10.    Income Taxes

The components of the income tax provision (benefit) from continuing operations for the fiscal years ended September 30, 2017, 2016 and 2015 are as follows (in thousands):

 

The components of income (loss) from continuing operations before income taxes and equity in earnings (losses) of equity method investments for the fiscal years ended September 30, 2017, 2016 and 2015 are as follows (in thousands):

 

The differences between the income tax provision (benefit) on income (loss) from continuing operations including income from equity in earnings (losses) of equity method investments and income taxes computed using the applicable U.S. statutory federal tax rate of 35 percent for the fiscal years ended September 30, 2017, 2016 and 2015 are as follows (in thousands):

 

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. As of September 30, 2017 these earnings amounted to approximately $100.0 million. 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. There is considerable complexity for the company to make such calculations given the need to properly assess and calculate the withholding tax implications at each level of remittance while considering foreign tax credits, foreign tax pools and other factors that the company doesn’t currently consider because they are not relevant to the company’s current strategy under the current tax laws. Deferred taxes have also not been provided on unremitted earnings of a 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 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, 2017 and 2016 are as follows (in thousands):

 

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.

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 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 outweighing the negative evidence to support the reversal of all or some portion of these allowances.  The Company has reached a point of cumulative profitability in the U.S. on a pre-tax income basis which is a starting point of positive evidence.  However, as noted in Note 21, “Subsequent Events,” to the consolidated financial statements, the U.S. Company entered into a term loan agreement to fund future growth opportunities.  The Company has determined that the level of historical U.S. core earnings would not be sufficient to offset the interest costs of the new debt.   The Company also continues to generate a significant portion of its revenue from the semiconductor industry and is subject to unpredictable swings in the business cycle.  This is carefully considered by the Company and considered to be negative evidence in evaluating the U.S. deferred tax assets.  After evaluating all the relevant positive and negative evidence mentioned above, the Company has concluded that it will maintain the valuation allowance against U.S. net deferred tax assets as of the end of fiscal year 2017.

As of September 30, 2017, the Company had federal, state and foreign net operating loss carry-forwards of approximately $76.1 million, $96.0 million and $90.7 million, respectively. The federal net operating losses expire beginning in 2026 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 2018 through 2035. Certain foreign net operating loss carryovers will begin to expire in 2018, while a significant portion has an unlimited carryover period. The net operating loss carry-forward does not include excess deductions related to stock compensation in the amount of $19.2 million which have not been recognized for financial statement purposes. Upon adoption of ASU 2016-09 in fiscal year 2018, these benefits will be recognized in the financial statements as a deferred tax asset with an offset to retained earnings.  Additionally, a valuation allowance will be recorded against the deferred tax assets with an offset to retained earnings.

As of September 30, 2017, the Company had federal research and development tax credit carry-forwards of $19.6 million. These credit carry-forwards will expire at various dates beginning in 2019 through 2037. The Company also has $10.9 million of state credits which begin to expire in 2018, 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.

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, 2017, 2016 and 2015 is as follows (in thousands):

 

Included in the ending balance of unrecognized tax benefits for the fiscal year ended September 30, 2017 are $3.0 million of tax benefits that if recognized would impact the effective tax rate. The Company recognizes interest related to unrecognized benefits as a component of income tax provision (benefit), of which $0.1 million, $0.1 million and $0.2 million, respectively, was recognized for the fiscal years ended September 30, 2017, 2016 and 2015. The statute of limitations lapsed on several uncertain tax positions in the foreign jurisdictions during fiscal year 2017 that resulted in a $0.4 million reduction in gross unrecognized tax benefits that impacted the effective tax rate.

The Company is subject to U.S. federal income tax and 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 2011. 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 $0.5 million in the next 12 months.