Note F - Income Taxes

12 Months Ended

Jun. 30, 2015

Income Taxes

During fiscal 2014 we recognized certain discrete items as part of our income tax calculations. These discrete items included (1) an expense to adjust the state deferred tax assets as a result of a change in the estimated state tax rate, (2) an expense to establish a valuation allowance on a portion of the deferred tax asset for the California net operating loss, (3) a net benefit of state taxes as a result of adjusting California apportionment and filing in other states for prior years, and (4) a true-up of the R&D credit claimed on the federal income tax return filed in fiscal 2014. We did not have any such discrete items in fiscal 2015.

In addition, during fiscal 2014, as a result of changes in California apportionment rules and the state nexus study which was completed during the year, we determined that $193,000 of the deferred tax asset for California net operating losses was not more likely than not to be realized. As a result, we have established a valuation allowance on our net deferred tax assets for this amount. We did not make any adjustment to our deferred tax asset valuation in fiscal 2015.

The provision for income taxes for the years ended June 30 consisted of the following (in thousands):

	2015			2014
Current:
Federal	$	396		$	559
State		41			(370	)
Foreign		450			343
		887			532

Deferred:
Federal		125			(264	)
State		(51	)		213
Valuation allowance		—			193
		74			142
Provision for income taxes	$	961		$	674

Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):

	2015			2014
Deferred tax assets:
Allowance for doubtful accounts	$	3		$	28
Accrued vacation expense		106			101
Tax credit carry forward		88			51
Allowance for inventories		74			234
Stock-based compensation		130			157
Pension liability		322			238
Other, net		210			106
Deferred rent		143			13
Accumulated depreciation and amortization		897			911
Net operating loss carry forward		439			458
Total gross deferred tax assets		2,412			2,297
Deferred tax liabilities:
Prepaid expenses		(189	)		(157	)
Other		—			(10	)
Deferred tax liabilities		(189	)		(167	)
Valuation allowance		(193	)		(193	)
Net deferred tax assets	$	2,030		$	1,937

At June 30, 2015, we had state tax net operating loss carry forwards of approximately $7.5 million. Under California tax law, net operating loss deductions were suspended for tax years beginning in 2008, 2009, 2010 and 2011 and the carry forward periods of any net operating losses not utilized due to such suspension were extended.

Our state tax loss carry forwards will begin to expire in fiscal 2022, unless used before their expiration.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating loss carry forwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. We did not have any ownership changes that met this criterion during the fiscal years ended June 30, 2015 and June 30, 2014.

NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 17.0%. NAIE had net income of $2.2 million for the fiscal year ended June 30, 2015. Undistributed earnings of NAIE amounted to approximately $15.1 million at June 30, 2015. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal taxes has been provided thereon.

A reconciliation of income tax provision computed by applying the statutory federal income tax rate of 34% to net income before income taxes for the year ended June 30 is as follows (dollars in thousands):

	2015			2014
Income taxes computed at statutory federal income tax rate	$	1,463		$	913
State income taxes, net of federal income tax expense		7			(35	)
Expenses not deductible for tax purposes		13			19
Foreign tax rate differential		(451	)		(297	)
Return to provision – differences		—			(41	)
Adjust state deferred due to change in apportionment		(25	)		195
State tax planning – net savings		—			(239	)
Change in valuation allowance		—			193
Other, net		(46	)		(34	)
Income tax provision as reported	$	961		$	674
Effective tax rate		22.3	%		25.1	%