Most important part of today's announcement to long term investors, all JMHO of course.
From today's press release:
In addition, because of its solid operating performance over the past few years and expectations for generating future taxable income, the Company will recognize a non-cash benefit of approximately $27 million in third quarter 2004 associated with the partial reversal of its valuation allowance against deferred tax assets, approximately $17 million of which will be recognized as income. The remaining $10 million will be credited to additional paid-in-capital.
History lesson: IDCC for years (decades actually) accumulated losses on its books. From a tax standpoint, these losses, with certain limitations, are allowed to be deducted in a future period IF IDCC has taxable income. The dollar value of the benefit for financial statements is a percentage of IDCC's carryforward loss and other tax credit carryforwards. By this I mean, if IDCC had an NOL carryforward equal to $100 million, the realizable income tax benefit would be equal to $34 million assuming a tax rate of 34%. With me so far? Good.
According to today's press release, the total dollar benefit of IDCC's carryforward items amounts to almost $90 million dollars. That means that IDCC could generate roughly 3 times that amount in future taxable income and not have to pay any taxes on that money since they have these carryforward items. In effect, IDCC has an asset that will be worth $90 million dollars in reduced tax expense in the future.
Now why don't you see this in IDCC's balance sheet? The reason is actually quite simple; since IDCC has always had losses, the accounting rules specify that after you record the asset of $90 million dollars you must also record a valuation allowance up to the amount of the deferred tax asset if future taxable income is not expected. In IDCC's case, this information is buried in the footnotes to the financial statements. The actual wording in FASB 109 is different but basically that is what it states. In IDCC's case, they have set up a valuation allowance equal to the amount of the asset which basically means the asset on IDCC's balance sheet is worthless, until now that is.
On an ongoing basis, companies with deferred tax assets must review whether or not the asset has a reasonable chance of being used and as in IDCC's case, if a reserve had been established, then a portion or all of this reserve should be reversed when it is more likely than not that they will have taxable income in the future in which to utilize the deferred tax asset.
What could make IDCC change its position on this reserve? IDCC now feels that EXCLUDING INCOME FROM ARBITRATIONS AND LAWSUITS, that it anticipates generating taxable income to use up $27 million of this reserve. In order to use up $27 million of the reserve, at an effective tax rate of 34% as stated in today's release, IDCC expects on a conservative basis to generate $79 million (27 million/34%) taxable income in the future.
This is a big change from the way they previously addressed the issue. In the past they reserved the entire value of the asset, in effect telling the world they didn't anticipate generating taxable income in the future. The wording in FASB 109 dealing with deferred income taxes is "more likely than not" that they will have taxable income in the future as was stated in today's press release. In IDCC's case, the way they are anticipating future taxable income excludes any Nokia, Samsung or Lucent money they are expecting.
From today's release:
This adjustment, as applied, is based upon conservative estimates that exclude future potential income sources such as impacts from litigation or arbitration proceedings. The Company expects that its cash tax obligations will remain unaffected until all federal net operating loss carryforwards, which approximated $123 million at December 31, 2003, are fully utilized or have expired.
"We are pleased that our recent and prospective performance warrants an adjustment to our valuation allowance against deferred tax assets for the first time in InterDigital's history," stated Rich Fagan, Chief Financial Officer.
Now recognizing $27 million of the total deferred tax asset, while not all of the reserve, certainly is an important piece of information as it foretells what the company is anticipating in the future. The other part of today's news release about revenue recognition IMO is no where near as important as the part concerning the reversal of the valuation allowance.
When IDCC reverses the remaining amount of the deferred tax asset valuation allowance, I will be a very happy investor as it will speak very loudly about IDCC's expected prospects. As with the royalty reporting, the issue of deferred income taxes and valuation allowances is a very complicated area. Hopefully the above post helps some understand what was very important about today's release. Maybe one or more of the analysts will read these posts and be able to digest it before the conference call in order to ask some specific questions.
Any comments are welcome from those who also have an accounting and tax background. Good luck to all long term investors tomorrow as I have a bad feeling that most don't understand what today's announcement means and will use the opportunity for the shorts to put some damage on the stock price. In the near future, hopefully it is the long term investors that have a reason to celebrate. I am tired of always having these once in a lifetime buying opportunities. I hope my short term prediction about possible weakness tomorrow doesn't come true. I have been wrong so many other times that I sure wouldn't be surprised by being wrong again. Only 8 more hours to find out. Good luck and good night.
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