Income Taxes

9 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

The components of income (loss) from continuing operations before income taxes are as follows (dollars in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2020			2019			2020			2019
Domestic	$	(11,060	)	$	(6,469	)	$	(13,740	)	$	(16,500	)
Foreign	11,062			16,502			33,479			13,426
Income (loss) before income taxes	$	2		$	10,033		$	19,739		$	(3,074	)

The components of (benefit) provision for income taxes from continuing operations are as follows (dollars in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2020			2019			2020			2019
Domestic	$	(4,557	)	$	425		$	(31,595	)	$	(1,704	)
Foreign	(12,103		)	10,295			(199		)	13,833
(Benefit) provision for income taxes	$	(16,660	)	$	10,720		$	(31,794	)	$	12,129
Effective tax rate	NA			106.8		%	(161.1		)%	(394.6		)%

The effective income tax rate is based upon the income for the year, the composition of the income in different countries, changes relating to valuation allowances for certain countries if and as necessary, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our effective income tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.

We recorded a $16.7 million tax benefit on near-zero income (loss) before income taxes for the three months ended June 30, 2020, primarily due to the valuation allowance on deferred tax assets in the United States and a foreign tax benefit of $14.7 million related to prior-year intangible property transfers. The effective tax rate for the three months ended June 30, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States.

The effective tax rate for the nine months ended June 30, 2020 differed from the U.S. federal statutory rate of 21.0% due to a net $29.9 million deferred tax benefit from an adjustment to domestic valuation allowance, primarily related to the Cerence spin-off, and a foreign tax benefit of $14.7 million related to prior-year intangible property transfers. The effective tax rate for the nine months ended June 30, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States.

Valuation Allowances

As of June 30, 2020 and September 30, 2019, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to continue maintaining valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. Cumulative pretax losses have historically represented significant negative evidence of our ability to realize our domestic deferred tax assets. We continue to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of June 30, 2020, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.

Automotive Deferred Taxes

We have made a policy election to classify the deferred tax assets and liabilities associated with assets and liabilities held for sale or spun off within our consolidated balance sheets of continuing operations. As a result, approximately $92.6 million of deferred tax assets related to Cerence's intellectual property was included within Other assets as of September 30, 2019, which was spun off on October 1, 2019 and was recorded against equity.

Tax Adjustment Related to the CARES Act

On March 27, 2020, the CARES Act was enacted, which provided a technical correction to a provision in the TCJA related to the characterization of federal net operating losses ("NOLs") generated during fiscal year 2018. Under the TCJA, NOLs generated in fiscal years that straddled December 31, 2017 were designated as indefinite-lived NOLs. The CARES Act amended this legislation to designate these NOLs as definite-lived NOLs. This recharacterization resulted in an increase of $6.5 million in deferred tax assets related to our definite lived NOLs, thus requiring additional valuation allowance of the same amount. The adjustment should have been recorded during the three months ended March 31, 2020.

We determined that these amounts are not material to our previously issued condensed consolidated financial statements for the three months ended March 31, 2020. The line items of our previously issued financial statements that are impacted by the adjustment are as follows (dollars in thousands, except per share):

	As of March 31, 2020
	Previously Reported			Adjustment			As Revised
Deferred tax liabilities	$	63,942		$	6,496		$	70,438
Total liabilities	$	2,641,033		$	6,496		$	2,647,529
Accumulated deficit	$	(258,437	)	$	(6,496	)	$	(264,933	)
Total stockholders’ equity	$	1,115,717		$	(6,496	)	$	1,109,221

	For the three Months Ended March 31, 2020
	Previously Reported			Adjustment			As Revised
Provision for income taxes	$	14,810		$	6,496		$	21,306
Net loss from continuing operations	$	(13,510	)	$	(6,496	)	$	(20,006	)
Net loss	$	(13,510	)	$	(6,496	)	$	(20,006	)
Net loss per basic common share - Continuing operations	$	(0.05	)	$	(0.02	)	$	(0.07	)
Total net loss per basic common share	$	(0.05	)	$	(0.02	)	$	(0.07	)
Net loss per diluted common share - Continuing operations	$	(0.05	)	$	(0.02	)	$	(0.07	)
Total net loss per diluted common share	$	(0.05	)	$	(0.02	)	$	(0.07	)