NOTE 10—INCOME TAXES

Income (loss) before income taxes includes the following components (in thousands):

Years ended September 30,	2014			2013			2012
	(in thousands)
United States	$	(22,788	)	$	(31,640	)	$	38,692
Foreign	112,199			71,411			99,271
Total	$	89,411		$	39,771		$	137,963

Significant components of the provision for income taxes are as follows:

Years ended September 30,	2014			2013			2012
	(in thousands)
Current:
Federal	$	(8,049	)	$	8,198		$	15,448
State	918			2,437			1,927
Foreign	25,705			18,581			21,005
Total current	18,574			29,216			38,380

Deferred:
Federal	1,296			(14,182		)	331
State	(1,232		)	(2,720		)	328
Foreign	1,193			2,188			1,293
Total deferred	1,257			(14,714		)	1,952
Provision for income taxes	$	19,831		$	14,502		$	40,332

The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:

Years ended September 30,	2014			2013			2012
	(in thousands)

Tax expense at U.S. statutory rate	$	31,290		$	13,921		$	48,287
State income taxes, net of federal tax effect	111			120			1,364
Nondeductible expenses	1,319			1,609			286
Change in reserve for tax contingencies	(601		)	(673		)	(2,752		)
Impact of goodwill impairment loss	—			10,046			—
Change in deferred tax asset valuation allowance	921			4,044			—
Tax effect from foreign earnings repatriation	—			—			2,773
Foreign earnings taxed at less than statutory rate	(12,783		)	(7,521		)	(7,847		)
R&D credits generated in the current year	(584		)	(3,202		)	(906		)
Reinstatement of federal research and development credit	—			(1,937		)	—
Manufacturing deduction	—			(1,333		)	(630		)
Other	158			(572		)	(243		)
Provision for income taxes	$	19,831		$	14,502		$	40,332

Significant components of our deferred tax assets and liabilities are as follows:

September 30,	2014			2013
	(in thousands)
Deferred tax assets:
Accrued employee benefits	$	13,944		$	11,642
Long-term contracts and inventory valuation reductions	9,554			14,152
Allowances for loss contingencies	5,121			5,441
Deferred compensation	4,310			4,346
Property, plant and equipment	1,507			1,127
Intangible assets	2,324			477
Retirement benefits	4,729			5,678
State research and development credit carryforward	7,285			4,839
Net operating losses carryforwards	15,662			18,639
Other	585			2,048
Total gross deferred tax assets	65,021			68,389
Deferred tax asset valuation allowance	(14,024		)	(8,801		)
Total deferred tax assets	50,997			59,588

Deferred tax liabilities:
Deferred revenue	(22,507		)	(28,865		)
State taxes	(6		)	(995		)
Other	(1,937		)	(2,052		)
Total deferred tax liabilities	(24,450		)	(31,912		)
Net deferred tax asset	$	26,547		$	27,676

The deferred tax assets and liabilities for fiscal 2014 and 2013 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2014 includes changes that are recorded to Other Comprehensive Income (OCI) and goodwill.

We calculate deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and measure them using the enacted tax rates and laws that we expect will be in effect when the differences reverse. Certain items within the 2013 presentation of the components of deferred tax assets and liabilities have been reclassified to conform to the current year presentation. The reclassifications primarily relate to $0.7 million of differences related to accounting for long-term contracts and were reclassified from other deferred tax assets and liabilities to long-term contracts and inventory valuation reductions.

As of September 30, 2014, we had net operating loss carryforwards of approximately $51.1 million for foreign and $30.4 million for state, and unused state tax credits of $13.8 million. In general, our foreign operating loss carryforwards and state tax credits are not subject to expiration. The state operating loss carryforwards will begin to expire in fiscal year 2026.

We are required to assess whether a valuation allowance should be recorded against our deferred tax assets by jurisdiction based on the consideration of all available evidence, with significant weight given to evidence that can be objectively verified and using a “more likely than not” realization standard. Through September 30, 2014, a valuation allowance of $14.0 million has been established for certain deferred tax assets related to state tax credits, certain foreign operating losses and other foreign assets. For fiscal 2014, the total change in the valuation allowance was $5.2 million, of which $2.3 million was recorded as tax expense through the income statement in the current year.

With the exception of $10.5 million of accumulated earnings which the Company intends to repatriate, we do not provide for U.S. income taxes on the earnings of foreign subsidiaries which are considered indefinitely reinvested outside the U.S. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings available for repatriation. As of September 30, 2014, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $389.8 million. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes and foreign withholding taxes, but would also be able to offset unrecognized foreign tax credit carryforwards, if any. It is not practicable for us to determine the total amount of unrecognized deferred U.S. income tax liability because of the complexities associated with its hypothetical calculation.

Accounting for Uncertainty in Income Taxes

During fiscal 2014 and 2013, our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:

Years ended September 30,	2014			2013
	(in thousands)

Balance at October 1	$	8,441		$	9,833
Increase (decrease) related to tax positions in prior years:
Recognition of benefits from expiration of statutes	(973		)	(575		)
Settlements with taxing authorities	(728		)	(2,332		)
Other	(54		)	824
Tax positions related to the current year	743			731
Currency translation adjustment	(123		)	(40		)
Balance at September 30	$	7,306		$	8,441

At September 30, 2014, the amount of unrecognized tax benefits from permanent tax adjustments that, if recognized, would affect the effective tax rate was $4.7 million. During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to approximately $1.0 million of the unrecognized tax benefits depending on the timing of examinations or expiration of statute of limitations, either because the Company’s tax positions are sustained or because the Company agrees to their disallowance and pays the related income tax. The amount of net interest and penalties recognized as a component of income tax expense during 2014, 2013 and 2012 was not material. Interest and penalties accrued at September 30, 2014 and 2013 amounted to $1.6 million and $2.2 million, respectively, bringing the total liability for uncertain tax issues to $8.0 million and $9.3 million, respectively, as of September 30, 2014 and 2013.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, 2014, the fiscal tax years open under the statute of limitations in significant jurisdictions include 2011-2014 in the U.S. and United Kingdom and 2009-2014 in New Zealand. We believe we have adequately provided for uncertain tax issues we have not yet resolved with federal, state and foreign tax authorities. Although not more likely than not, the most adverse resolution of these issues could result in additional charges to earnings in future periods. Based upon a consideration of all relevant facts and circumstances, we do not believe the ultimate resolution of uncertain tax issues for all open tax periods will have a material adverse effect upon our financial condition or results of operations.

Cash amounts paid for income taxes, net of refunds received, were $27.3 million, $42.1 million and $25.4 million in 2014, 2013 and 2012, respectively.