 through 2018
Germany |  | 2011 through 2018
France |  | 2015 through 2018
Japan |  | 2013 through 2018
Ireland |  | 2014 through 2018
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 2018, 2017 and 2016 of $82.9 million, $76.7 million and $66.0 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 $28.3 million, $1.3 million and $0.7 million in 2018, 2017 and 2016, 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 recorded to the tax provision. In 2018, windfall tax benefits of $13.2 million were recorded to the tax provision. Prior to the adoption of ASU 2016-09, windfall tax benefits were recorded to APIC when they resulted in a reduction in taxes payable. In 2017 and 2016, we recorded windfall tax benefits of $0.6 million and $0.1 million to APIC, respectively. In the first quarter of 2018, as a result of the adoption of ASU 2016-09, we recognized previously unrecognized tax benefits of $37.0 million as increases in deferred tax assets for tax loss carryovers and tax credits, primarily in the U.S. A corresponding increase to the valuation allowance of $36.9 million was recorded to the extent that it was not more likely than not that these benefits would be realized. Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely invested and accordingly, no deferred taxes were provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were subjected to U.S. federal taxation via a one-time transition tax, and there is therefore no longer a material cumulative basis difference associated with the undistributed earnings. We maintain our assertion of our intention to permanently reinvest these earnings outside the U.S. unless repatriation can be done substantially tax-free, with the exception of a foreign holding company formed in 2018 and our Taiwan subsidiary. 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 amount of unrecognized deferred tax liability on the undistributed earnings would not be material.

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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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