NOTE 11—INCOME TAXES

On December 22, 2017, the U.S. government enacted the Tax Act. The legislation significantly revises the U.S. corporate income tax system by, among other things, reducing the current corporate federal income tax rate to 21% from 35%, adopting a modified territorial regime, imposing a one-time transitional tax on deemed repatriated earnings of foreign subsidiaries, and creating new taxes on certain foreign sourced earnings. The rate reduction is effective January 1, 2018 resulting in a U.S. statutory rate for fiscal year 2018 of 24.5% and 21% for subsequent fiscal years.

The final transition impact of the Tax Act may differ from the estimates provided, due to, among other things, changes in interpretations of the Tax Act, regulatory guidance that may be issued, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the impact. The SEC has issued Staff Accounting Bulletin (SAB) No. 118, which was codified in March 2018 under ASU 2018-05, that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of September 30, 2018, we continue to consider the accounting for the transition tax on deferred foreign earnings to be provisional as we have not finalized the inputs to the foreign earnings and profits calculations, the basis on which income taxes are determined, and as we continue to analyze the impact of additional implementation guidance. Accordingly, the impact of the Tax Act may be subject to adjustment in the first quarter of fiscal 2019. However, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. We will conclude the accounting for the enactment-date effects within the remaining prescribed SAB 118 measurement period.

Based on our assessment, a discrete tax benefit of $7.1 million has been recorded for the year ended September 30, 2018 related to the re-measurement of U.S. net deferred tax liabilities at the lower enacted corporate tax rate and other effects of enactment of the Tax Act. While other deferred tax assets and liabilities were also reduced, such reduction was offset by changes to our U.S. valuation allowance. The one-time transition tax is based on post-1986 earnings and profits that we previously deferred from U.S. income taxes. At present, we do not anticipate a material impact on the income statement from the one-time transition tax and therefore have recorded a provisional amount of $0 as of September 30, 2018. The provisional amount includes a $10.2 million benefit related to the U.S. taxation of deemed foreign dividends in the transition fiscal year. This benefit may be reduced or eliminated in future legislation. If such legislation is enacted, we will record the impact of the legislation in the quarter of enactment, however, we anticipate that available foreign tax credits would offset the impact of the change in legislation and will not result in future cash payments.

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


Years ended September 30,	2018		2017		2016
	(in thousands)
United States	$	(51,049)	$	(70,566)	$	(76,136)
Foreign		65,935		59,484		49,699
Total	$	14,886	$	(11,082)	$	(26,437)

Significant components of the provision (benefit) for income taxes from continuing operations are as follows:


Years ended September 30,	2018		2017		2016
	(in thousands)
Current:
Federal	$	(4,775)	$	(4,070)	$	(1,679)
State		976		878		(618)
Foreign		19,882		13,869		8,249
Total current		16,083		10,677		5,952

Deferred:
Federal		(7,874)		2,257		(16,256)
State		482		569		(4,333)
Foreign		(1,598)		1,155		280
Total deferred		(8,990)		3,981		(20,309)
Provision for income taxes	$	7,093	$	14,658	$	(14,357)

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,	2018		2017		2016
	(in thousands)

Tax expense at U.S. statutory rate	$	3,124	$	(3,877)	$	(9,252)
State income taxes, net of federal tax effect		(237)		(923)		(1,754)
Nondeductible expenses (1)		1,186		(169)		7,765
Change in reserve for tax contingencies		(1,047)		(4,435)		27
Change in deferred tax asset valuation allowance (2)		8,784		17,374		(5,382)
Foreign rate differential (3)		5,684		9,912		(2,999)
Impact of US Tax Reform (4)		(7,053)		—		—
Research and development credits (5)		(2,656)		(3,459)		(2,542)
Other		(692)		235		(220)
Provision for income taxes	$	7,093	$	14,658	$	(14,357)

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

(2) In 2018, the increase in valuation allowance primarily related to the U.S. net operating loss for which no tax benefit was recognized. 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.

(3) In 2018, we recorded $3.5 million of tax expense related to foreign earnings which were not permanently reinvested prior to the enactment of the U.S. Tax Act. After enactment, certain foreign earnings are taxed at higher statutory rates than the U.S. which results in $2.1 million of tax expense. In 2017, we provided for deferred taxes on all cumulative unremitted foreign earnings, as the earnings were no longer considered permanently reinvested resulting in a charge of $9.5 million.

(4) In 2018, a tax benefit of $7.1 million was recorded in connection with the enactment of the U.S. Tax Act as a result of remeasuring deferred taxes.

(5) In 2016, we recorded tax benefits of $1.0 million 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,	2018		2017
	(in thousands)

Deferred tax assets:
Accrued employee benefits	$	8,285	$	15,863
Long-term contracts and inventory valuation reductions		8,238		13,974
Allowances for loss contingencies		3,232		4,212
Deferred compensation		3,272		4,830
Intangible assets		1,361		—
Retirement benefits		1,398		6,214
Tax credit carryforwards		35,137		31,161
Loss carryforwards		29,097		3,715
Other		2,173		2,762
Total gross deferred tax assets		92,193		82,731
Valuation allowance		(81,839)		(57,106)
Total deferred tax assets		10,354		25,625

Deferred tax liabilities:
Deferred revenue		(2,351)		(3,729)
Unremitted foreign earnings		(687)		(11,910)
Property, plant and equipment		(5,079)		(3,137)
Intangible assets		—		(9,713)
Other		(213)		(158)
Total deferred tax liabilities		(8,330)		(28,647)
Net deferred tax liability	$	2,024	$	(3,022)

The deferred tax assets and liabilities for fiscal 2018 and 2017 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2018 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, 2018, we have federal and state income tax credit carryforwards (in thousands) which expire as follows:


U.S. foreign tax credits	$	14,629	2027
U.S. research and development tax credits		9,158	2035-2038
State research and development tax credits		22,592	Do not expire

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


U.S. net operating loss carryforwards	$	68,730	2038
U.S. capital loss carryforwards		37,238	2023
State loss carryforwards		50,836	2020-2038
State capital loss carryforwards		54,825	Beginning 2023
Foreign net operating loss carryforwards		9,430	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, 2018.

As of September 30, 2018, a total valuation allowance of $81.8 million has been established against U.S. deferred tax assets, certain foreign operating losses and other foreign assets. For fiscal 2018, the valuation allowance was increased by $24.7 million, of which $21.1 million was recorded as a net tax expense in our Consolidated Statement of Operations, offset by amounts recorded to other components of income.

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.

Prior to the Tax Act, we provided deferred taxes on all undistributed foreign earnings, as we did not consider these amounts permanently reinvested. Under the transition to a modified territorial tax system, all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings. As of September 30, 2018, we have recorded a deferred tax liability of $0.7 million related to future taxes on our unremitted foreign earnings.

Accounting for Uncertainty in Income Taxes

During fiscal 2018 and 2017, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:


Years ended September 30,	2018		2017
	(in thousands)

Balance at beginning of year	$	13,248	$	16,932
Additions (reductions) for tax positions taken in prior years		(80)		399
Recognition of benefits from expiration of statutes		(1,770)		(26)
Recognition of benefits from open years effectively settled		—		(5,359)
Additions for tax positions related to the current year		713		1,302
Additions (reductions) for tax positions related to acquisitions		(2,169)		—
Balance at end of year	$	9,942	$	13,248

At September 30, 2018 and 2017, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.8 million and $3.7 million, respectively. During fiscal year 2019, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to approximately $1.1 million of net unrecognized tax benefits depending on the timing of examinations or expiration of statutes 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 fiscal 2018 and 2017 were not material.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, 2018, the fiscal years open under the statute of limitations in significant jurisdictions include 2015 through 2018 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 $15.7 million, $1.6 million and $14.2 million in 2018, 2017 and 2016, respectively.