Note F - Income Taxes

12 Months Ended

Jun. 30, 2016

Income Taxes

During fiscal 2016, we recorded U.S.-based domestic tax expense of $3.6 million on U.S.-based income from continuing operations, which was offset by the release of our deferred tax asset valuation of $193,000 resulting in a net domestic tax expense of $3.4 million. We released our deferred tax asset valuation based on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. The valuation allowance activity did not have any impact on the tax expense and related liability recorded for operating income recognized by NAIE during the years ended June 30, 2016 or June 30, 2015.

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

	2016			2015
Current:
Federal	$	3,339		$	396
State		138			41
Foreign		629			450
		4,106			887

Deferred:
Federal		46			125
State		67			(51	)
Valuation allowance		(193	)		—
		(80	)		74
Provision for income taxes	$	4,026		$	961

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

	2016			201 5
Deferred tax assets:
Inventory capitalization	$	576		$	167
Pension liability		403			322
Accrued bonus		391			107
Net operating loss carry forward		298			439
Deferred rent		175			143
Accumulated depreciation and amortization		158			897
Stock-based compensation		154			130
Tax credit carry forward		138			88
Accrued vacation expense		130			106
Other, net		64			13
Total gross deferred tax assets		2,487			2,412
Deferred tax liabilities:
Prepaid expenses		(260	)		(189	)
Other		—			—
Deferred tax liabilities		(260	)		(189	)
Valuation allowance		–			(193	)
Net deferred tax assets	$	2,227		$	2,030

At June 30, 2016, we had state tax net operating loss carry forwards of approximately $5.1 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, 2016 and June 30, 2015.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2013 and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended June 30, 2008 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2015 and forward are subject to examination by the Switzerland tax authorities.

NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 18.7%. NAIE had net income of $2.7 million for the fiscal year ended June 30, 2016. Undistributed earnings of NAIE amounted to approximately $17.8 million at June 30, 2016. 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):

	2016			201 5
Income taxes computed at statutory federal income tax rate	$	4,614		$	1,463
State income taxes, net of federal income tax expense		179			7
Expenses not deductible for tax purposes		19			13
Foreign tax rate differential		(514	)		(451	)
Adjust state deferred due to change in apportionment		(18	)		(25	)
Change in valuation allowance		(193	)		—
Other, net		(61	)		(46	)
Income tax provision as reported	$	4,026		$	961
Effective tax rate		29.7	%		22.3	%