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Income Taxes | 12 Months Ended
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Jan. 28, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company's regional income before income taxes is as follows:
| Fiscal Year Ended
(in thousands) | January 28, 2018 |  | January 29, 2017 |  | January 31, 2016
Domestic | $ | (14,421 | ) |  | $ | (19,602 | ) |  | $ | (5,636 | )
Foreign | 74,292 |  |  | 92,662 |  |  | 26,015 |
Total | $ | 59,871 |  |  | $ | 73,060 |  |  | $ | 20,379 |
The provision for taxes consists of the following:
| Fiscal Year Ended
(in thousands) | January 28, 2018 |  | January 29, 2017 |  | January 31, 2016
Current tax provision |  |  |  |  |
Federal | $ | 2,108 |  |  | $ | — |  |  | $ | — |
State | — |  |  | — |  |  | — |
Foreign | 13,442 |  |  | 16,034 |  |  | 8,709 |
Subtotal | 15,550 |  |  | 16,034 |  |  | 8,709 |
Deferred tax provision (benefit) |  |  |  |  |
Federal | 7,701 |  |  | 107 |  |  | 6,679 |
State | — |  |  | — |  |  | (96 | )
Foreign | (60 | ) |  | 2,258 |  |  | (6,410 | )
Subtotal | 7,641 |  |  | 2,365 |  |  | 173 |
Provision for taxes | $ | 23,191 |  |  | $ | 18,399 |  |  | $ | 8,882 |
The provision for taxes reconciles to the amount computed by applying the statutory federal rate to income before taxes as follows:
| Fiscal Year Ended
(in thousands) | January 28, 2018 |  | January 29, 2017 |  | January 31, 2016
Federal income tax at statutory rate | $ | 20,222 |  |  | $ | 25,571 |  |  | $ | 7,133 |
State income taxes, net of federal benefit | (159 | ) |  | — |  |  | (7 | )
Foreign taxes at rates less than federal rates | (8,698 | ) |  | (12,074 | ) |  | (62 | )
Tax credits generated | (3,278 | ) |  | (2,864 | ) |  | (3,598 | )
Changes in valuation allowance | (41,911 | ) |  | 5,578 |  |  | 1,847 |
Non-taxable gain on sale | — |  |  | (2,978 | ) |  | — |
Changes in uncertain tax positions | 1,538 |  |  | 1,047 |  |  | 1,009 |
Deemed dividends | 299 |  |  | 266 |  |  | 276 |
Equity compensation | (8,333 | ) |  | 2,553 |  |  | 2,529 |
Permanent differences | 264 |  |  | 448 |  |  | 28 |
Deferred tax provision - indefinite life intangibles | — |  |  | — |  |  | 5,670 |
Triune Earn-out | — |  |  | — |  |  | (5,670 | )
Revaluation of deferred tax assets and liabilities | — |  |  | — |  |  | 334 |
Impact of US tax reform (1) | 65,442 |  |  | — |  |  | — |
Other | (2,195 | ) |  | 852 |  |  | (607 | )
Provision for taxes | $ | 23,191 |  |  | $ | 18,399 |  |  | $ | 8,882 |
(1) Impact of US tax reform includes $2.6 million of benefit from remeasurement of deferreds, $0.4 million of expense due to change in permanent reinvestment assertion net of foreign tax credits generated, and $66.5 million of expense due to the estimated impact of the transition tax, net of foreign tax credits generated. The transition tax, net of previously fully valued deferreds results in a total estimated current income tax payable of $1.1 million. The Company receives an income tax benefit from tax rate differentials due to its presence in foreign jurisdictions such as Switzerland and Canada where statutory rates are lower than U.S. federal tax rates. This income tax benefit is reflected in the line item "Foreign taxes at rates less than federal rates." This line also includes the benefit of the Swiss Ruling discussed below. The Company, via its Swiss subsidiary, Semtech (International) AG, receives an income tax benefit in Switzerland because only a portion of its total earnings are subject to taxation in Switzerland. Specifically, in the third quarter of fiscal year 2014, the Company received a Swiss tax ruling ("Swiss Ruling"), with an effective date retroactive to the beginning of fiscal year 2014, which allows the Company to compute Swiss income tax using an allocated portion of its total pre-tax earnings that are attributable to the sourcing of production activities. This Swiss Ruling superseded a Swiss tax ruling that was in effect during fiscal years 2012 and 2013. On December 6, 2016, the Company was granted a tax holiday ("Tax Holiday") with an effective date of January 30, 2017. This Tax Holiday replaces the current Swiss Ruling. The Tax Holiday provides Semtech (International) AG with a 70% reduction to the Cantonal tax rate, bringing the statutory Cantonal tax rate down from 12.56% to 3.77%. The maximum benefit under this Tax Holiday is CHF 500.0 million of cumulative after tax profit which equates to a maximum potential tax savings of CHF 44.0 million. The Tax Holiday is effective for five years and can be extended for an additional five years if the Company meets certain staffing targets by January 30, 2022. The Tax Cuts and Jobs Act of 2017 On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates. Although the Tax Act is generally effective January 1, 2018, U.S. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. As a result of the impact of the Tax Act, the SEC provided guidance (Staff Accounting Bulletin 118 (“SAB 118”)) that allows public companies to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of January 28, 2018, the Company has not completed the accounting for the tax effects of the Tax Act. Therefore, the Company has recorded provisional amounts for the effects of the Tax Act, including but not limited to, the following primary impacts of the Tax Act: re-measurement of deferred tax assets and liabilities and the estimated calculation of the one-time mandatory transition tax on undistributed earnings of foreign affiliates. Corporate Tax Rate Change: For the year ended January 28, 2018, the Company recorded an income tax benefit of approximately $2.6 million due to the decrease in the corporate tax rate from 35% to 21% and resulting re-measurement of the Company’s indefinite-lived deferred tax liability. Mandatory Transition Tax: For the year ended January 28, 2018, the Company recorded a provisional income tax expense of $2.1 million (net of valuation allowance) due to the imposition of the mandatory transition tax on the deemed repatriation of undistributed foreign earnings. In connection with this expense, the Company has estimated that it will utilize approximately $78.4 million of tax attributes, resulting in a current tax liability of $1.1 million. The Tax Act imposes a one-time tax on undistributed and previously untaxed post-1986 foreign earnings and profits, as determined in accordance with U.S. tax principles, of certain foreign corporations owned by U.S. shareholders. The mandatory transition tax is imposed at a rate of 15.5% to the extent of the cash and cash equivalents that are held by the foreign affiliates at certain testing dates; the remaining earning and profits are taxed at a rate of 8.0%. In accordance with the Tax Act, the Company will elect to pay the mandatory transitional tax liability during fiscal 2019. The Company has recorded a provisional amount because there is limited information from federal and state taxing authorities regarding the application and interpretation of the recently enacted legislation. The Company will disclose the impact to the provisional amount in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the Tax Act. Undistributed Foreign Earnings: Prior to the enactment of the Tax Act, with few exceptions, U.S. federal income and foreign withholding taxes had not been provided on the excess of the amount for financial reporting over the tax basis of investments in the Company’s foreign subsidiaries that were essentially permanent in duration. With the enactment of the Tax Act, all post-1986 previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Not withstanding the U.S. taxation of these amounts, the Company has determined that $453.6 million of foreign earnings will continue to be reinvested indefinitely outside of the U.S. As a result, the Company has not provided any tax on these amounts because the Company believes that it currently has the ability to keep those earnings indefinitely invested and the Company has specific plans for reinvestment of these undistributed foreign earnings. In connection with the enactment of the Act, the Company has determined it will remit approximately $240.0 million of foreign earnings in the foreseeable future, and as a result, has established a deferred income tax liability for the withholding tax that will be due upon distribution of these earnings. Global Intangible Low Taxed Income: In addition to the changes described above, the Tax Act imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is still subject to interpretation and additional clarifying guidance is expected, but is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. The Company is continuing to evaluate the impact of the GILTI provisions on our domestic valuation allowance, if any. We do not currently have all the information necessary to complete this analysis, and, as such, have not adjusted our valuation allowance analysis in the current fiscal year to reflect the impact of the GILTI provisions. In accordance with guidance issued by the FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. The components of the net deferred income tax assets and liabilities at January 28, 2018 and January 29, 2017 are as follows:
(in thousands) | January 28, 2018 |  | January 29, 2017
Non-current deferred tax asset: |  |  |
Deferred revenue | $ | — |  |  | $ | 6,229 |
Inventory reserve | 2,406 |  |  | 3,096 |
Bad debt reserve | 659 |  |  | 645 |
Accrued service fees | 306 |  |  | — |
Foreign tax credits | 9,987 |  |  | — |
Research credit carryforward | 11,707 |  |  | 25,770 |
NOL carryforward | 8,326 |  |  | 42,870 |
Payroll and related accruals | 7,344 |  |  | 12,556 |
Share-based compensation | 9,282 |  |  | 5,524 |
Foreign pension deferred | 477 |  |  | 727 |
Other deferred assets | 1,847 |  |  | 5,918 |
Valuation allowance | (41,050 | ) |  | (82,961 | )
Total non-current deferred tax asset | 11,291 |  |  | 20,374 |
Non-current deferred tax liabilities: |  |  |
Inventory reserve - foreign | — |  |  | — |
Goodwill and other intangibles | (5,844 | ) |  | (12,534 | )
Property, plant and equipment | (4,955 | ) |  | (7,483 | )
Repatriation of foreign earnings | (10,427 | ) |  | — |
Other non-current deferred tax liabilities | (511 | ) |  | (1,745 | )
Total non-current deferred tax liabilities | (21,737 | ) |  | (21,762 | )
Net deferred tax assets (liabilities) | $ | (10,446 | ) |  | $ | (1,388 | )
As of January 28, 2018, the Company had federal and state net operating loss carryforwards of $0.0 million and $111.4 million, respectively, which, subject to certain limitations, are available to offset future taxable income through fiscal year 2038. The Company does not expect these changes in control limitations to significantly impact its ability to utilize these attributes. In the first quarter of fiscal year 2018, the Company adopted FASB ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). Under the amended guidance, all excess tax benefits and tax deficiencies will be recognized in the Statements of Income as they occur. This replaced the previous guidance, which requires tax benefits that exceed compensation cost ("windfalls") to be recognized in additional paid in capital. It also eliminates the need to maintain a windfall pool, and removes the requirement to delay recognizing a windfall until it reduces current taxes payable. Using the modified retrospective adoption method, in the first quarter of fiscal year 2018, the Company recognized deferred tax assets of $8.4 million for the windfall tax benefits and also recognized an increase of an equal amount in the valuation allowance against those deferred tax assets. As of January 28, 2018, the Company had gross federal and state research credits available of approximately $6.3 million and $14.6 million, respectively, which are available to offset taxable income. These credits will expire between fiscal years 2032 through 2038. The Company also had gross Canadian research credits available of approximately $11.6 million. These credits will expire between fiscal years 2029 and 2038. As of January 28, 2018 and January 29, 2017, the Company had approximately $30.6 million and $81.6 million of net deferred tax assets, respectively, the majority of which are in the U.S. and Canada. The Company has recorded valuation allowances of $41 million and $83 million against its deferred tax assets at January 28, 2018 and January 29, 2017, respectively, based on the Company's assessment of its ability to utilize its deferred tax assets. The valuation allowances established relate to all U. S. and state deferred tax assets, for which the Company has determined that it is more likely than not that a benefit will not be realized. In considering in whether a valuation allowance was required for our U.S. deferred income tax assets, the Company considered all available positive and negative evidence. Positive evidence considered included reversing taxable temporary differences. Negative evidence considered included the cumulative taxable losses in the U.S. recorded during the three year period ended January 29, 2018, on both an annual and cumulative basis. Based on the weight of all available evidence, we concluded that the negative evidence outweighed the positive evidence and that it was more likely than not that the U.S. federal and state deferred tax assets that cannot be realized through the reversal of taxable temporary differences would not be realized. As a result, we have established a full valuation allowance against the deferred tax assets in the U.S. that will not be realized through the reversal of taxable temporary differences. Changes in the valuation allowance for the three years ended January 28, 2018 are summarized in the table below:
| Fiscal Year Ended
(in thousands) | January 28, 2018 |  | January 29, 2017 |  | January 31, 2016
Beginning balance | $ | 82,961 |  |  | $ | 77,383 |  |  | $ | 75,536 |
Additions | 74 |  |  | 5,578 |  |  | 9,055 |
Releases | (41,985 | ) |  | — |  |  | (7,208 | )
Ending balance | $ | 41,050 |  |  | $ | 82,961 |  |  | $ | 77,383 |
Uncertain Tax Positions The Company uses a two-step approach to recognize and measure uncertain tax positions ("UTP"). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (before federal impact of state items) is as follows:
| Fiscal Year Ended
(in thousands) | January 28, 2018 |  | January 29, 2017
Beginning balance | $ | 11,452 |  |  | $ | 10,567 |
Additions based on tax positions related to the current year | 5,789 |  |  | 1,005 |
Reductions for tax positions of prior years, net | (1,182 | ) |  | (120 | )
Ending balance | $ | 16,059 |  |  | $ | 11,452 |
Included in the balance of gross unrecognized tax benefits at January 28, 2018 and January 29, 2017, are $3.9 million and $9.3 million, respectively, of net tax benefits (after federal impact of state items) that, if recognized, would impact the effective tax rate. The liability for UTP is reflected on the Balance Sheets as follows:
| Fiscal Year Ended
(in thousands) | January 28, 2018 |  | January 29, 2017
Deferred tax assets - non-current | $ | 12,135 |  |  | $ | 9,309 |
Accrued liabilities | — |  |  | — |
Other long-term liabilities | 3,924 |  |  | 2,143 |
Total accrued taxes | $ | 16,059 |  |  | $ | 11,452 |
The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes on the Statements of Income. Since the Company has sufficient net operating losses and research and development ("R&D") credit carryforwards, there would be no cash tax liability, and therefore no additional penalties or interest accrued during fiscal year 2018. The Company had approximately $0.0 million and $0.3 million of net interest and penalties accrued at January 28, 2018 and January 29, 2017, respectively. Tax years prior to 2013 (the Company’s fiscal year 2014) are generally not subject to examination by the Internal Revenue Service ("IRS") except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. For state returns, the Company is generally not subject to income tax examinations for years prior to 2012 (the Company’s fiscal year 2013). The Company has a significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2017. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

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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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