Income Taxes

12 Months Ended

Oct. 31, 2019

For the fiscal periods indicated, the provision (benefit) for income taxes consists of the following (in thousands):



	Year Ended October 31,
	2019			2018					2017
Provision (benefit) for income taxes:
Current:
Federal	$	13,143		$	8,327				$	—
State	16,945			8,219					6,342
Foreign	9,816			13,294					14,563
Total current	39,904			29,840					20,905
Deferred:
Federal	31,872			475,951			⁽¹	⁾	(1,047,699		)	⁽¹	⁾
State	(9,159		)	(8,202		)			(77,429		)	⁽¹	⁾
Foreign	(2,861		)	(4,118		)			(1,604		)
Total deferred	19,852			463,631					(1,126,732		)
Provision (benefit) for income taxes	$	59,756		$	493,471				$	(1,105,827	)

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(1) The income tax expense for 2018 includes the impact of the remeasurement of the net deferred tax assets and the federal transition tax. See further discussion below. The income tax benefit for fiscal 2017 includes the reversal of a significant portion of the valuation allowance on Ciena’s deferred tax assets in the U.S.

For the fiscal periods indicated, income before provision for income taxes consists of the following (in thousands):



	Year Ended October 31,
	2019		2018		2017
United States	$	256,461	$	106,972	$	114,242
Foreign	56,729		41,809		41,884
Total	$	313,190	$	148,781	$	156,126

Ciena’s foreign income tax as a percentage of foreign income may appear disproportionate compared to the expected tax based on the U.S. federal statutory rate and is dependent on the mix of earnings and tax rates in foreign jurisdictions.

For the periods indicated, the tax provision (benefit) reconciles to the amount computed by multiplying income before income taxes by the U.S. federal statutory rate of 21% for fiscal 2019, 23.41% for fiscal 2018 (see note below), and 35% for fiscal 2017 as follows:



	Year Ended October 31,
	2019		2018		2017
Provision at statutory rate	21.00	%	23.41	%	35.00	%
Deferred tax assets remeasurement	—	%	294.56	%	—	%
Base Erosion and Anti-Abuse Tax	3.60	%	—	%	—	%
State taxes	2.18	%	(0.16	)%	2.29	%
Foreign taxes	(0.37	)%	1.22	%	(0.35	)%
Research and development credit	(7.53	)%	(8.80	)%	(15.38	)%
Non-deductible compensation	1.01	%	3.39	%	3.45	%
Fair value of debt conversion liability	—	%	1.90	%	—	%
Transition tax	0.29	%	23.23	%	—	%
Valuation allowance	(2.13	)%	(11.95	)%	(739.97	)%
Other	1.03	%	4.88	%	6.67	%
Effective income tax rate	19.08	%	331.68	%	(708.29	)%

On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate (“federal tax rate”) from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries.

As a result of the decrease in the federal tax rate from 35% to 21% effective January 1, 2018, Ciena computed its income tax expense for the October 31, 2018 fiscal year using a blended federal tax rate of 23.41%. Ciena remeasured its DTA using the federal tax rate that will apply when the related temporary differences are expected to reverse.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes due to the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The final impact of the Tax Act may differ from the above amounts to the extent they are provisional due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. The enactment of the Tax Act resulted in Ciena recording a provisional tax expense of $472.8 million in fiscal 2018. In the first quarter of fiscal 2019, the measurement period under the Tax Act concluded, which resulted in immaterial adjustments to our provisional estimates.

Ciena is also required to make accounting policy elections as a result of the Tax Act. These include whether a valuation allowance is recorded for the estimated effect of the application of GILTI and BEAT or if these will be treated as period costs when incurred. Ciena had made the incremental cash tax cost policy election with respect to analyzing the impact of GILTI on the assessment of the realizability of net operating losses. Ciena’s analysis of the new BEAT rules, as well as the very recent regulatory guidance and how they may impact the company, continue to progress. The realizability of U.S. tax carryforwards is not impacted by the BEAT, and the BEAT is a period cost when incurred. Ciena is also required to elect to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred or reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in Ciena’s current measurement of deferred taxes. Ciena’s accounting policy election is to treat the taxes due on future U.S. inclusions in taxable income under GILTI as a period cost when incurred.

The significant components of DTA are as follows (in thousands):



	October 31,
	2019			2018
Deferred tax assets:
Reserves and accrued liabilities	$	54,183		$	40,959
Depreciation and amortization	455,007			353,838
NOL and credit carry forward	302,325			483,495
Other	39,405			9,397
Gross deferred tax assets	850,920			887,689
Valuation allowance	(135,978		)	(142,650		)
Deferred tax asset, net of valuation allowance	$	714,942		$	745,039

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):



	Amount
Unrecognized tax benefits at October 31, 2016	$	30,668
Increase related to positions taken in prior period	122
Increase related to positions taken in current period	111,412
Reductions related to expiration of statute of limitations	(620		)
Unrecognized tax benefits at October 31, 2017	141,582
Decrease related to positions taken in prior period	(46,400		)
Increase related to positions taken in current period	2,482
Reductions related to expiration of statute of limitations	(1,301		)
Unrecognized tax benefits at October 31, 2018	96,363
Increase related to positions taken in prior period	1,959
Reductions related to settlements with taxing authorities	(1,224		)
Reductions related to expiration of statute of limitations	(2,494		)
Unrecognized tax benefits at October 31, 2019	$	94,604

As of October 31, 2019 and 2018, Ciena had accrued $3.0 million and $3.5 million of interest and penalties, respectively, related to unrecognized tax benefits within other long-term liabilities in the Consolidated Balance Sheets. Interest and penalties of $1.0 million and $0.6 million were recorded as a net benefit to the provision for income taxes during fiscal 2019 and fiscal 2017, respectively. During fiscal 2019, Ciena recorded a net benefit primarily as a result of a settlement with a taxing authority. During fiscal 2017, Ciena recorded a net benefit primarily as a result of recognizing a portion of previously unrecognized tax benefits. During fiscal 2018, Ciena recorded a provision for interest and penalties in its provision for income taxes of $1.1 million. If recognized, the entire balance of unrecognized tax benefits would impact the effective tax rate. Over the next 12 months, Ciena does not estimate any material changes in unrecognized income tax benefits.

Ciena has not provided for U.S. deferred income taxes on the cumulative unremitted earnings of its non-U.S. affiliates, as it plans to indefinitely reinvest these foreign earnings outside the U.S. As of October 31, 2019, the cumulative amount of such temporary differences for which a deferred tax liability has not been recognized is an estimated $372.0 million. If these earnings were distributed to the U.S., Ciena would be subject to additional foreign withholding taxes of approximately $31.0 million. Additionally, there are no other significant temporary differences for which a deferred tax liability has not been recognized.

As of October 31, 2019, Ciena continues to maintain a valuation allowance against net deferred tax assets of $136.0 million primarily related to state and foreign net operating losses and credits that Ciena estimates it will not be able to use.

The following table summarizes the activity in Ciena’s valuation allowance against its gross deferred tax assets (in thousands):



Year ended	Beginning						Ending
October 31,	Balance		Additions		Deductions		Balance
2017	$	1,489,780	$	—	$	1,303,882	$	185,898
2018	$	185,898	$	23,720	$	66,968	$	142,650
2019	$	142,650	$	27,459	$	34,131	$	135,978

As of October 31, 2019, Ciena had a $391.0 million net operating loss carry forward and a $62.0 million income tax credit carry forward which begin to expire in fiscal 2029 and fiscal 2021, respectively. Ciena’s ability to use net operating losses and credit carry forwards is subject to limitations pursuant to the ownership change rules of the Internal Revenue Code Section 382.

Ciena adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, in the first quarter of fiscal 2018. In connection with the adoption of this guidance, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018.