Quantum Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Mar. 31, 2017

Pre-tax income (loss) reflected in the Consolidated Statements of Operations for the years ended March 31, 2017, 2016 and 2015 is as follows (in thousands):



	For the year ended March 31,
	2017		2016			2015
U.S.	$	1,268	$	(78,956	)	$	13,830
Foreign	3,489		3,745			3,971
	$	4,757	$	(75,211	)	$	17,801

Income tax provision consists of the following (in thousands):



	For the year ended March 31,
	2017			2016			2015
Federal:	$	(421	)	$	(401	)	$	(138	)
State:
Current	75			52			125
Foreign:
Current	1,555			1,591			890
Deferred	(97		)	(59		)	(159		)
Total foreign	1,458			1,532			731
Income tax provision	$	1,112		$	1,183		$	718

The income tax provision differs from the amount computed by applying the federal statutory rate of 35% to income (loss) before income taxes as follows (in thousands):



	For the year ended March 31,
	2017			2016			2015
Expense (benefit) at federal statutory rate	$	1,665		$	(26,324	)	$	6,230
Permanent items	714			20,597			622
Foreign taxes	1,353			974			628
State income taxes	75			53			125
Unbenefited (Benefited) losses and credits	(2,379		)	5,726			(6,852		)
Credit monetization	(421		)	(401		)	(138		)
Other	105			558			103
Income tax provision	$	1,112		$	1,183		$	718

Significant components of deferred tax assets and liabilities are as follows (in thousands):



	As of March 31,
	2017			2016
Deferred tax assets:
Inventory valuation method	$	1,964		$	2,025
Accrued warranty expense	1,256			1,320
Distribution reserves	5,364			3,898
Loss carryforwards	87,579			108,576
Tax credits	131,939			132,054
Restructuring charge accruals	520			1,054
Deferred revenue	17,592			16,739
Other accruals and reserves not currently deductible for tax purposes	11,414			11,917
	257,628			277,583
Less valuation allowance	(202,991		)	(224,661		)
Deferred tax asset	$	54,637		$	52,922
Deferred tax liabilities:
Depreciation	$	(3,906	)	$	(3,962	)
Acquired intangibles	(11,485		)	(8,244		)
Tax on unremitted foreign earnings	(16,571		)	(16,549		)
Other	(21,558		)	(23,147		)
Deferred tax liability	$	(53,520	)	$	(51,902	)
Net deferred tax asset	$	1,117		$	1,020

A reconciliation of the gross unrecognized tax benefits follows (in thousands):



	For the year ended March 31,
	2017			2016		2015
Beginning balance	$	32,860		$	32,449	$	32,449
Settlement and effective settlements with tax authorities and related remeasurements	(411		)	—		—
Increase in balances related to tax positions taken in prior period	243			411		—
Ending balance	$	32,692		$	32,860	$	32,449

During fiscal 2017, excluding interest and penalties, there was a $0.2 million change in our unrecognized tax benefits. Including interest and penalties, the total unrecognized tax benefit at March 31, 2017 was $34.0 million, all of which, if recognized, would favorably affect the effective tax rate. At March 31, 2017, accrued interest and penalties totaled $1.3 million. Our practice is to recognize interest and penalties related to income tax matters in income tax provision in the Consolidated Statements of Operations. Unrecognized tax benefits, including interest and penalties, were recorded in other long-term liabilities in the Consolidated Balance Sheets.

We file our tax returns as prescribed by the laws of the jurisdictions in which we operate. Our U.S. tax returns have been audited for years through 2002 by the Internal Revenue Service. In other major jurisdictions, we are generally open to examination for the most recent three to five fiscal years. Although timing of the resolution and closure on audits is highly uncertain, we do not believe it is likely that the unrecognized tax benefits would materially change in the next 12 months.

As of March 31, 2017, we had federal net operating loss and tax credit carryforwards of approximately $295.8 million and $91.3 million, respectively. Our federal net operating loss carryforwards include $34.3 million attributable to excess tax deductions from stock option exercises, and are not included in the deferred tax assets shown above. The benefit of these loss carryforwards will be credited to equity when realized. The net operating loss and tax credit carryforwards expire in varying amounts beginning in fiscal 2018 if not previously utilized, the utilization of which is limited under the tax law ownership change provision. These carryforwards include $11.1 million of acquired net operating losses and $9.6 million of credits.

Certain changes in stock ownership could result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. Should the company undergo such a change in stock ownership, it could severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges.

Due to our history of net losses and the difficulty in predicting future results, we believe that we cannot rely on projections of future taxable income to realize the deferred tax assets. Accordingly, we have established a full valuation allowance against our U.S. net deferred tax assets. Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Our income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, our valuation allowance.