Income Taxes

The components of the income tax provision (benefit), excluding amounts related to the discontinued operations, for the fiscal years ended September 30, 2016, 2015 and 2014 are as follows (in thousands):



	Year Ended September 30,
	2016			2015			2014
Current income tax provision (benefit):
Federal	$	(145	)	$	10		$	15
State	(186		)	56			177
Foreign	5,868			5,537			1,417
Total current income tax provision	5,537			5,603			1,609
Deferred income tax benefit:
Federal	68,300			(1,773		)	(2,276		)
State	4,000			(104		)	(35		)
Foreign	(2,027		)	(296		)	(1,278		)
Total deferred income tax benefit	70,273			(2,173		)	(3,589		)
Income tax provision (benefit)	$	75,810		$	3,430		$	(1,980	)

The components of income (loss) before income taxes and equity in (losses) earnings of equity method investments for the fiscal years ended September 30, 2016, 2015 and 2014 are as follows (in thousands):



	Year Ended September 30,
	2016			2015			2014
Domestic	$	(8,186	)	$	(1,321	)	$	(7,338	)
Foreign	12,140			19,136			5,643
	$	3,954		$	17,815		$	(1,695	)

The differences between the income tax provision (benefit) and income taxes computed using the applicable U.S. statutory federal tax rate for the fiscal years ended September 30, 2016, 2015 and 2014 are as follows (in thousands):



	Year Ended September 30,
	2016			2015			2014
Income tax provision (benefit) computed at federal statutory rate	$	2,217		$	6,177		$	(217	)
State income taxes, net of federal benefit	113			243			(12		)
Foreign income taxed at different rates	(755		)	(938		)	(596		)
Dividends	(1,666		)	(1,069		)	(1,373		)
Change in deferred tax asset valuation allowance	77,531			(36		)	453
Reduction in uncertain tax positions	(1,543		)	(1,207		)	(1,236		)
Nondeductible compensation	782			1,325			1,064
Tax credits	(1,786		)	(1,741		)	(704		)
Travel and entertainment	274			314			220
Merger costs	503			228			187
Other	140			134			234
Income tax provision (benefit)	$	75,810		$	3,430		$	(1,980	)

The Company has not provided deferred income taxes on the unremitted earnings of its foreign subsidiaries as these earnings are considered to be indefinitely reinvested outside of the U.S. These earnings amounted to approximately $52.0 million, $40.3 million and $25.2 million, respectively, at September 30, 2016, 2015 and 2014. It is not practicable to compute the estimated deferred tax liability on these earnings as they depend on numerous factors and vary based on the timing of future remittances and the future results of various foreign operations. Deferred taxes have not been provided on unremitted earnings of its fifty percent-owned foreign corporate joint venture, Ulvac Cryogenics, Inc. as these earnings are also considered to be indefinitely reinvested outside of the U.S. The Company does, however, receive annual dividends only from current year earnings of this joint venture and these dividends are included in taxable income for the year. Any earnings that are not distributed in the current year will then be considered indefinitely reinvested as the company does not expect to receive dividends from prior year earnings.

The significant components of the net deferred tax assets and liabilities as of September 30, 2016 and 2015 are as follows (in thousands):



	September 30,
	2016			2015
Accruals and reserves not currently deductible	$	16,448		$	9,602
Federal, state and foreign tax credits	24,539			22,115
Other assets	4,294			5,939
Net operating loss carryforwards	73,097			63,569
Inventory reserves and valuation	11,342			10,598
Deferred tax assets	129,720			111,823
Depreciation and intangible amortization	25,850			9,388
Deferred tax liabilities	25,850			9,388
Valuation allowance	(104,802		)	(18,797		)
Net deferred tax (liability) asset	$	(932	)	$	83,638

In November 2015, the FASB issued Accounting Standards Update ("the ASU") 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. This guidance requires deferred tax liabilities, deferred tax assets and valuation allowances to be classified as non-current in a classified balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted and may be applied either prospectively or retrospectively to all periods presented. The Company has elected to early adopt the ASU as of September 30, 2016 on retrospective basis. The classification of deferred tax assets and liabilities as of September 30, 2015 has been recast to reflect the current period presentation. Current deferred tax assets, non-current deferred tax assets, current deferred tax liabilities and non-current deferred tax liabilities were $17.6 million, $70.5 million, $1.3 million and $3.2 million, respectively, in the previously issued financial statements for the fiscal year ended September 30, 2015.

ASC Topic 740, Income Taxes, requires that all available evidence, both positive and negative, be considered in determining, based on the weight of that evidence, whether a valuation allowance is needed. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. A cumulative loss in recent years is considered a significant piece of negative evidence that is difficult to overcome in assessing the need for a valuation allowance.

The Company evaluates the realizability of its deferred tax assets by tax-paying component and assesses the need for a valuation allowance on an annual and quarterly basis. The Company evaluates the profitability of each tax-paying component on a historic cumulative basis and a forward looking basis in the course of performing this analysis. The Company evaluated all positive and negative evidence in concluding it was appropriate to establish a full valuation allowance against U.S. net deferred tax assets during fiscal year 2016.

The Company evaluated negative evidence to assess if it is more likely than not that the Company could utilize the U.S. deferred tax assets. In reviewing performance over the recent years, the Company currently shows cumulative income. This history considers earnings in recent years from the discontinued operations of Granville-Phillips, which was divested during fiscal year 2014 and freed up capital for investments in strategic growth businesses. In evaluating the historical results of the continuing businesses, the Company has not yet demonstrated profitability with losses in recent periods. The Company reported U.S. pre-tax losses during fiscal year 2015 and fiscal year 2016. The loss in fiscal year 2016 included a significant charge for restructuring actions which are ultimately expected to improve future profitability. However, these losses presented significant negative evidence in the evaluation.

The Company also considered positive evidence such as expected improvements that are the results of investments in growth businesses. The Company prepares comprehensive forecasts based on the cyclical trends of the semiconductor industry, expected capital spending in the industry and demand for new product offerings. The Company's forecast of future improved profits includes a portion related to foreign operations, specifically in the Contamination Control Solutions business, which are excluded from the evaluation of U.S. deferred tax assets. The forecast of future improved profits also includes a portion related to U.S. operations. The Brooks Life Science Systems segment has driven cumulative losses in the U.S. in the past years, but is expected to provide growth in revenue and improved profitability resulting in increased profits in the U.S. After extensive review, despite significant projected improvements, the forecasted income is not considered to be objectively verifiable evidence because the revenue growth expected for the future periods is based on projections and not significantly supported by specific bookings and backlog of orders for product in place as of the end of the quarter. The evidence is therefore considered more subjective than objective under the accounting rules. Accordingly, this positive evidence is given less weight than the negative evidence discussed above.

A cumulative loss is difficult negative evidence to overcome on a more likely than not basis. Future income projections can only overcome this negative evidence if the projections are considered objectively verifiable. Since the income projections are not considered objectively verifiable, the Company determined that realization of the U.S. net deferred tax assets should not be viewed as more likely than not until the projected profits are supported with objectively verifiable evidence of the improvements. As a result of this change in assessment, the Company recorded a tax provision of $79.3 million to establish the valuation allowance against U.S. net deferred tax assets during the second quarter of fiscal year 2016. The Company will continue to maintain a full valuation allowance on its U.S. deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of these allowances.

As of September 30, 2016, the Company had federal, state and foreign net operating loss carry-forwards of approximately $137.0 million, $114.0 million and $85.0 million, respectively. The federal net operating losses expire beginning in 2024 through 2035, with the majority of the loss expiring in 2029. The state net operating losses are generated in various jurisdictions with different carryover periods and expire starting in 2017 through 2035. Certain foreign net operating loss carryovers will begin to expire in 2017, while a significant portion has an unlimited carryover period. The net operating loss carry-forward includes excess deductions related to stock compensation in the amount of $15.0 million which have not been recognized for financial statement purposes. The benefits of these tax deductions will be credited to additional paid-in capital upon being realized.

As of September 30, 2016, the Company had federal research and development tax credit carry-forwards of $18.7 million. These credit carry-forwards will expire at various dates beginning in 2020 through 2036. The Company also has $10.4 million of state credits which begin to expire in 2020, while some of these credits have an unlimited carryover period.

The Company has performed studies to determine if there are any annual limitations on the federal net operating losses under the Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. As a result of these studies, the Company has determined that ownership changes have occurred primarily in connection with acquisitions when the Company has issued stock to the sellers, as well as ownership changes in the subsidiaries acquired by the Company. Certain limitations have been calculated, and the benefits of the net operating losses that will expire before utilization have not been recorded as deferred tax assets in the accompanying Consolidated Balance Sheets.

In fiscal year 2016, the Company identified an error in footnote disclosures related to historical components of its net deferred tax asset balance. Specifically, as of September 30, 2015, the gross deferred tax assets net operating loss carryforwards and related valuation allowance were understated by an equal and offsetting amount of $12.9 million. The error was corrected as of September 30, 2016 and had no impact on the net deferred tax assets or the provision for income taxes. The error and associated out of period correction were determined to be immaterial and had no effect on the Company’s Consolidated Balance Sheets, Statements of Operations, Changes in Equity or Cash Flows for any period presented.

The Company maintains liabilities for uncertain tax positions. These liabilities involve judgment and estimation and are monitored based on the best information available. A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the fiscal years ended September 30, 2016, 2015 and 2014 is as follows (in thousands):



	Total
Balance at October 1, 2013	$	5,147
Reductions from lapses in statutes of limitations	(861		)
Foreign exchange rate adjustment	(24		)
Balance at September 30, 2014	4,262
Reductions from settlements with taxing authorities	(1,304		)
Reductions from lapses in statutes of limitations	(734		)
Foreign exchange rate adjustment	(33		)
Balance at September 30, 2015	2,191
Additions for tax positions in current year	4,165
Reductions from lapses in statutes of limitations	(897		)
Foreign exchange rate adjustment	(32		)
Balance at September 30, 2016	$	5,427

Included in the ending balance of unrecognized tax benefits for the fiscal year ended September 30, 2016 are $3.8 million of tax benefits that if recognized would result in adjustments to deferred taxes in jurisdictions where a full valuation allowance is recorded. The Company recognizes interest related to unrecognized benefits as a component of income tax provision (benefit), of which $0.1 million, $0.2 million and $0.3 million, respectively, was recognized for the fiscal years ended September 30, 2016, 2015 and 2014. The statute of limitations lapsed on several uncertain tax positions in the foreign jurisdictions during fiscal year 2016 that resulted in a $0.9 million reduction in gross unrecognized tax benefits that impacted the effective tax rate.

The Company is subject to U.S. federal income tax and various state, local and international income taxes in various jurisdictions. The amount of income taxes paid is subject to the Company's interpretation of applicable tax laws in the jurisdictions in which it files.

In the normal course of business, the Company is subject to income tax audits in various global jurisdictions in which it operates. The years subject to examination vary for the U.S. and international jurisdictions, with the earliest tax year being 2010. Based on the outcome of these examinations or the expiration of statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the Company's Consolidated Balance Sheets. The Company currently anticipates that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $1.1 million in the next 12 months.