Penguin Solutions, Inc.PENG
Penguin Solutions, Inc. Income Taxes Disclosure
Income Taxes
Income (loss) before provision for income taxes consisted of the following:
| Year ended | August 29, 2025 | August 30, 2024 | August 25, 2023 | ||||||||||||||
| Income (loss) before income taxes: | |||||||||||||||||
| U.S. | $ | 39,438 | $ | 38,246 | $ | 20,118 | |||||||||||
| Non-U.S. | 9,463 | (69,413) | (59,631) | ||||||||||||||
| $ | 48,901 | $ | (31,167) | $ | (39,513) | ||||||||||||
Income tax provision (benefit) consisted of the following:
| Year ended | August 29, 2025 | August 30, 2024 | August 25, 2023 | ||||||||||||||
| Income tax provision (benefit): | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 17,444 | $ | 10,930 | $ | 3,253 | |||||||||||
| State | 4,000 | 1,821 | 2,417 | ||||||||||||||
| Foreign | 12,768 | 9,253 | 8,418 | ||||||||||||||
| 34,212 | 22,004 | 14,088 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (12,227) | (6,815) | (51,540) | ||||||||||||||
| State | (1,099) | 540 | (6,998) | ||||||||||||||
| Foreign | (820) | (5,111) | (4,753) | ||||||||||||||
| (14,146) | (11,386) | (63,291) | |||||||||||||||
| Income tax provision (benefit) | $ | 20,066 | $ | 10,618 | $ | (49,203) | |||||||||||
In applying the statutory tax rate in the effective income tax rate reconciliation below, we used the U.S. statutory tax rate rather than the Cayman Islands zero percent tax rate. The table below reconciles our tax provision (benefit) based on the U.S. federal statutory rate to our effective tax rate:
| Year ended | August 29, 2025 | August 30, 2024 | August 25, 2023 | ||||||||||||||||||||||||||||||||
| Statutory tax rate | $ | 10,269 | 21.0 | % | $ | (6,545) | 21.0 | % | $ | (8,298) | 21.0 | % | |||||||||||||||||||||||
| Foreign income taxes at different rates | 6,665 | 13.6 | % | 15,870 | (50.9) | % | 16,992 | (43.0) | % | ||||||||||||||||||||||||||
| State income tax, net of federal benefit | 1,903 | 3.9 | % | 2,278 | (7.3) | % | 2,793 | (7.1) | % | ||||||||||||||||||||||||||
| Goodwill impairment | — | — | % | — | — | % | 2,876 | (7.3) | % | ||||||||||||||||||||||||||
| Tax on uncertain tax positions | 313 | 0.6 | % | (3,825) | 12.3 | % | 5,679 | (14.4) | % | ||||||||||||||||||||||||||
Stock-based compensation | 135 | 0.3 | % | (100) | 0.3 | % | (538) | 1.4 | % | ||||||||||||||||||||||||||
| Change in valuation allowance | 69,669 | 142.5 | % | 1,111 | (3.6) | % | (69,789) | 176.6 | % | ||||||||||||||||||||||||||
| Non-deductible expenses (non-taxable income) | 2,177 | 4.5 | % | 1,053 | (3.4) | % | 2,151 | (5.4) | % | ||||||||||||||||||||||||||
| Foreign withholding tax | 2,429 | 5.0 | % | 4,548 | (14.6) | % | 3,371 | (8.5) | % | ||||||||||||||||||||||||||
| Tax credits | (1,814) | (3.7) | % | (3,337) | 10.7 | % | (4,339) | 11.0 | % | ||||||||||||||||||||||||||
| Effect of cross-border tax laws | 1,409 | 2.9 | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| U.S. Domestication | (75,126) | (153.6) | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
Return to Provision | 2,283 | 4.7 | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Other | (246) | (0.7) | % | (435) | 1.4 | % | (101) | 0.2 | % | ||||||||||||||||||||||||||
| Effective tax rate | $ | 20,066 | 41.0 | % | $ | 10,618 | (34.1) | % | $ | (49,203) | 124.5 | % | |||||||||||||||||||||||
For 2025, the primary difference between the U.S. federal statutory tax rate and the effective tax rate was due to losses in jurisdictions where no tax benefit can be recognized prior to the U.S. Domestication, non-deductible expenses, return to provision adjustments, and foreign withholding taxes, partially offset by benefits from the U.S. Domestication (net of valuation allowance) and tax credits.
As a result of the U.S. Domestication, we inherited $75.1 million of certain tax attributes, including interest expense carryforwards and capitalized R&D carryforwards. The utilization of certain of these tax attributes is subject to various limitations under the Internal Revenue Code and applicable regulations, restricting the extent to which attributes generated in periods prior to the U.S. Domestication may be used to offset future consolidated taxable income. Under our current structure the Company has no ability to utilize a portion of these attributes. Accordingly, the Company has recorded a $69.7 million valuation allowance against such portion which is not expected to be realized.
Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes as well as carryforwards. Deferred tax assets and liabilities consisted of the following:
| As of | August 29, 2025 | August 30, 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Accruals and allowances | $ | 16,868 | $ | 13,868 | |||||||
| Deferred revenue | 371 | 1,838 | |||||||||
| Stock-based compensation | 2,028 | 3,027 | |||||||||
| Research and other tax credit carryforwards | 4,479 | 4,762 | |||||||||
| Capitalized research and development | 29,584 | 22,059 | |||||||||
| Operating lease liabilities | 15,823 | 15,199 | |||||||||
| Tax amortizable goodwill | 13,370 | 14,097 | |||||||||
| Interest carryforward | 91,125 | 21,873 | |||||||||
| Intangible assets | 11,704 | 5,039 | |||||||||
| Loss carryforwards | 10,690 | 11,908 | |||||||||
| Gross deferred tax assets | 196,042 | 113,670 | |||||||||
| Valuation allowance | (73,443) | (3,774) | |||||||||
| Net deferred tax assets | 122,599 | 109,896 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Operating right-of-use assets | 13,531 | 13,306 | |||||||||
| Property and equipment | 9,346 | 10,717 | |||||||||
| Brazil capital gains tax | — | 4,138 | |||||||||
| Other liabilities | 922 | 1,143 | |||||||||
| Gross deferred tax liabilities | 23,799 | 29,304 | |||||||||
| Net deferred tax assets | $ | 98,800 | $ | 80,592 | |||||||
| Reported as: | |||||||||||
| Deferred tax assets | $ | 99,107 | $ | 85,078 | |||||||
| Deferred tax liabilities (included in other noncurrent liabilities) | (307) | (4,486) | |||||||||
| Net deferred tax assets | $ | 98,800 | $ | 80,592 | |||||||
We assess positive and negative evidence for each jurisdiction to determine whether it is more likely than not existing deferred tax assets will be realized. In 2025, we recorded $69.0 million of valuation allowance on interest expense carryforward attributes inherited as part of the U.S. Domestication due to uncertainty regarding the realizability of these deferred tax assets. We also have a valuation allowance against certain acquired state and foreign tax attributes due to expected limitations on utilization. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets.
As of August 29, 2025, we had U.S. federal and state net operating loss carryforwards of $23.6 million and $36.2 million, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in 2027. State net operating loss carryforwards of $35.9 million will begin to expire in 2031, while the remaining state net operating loss carryforwards do not expire. In addition, we had U.S. federal and state research and development credit carryforwards of $8.5 million and $4.5 million, respectively, and $1.2 million of foreign tax credit carryforwards. If not utilized, the federal research and foreign tax credits will begin to expire in 2032. If not utilized, $2.0 million of state credits will begin to expire in 2030, while $2.5 million of state credits do not expire. In addition, we had Section 163(j) interest expense carryforwards of $99.0 million from the acquisition of Stratus Technologies as well as $318.5 million from the U.S. Domestication, both of which do not expire. Net operating loss carryforwards in Hong Kong of $29.6 million do not expire.
Federal and state tax attributes can be subject to an annual limitation under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and state tax laws. Further, under Section 382 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards to offset its post-change taxable income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by certain “5-percent shareholders” (including
groups of stockholders) that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our net operating loss, tax credit and section 163(j) interest expense carryforwards are subject to limitations per Sections 382 and 383 of the Code. We have experienced ownership changes in the past, and we may experience ownership changes in the future as a result of future transactions in our common stock, some changes of which may be outside of our control. As a result, our ability to use our pre-change net operating loss, tax credit and section 163(j) interest expense carryforwards to offset post-change U.S. federal and state taxable income may be subject to additional limitations.
On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted into U.S. law. Certain provisions were applicable to the Company beginning in 2025 while other provisions will become implemented in future periods. As a result of OBBBA we expect a decrease to our deferred tax assets and income tax payable resulting from the restoration of full expensing of U.S. research and experimentation expenditures. We do not expect any current or ongoing material impact to our effective tax rate as a result of the OBBBA.
Activity related to our deferred tax valuation allowance was as follows:
| Year ended | August 29, 2025 | August 30, 2024 | August 25, 2023 | ||||||||||||||
| Balance at beginning of period | $ | 3,774 | $ | 2,663 | $ | 52,267 | |||||||||||
| Charged (credited) to operations | 69,669 | 1,111 | (69,789) | ||||||||||||||
Charged to other accounts (1) | — | — | (4,073) | ||||||||||||||
| Business acquisitions | — | — | 24,258 | ||||||||||||||
| Balance at end of period | $ | 73,443 | $ | 3,774 | $ | 2,663 | |||||||||||
(1)During the period ended August 25, 2023, SMART Embedded Computing B.V. entered liquidation, resulting in the existing Netherlands NOL carryforwards being considered to have a remote likelihood of being utilized. Accordingly, a deferred tax asset of $4.1 million was written off and the related valuation allowance released.
We choose to maintain flexibility to repatriate excess cash from all jurisdictions where needed, to manage debt balances. Provisions have been made for deferred income taxes on undistributed earnings of foreign subsidiaries to the extent that dividend payments by such foreign subsidiaries are expected to result in additional tax liability, which is primarily related to foreign withholding taxes which are not individually or cumulatively significant.
We have operations in Malaysia, where we have tax incentive arrangements for our pioneer status activities and our global supply chain operations. The statutory rate for Malaysia is 24%. During the year ended August 25, 2025 the incentive agreement for the pioneer status activities was amended and extended to 2031. As of August 29, 2025, the global supply chain operation incentives were scheduled to expire in August 2028. Both incentive agreements are subject to certain conditions, with which we have fully complied for the pioneer status activities incentive in 2025, 2024, and 2023, and partially complied for the global supply chain operations incentive in 2025 and 2024 and fully complied in 2023. The effect of the tax incentive arrangements noted above reduced our income tax provision by $1.8 million ($0.03 per diluted share) in 2025, $1.2 million ($0.02 per diluted share) in 2024 and $10.4 million ($0.20 per diluted share) in 2023.
Below is a reconciliation of our unrecognized tax benefits:
| Year ended | August 29, 2025 | August 30, 2024 | August 25, 2023 | ||||||||||||||
| Beginning unrecognized tax benefits | $ | 21,428 | $ | 25,603 | $ | 18,920 | |||||||||||
| Acquired balances | — | — | 871 | ||||||||||||||
| Increases related to prior year tax provisions | — | 129 | 6,271 | ||||||||||||||
| Increases related to current year tax provisions | 495 | 1,099 | 4,248 | ||||||||||||||
| Decreases related to prior year tax provisions | (602) | (5,348) | (3,468) | ||||||||||||||
| Lapse of statute of limitation | (280) | (55) | (1,239) | ||||||||||||||
| Ending unrecognized tax benefits | $ | 21,041 | $ | 21,428 | $ | 25,603 | |||||||||||
As of August 29, 2025 and August 30, 2024, the total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, was $18.3 million and $18.7 million, respectively. Amounts accrued for interest
and penalties related to uncertain tax positions were not material for any period presented. The resolution of tax audits or expiration of statute of limitations could also reduce our unrecognized tax benefits. Although the timing of final resolution is uncertain, the estimated potential reduction in our unrecognized tax benefits in the next 12 months would not be material.
We and our subsidiaries file income tax returns with the U.S. federal government, various U.S. states and various foreign jurisdictions throughout the world. We regularly engage in discussions and negotiations with tax authorities regarding tax matters, including transfer pricing, and we continue to defend any and all such claims presented. Our U.S. federal and state tax returns remain open to examination for 2007 through 2024. In addition, tax returns that remain open to examination in non-U.S. subsidiaries, including Malaysia, Luxembourg, Ireland, United Kingdom, Hong Kong and China, vary by country. We believe that adequate amounts of taxes and related interest and penalties have been provided and any adjustments as a result of examinations are not expected to materially adversely affect our business, results of operations or financial condition.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Oct 21, 2025 | Showing above |
| 2024 | Oct 24, 2024 | |
| 2023 | Oct 20, 2023 | |
| 2022 | Oct 14, 2022 | |
| 2021 | Oct 25, 2021 | |
| 2020 | Oct 22, 2020 | |
| 2019 | Nov 6, 2019 | |
| 2018 | Oct 30, 2018 | |
| 2017 | Oct 13, 2017 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.