NOTE 10—INCOME TAXES

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


Years ended September 30,	2017		2016		2015
	(in thousands)
United States	$	(55,634)	$	(57,176)	$	(18,712)
Foreign		59,484		49,699		90,623
Total	$	3,850	$	(7,477)	$	71,911

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


Years ended September 30,	2017		2016		2015
	(in thousands)
Current:
Federal	$	(4,330)	$	2,469	$	(2,433)
State		816		(231)		723
Foreign		13,869		8,249		20,266
Total current		10,355		10,487		18,556

Deferred:
Federal		2,839		(15,614)		24,112
State		710		(4,365)		5,710
Foreign		1,155		280		619
Total deferred		4,704		(19,699)		30,441
Provision for income taxes	$	15,059	$	(9,212)	$	48,997

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,	2017		2016		2015
	(in thousands)

Tax expense at U.S. statutory rate	$	1,349	$	(2,616)	$	25,169
State income taxes, net of federal tax effect		(489)		(1,199)		(34)
Nondeductible expenses (1)		54		7,828		1,555
Change in reserve for tax contingencies		(4,588)		1,320		(1,192)
Change in deferred tax asset valuation allowance (2)		12,647		(9,228)		37,589
Foreign income taxed at less than statutory rate (3)		9,122		(2,999)		(11,924)
Research and development credits (4)		(3,461)		(2,542)		(2,248)
Other		425		224		82
Provision for income taxes	$	15,059	$	(9,212)	$	48,997

(1) In 2016, we recorded $6.3 million of tax expense related to nondeductible acquisition-related compensation expenses.

(2) In 2017, we recorded $13.1 million of tax expense related to an increase in the valuation allowance related to tax credit carryforwards generated in the current year. In 2016, we recorded a net tax benefit primarily related to a business combination in which we acquired significant U.S. deferred tax liabilities as well as a utilization and subsequent release of the deferred tax valuation allowance in Australia. In 2015, we recorded a full valuation allowance on U.S. net deferred tax assets with a charge to expense of $35.8 million.

(3) In 2017, we provided for deferred taxes on all unremitted foreign earnings, as the earnings are no longer considered permanently reinvested resulting in a charge of $9.5 million.

(4) In both 2016 and 2015, we recorded tax benefits of $1.0 million and $1.2 million, respectively, related to the reinstatement of the research and development tax credit.

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


September 30,	2017		2016
	(in thousands)

Deferred tax assets:
Accrued employee benefits	$	18,747	$	15,133
Long-term contracts and inventory valuation reductions		14,490		12,697
Allowances for loss contingencies		6,038		5,754
Deferred compensation		4,830		4,369
Retirement benefits		6,214		12,282
Tax credit carryforwards		31,161		16,512
Net operating losses carryforwards		3,968		12,713
Other		2,652		2,796
Total gross deferred tax assets		88,100		82,256
Valuation allowance		(58,837)		(47,887)
Total deferred tax assets		29,263		34,369

Deferred tax liabilities:
Deferred revenue		(15,085)		(19,952)
Unremitted foreign earnings		(11,910)		(2,347)
Property, plant and equipment		(2,081)		(33)
Intangible assets		(8,176)		(12,894)
Foreign currency mark-to-market		—		(191)
Other		(212)		(740)
Total deferred tax liabilities		(37,464)		(36,157)
Net deferred tax liability	$	(8,201)	$	(1,788)

The deferred tax assets and liabilities for fiscal 2017 and 2016 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2017 includes changes that are recorded to other comprehensive income (loss) 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.

At September 30, 2017, we have federal and state income tax credit carryforwards of $21.9 million and $20.5 million, respectively, which will expire at various dates beginning in 2027. Such credit carryforwards (in thousands) expire as follows:


U.S. foreign tax credits	$	15,567	2027
U.S. research and development tax credits		6,303	2035-2037
State research and development tax credits		20,486	Do not expire

We have federal, state and foreign net operating losses (in thousands) which expire as follows:


U.S. net operating loss carryforwards	$	—	—
State net operating loss carryforwards		42,885	2020-2037
Foreign net operating loss carryforwards		10,903	Do not expire

During 2015, we evaluated our net U.S. deferred income taxes, which included an assessment of the cumulative income or loss over the prior-three year period and future periods, and concluded that a valuation allowance was required. After consideration of our recent history of U.S. losses, we continue to maintain a valuation allowance on net U.S. deferred tax assets as of September 30, 2017.

As of September 30, 2017, a total valuation allowance of $58.8 million has been established against U.S. deferred tax assets, certain foreign operating losses and other foreign assets. For fiscal 2017, the valuation allowance was increased by $11.0 million, of which $12.7 million was recorded as a net tax expense in our Consolidated Statement of Operations, offset by amounts recorded through other comprehensive income (loss) related to retirement benefits.

The non-cash charge to increase or decrease a valuation allowance does not have any impact on our cash flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future. Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the Consolidated Statement of Operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the Consolidated Statement of Operations. If sufficient positive evidence arises in the future, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached.

We provide for U.S. income taxes on the earnings of foreign subsidiaries which are not considered indefinitely reinvested outside the U.S. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings available for distribution. As of September 30, 2017, we have recorded a deferred tax liability of $11.9 million related to future taxes on our unremitted foreign earnings.

Accounting for Uncertainty in Income Taxes

During fiscal 2017 and 2016, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:


Years ended September 30,	2017		2016
	(in thousands)

Balance at beginning of year	$	16,932	$	12,619
Additions (reductions) for tax positions taken in prior years:		399		3,641
Recognition of benefits from expiration of statutes		(26)		(359)
Recognition of benefits from open years effectively settled		(5,359)		—
Additions for tax positions related to the current year		1,302		986
Additions for tax positions related to current year acquisitions		—		45
Balance at end of year	$	13,248	$	16,932

At September 30, 2017 and 2016, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $3.7 million and $7.5 million, respectively. During fiscal year 2018, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to approximately $2.9 million of the unrecognized tax benefits depending on the timing of examinations or expiration of statute of limitations, either because our tax positions are sustained or because we agree to the disallowance and pay the related income tax. We recognize interest and/or penalties related to income tax matters in income tax expense. The amount of net interest and penalties recognized as a component of income tax expense during 2017, 2016 and 2015 was not material. Interest and penalties accrued at September 30, 2017 and 2016 amounted to $0.9 million and $1.6 million, respectively, bringing the total net liability for uncertain tax issues to $12.0 million and $15.5 million, respectively, as of September 30, 2017 and 2016.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, 2017, the fiscal years open under the statute of limitations in significant jurisdictions include 2013 through 2017 in the U.S. 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 $1.6 million, $14.2 million and $15.2 million in 2017, 2016 and 2015, respectively.