INCOME TAXES

In determining the provision for income taxes for the

third

quarter of fiscal

2018,

the Company calculated income tax expense based on actual quarterly results, adjusted for discrete items recorded during the period. Due to the near breakeven forecast for fiscal

2018,

actual quarterly results provided a more reliable estimate of quarterly tax expense. In determining the provision for income taxes for the

third

quarter of fiscal

2017,

the Company calculated income tax expense based on the estimated annual tax rate for the year, adjusted for discrete items recorded during the period.

The Company recorded income tax expense of $

1.2

million in the

third

quarter of both fiscal

2018

and

2017.

The Company’s effective tax rate

increased to

115%

during the

third

quarter of fiscal

2018

compared to

43%

for the same period in the prior year. The difference in the effective tax rate is primarily due to the difference in calculation methodology (actual vs. estimated) and the valuation allowance recorded against additional U.S. deferred tax assets generated during the

third

quarter of fiscal

2018

The Company recorded income tax expense (benefit) of $

2.7

million and $(

0.5

) million for the

first

nine

months of fiscal

2018

and

2017,

respectively.

The Company’s effective tax rate was (

227%

) for the

first

nine

months of fiscal

2018

and

63%

first

nine

months of fiscal

2018

The gross amount of unrecognized tax benefits was

$1.7

million at

October 31, 2017,

including interest and penalties. The unrecognized tax benefits were reduced by

$0.9

million with an accompanying reduction of deferred tax assets, as a result of the nett

ing required under ASU

2013

11.

The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within

twelve

months of the reporting date.

The Company

’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of

October 31, 2017,

the Company has accrued approximately

$0.2

million of interest and penalty expense related to unrecognized tax benefits.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

●

India for fiscal years ended

March

31,

2010,

2013

and

2014

●

Iowa for fiscal year ended

January 31, 2014

●

Kentucky for fiscal year ended

January

31,

2016

●

Netherlands for fiscal year ended

January 31, 2016

During fiscal

2018,

the Company closed the following audi

ts with a small or

adjustment:

●

India for fiscal years ended

March

31,

1998,

1999

and

2015

●

China for calendar years ended

December 31, 2015

and

2016