Note H - Income Taxes

6 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

H. Income Taxes

The Tax Cuts and Jobs Act (the “Act”) was enacted on

December 22, 2017.

Among other things, the Act reduces the U.S. federal corporate tax rate to

21%

and requires companies to pay a

one

-time deemed repatriation transition tax on earnings of U.S.-owned foreign subsidiaries that were previously tax deferred. At

December 31, 2017,

we had 

not

completed our accounting for the tax effects of the Act; however, in certain cases, as described below and in accordance with SAB

 

1

18,

we made a reasonable estimate of the effects on our existing deferred tax balances and the

one

-time transition tax. In other cases, we were

not

 able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC

740,

Income Taxes. For the items for which we did determine a reasonable estimate, we recognized a provisional amount as a discrete component of our provision for income taxes. The impact of the Tax Legislation

may

differ from these estimates, possibly materially, during the

one

-year measurement period

ending

December 22, 2018

due to, among other things, further refinement of our calculations, changes in interpretations and assumptions we made, guidance that

may

be issued and actions we

may

take as a result of the Act.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate that is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized

as discrete items in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.

The effective tax rate for the

three

months ended

December 31, 2017

was

153.1%

and the effective tax rate for the

six

months ended

December 31, 2017

was

97.31%.

In comparison, the effective tax rate for the

three

months ended

December 31, 2016

was

29.6

% and the effective tax rate for the

six

months ended

December 31, 2016

was

30.1%.

The effective tax rates for the

three

and

six

months ended

December 31, 2017

differ from the estimated U.S. federal statutory rate of

28.06%

primarily due to the impact of the Act's required 

one

-time transition tax and the reevaluation of our deferred taxes, offset by the favorable impact of foreign earnings taxed at less than the U.S. statutory rate. As a fiscal taxpayer, our U.S. federal statutory rate for the year ending

June 30, 2018

is estimated to be

28.06%

and is a blended rate of the historic

35%

statutory rate and the newly enacted

21%

rate. We expect our U.S. federal statutory rate to be

21%

for fiscal years beginning after

June 30, 2018.

As part of the Act, we are required to recognize a

one

-time deemed repatriation transition tax based on our total post-

1986

earnings and profits (E&P) from our Swiss subsidiary NAIE. This accumulated E&P amount has historically been considered permanently reinvested thereby allowing us to defer recognizing any U.S. income tax on the amount. As a result of the Act we recorded a provisional amount for our

one

-time transition tax liability resulting in an increase in income tax expense during the

three

and

six

months ended

December 31, 2017

of

$1,815,966

,

which was treated as a discrete expense. In accordance with the provisions of the Act, we will elect to pay this tax over an

eight

-year period. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount

may

change when we finalize the calculation at the conclusion of fiscal

2018.

As of

December 31, 2017,

we

no

longer consider undistributed foreign earnings from NAIE as indefinitely reinvested. As a result, we have recorded

$775,000

in estimated foreign withholding taxes on the amounts deemed repatriated under the Act, which was also treated as a discrete expense during the period.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are measured using enacted tax rates for each of the jurisdictions in which we operate,

and the tax rates

expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As of

December 31, 2017,

we remeasured certain deferred tax assets and liabilities based on the tax rates expected to apply in the future. For deferred tax asset and liability balances we expect to reverse during fiscal

2018

we used the blended U.S. statutory rate of

28.06%

and for amounts expected to reverse in future periods we used the newly enacted

21%

tax rate. However, we are still analyzing certain aspects of the Act and refining our calculations accordingly. This analysis and refinement could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount we recorded from our remeasurement of our deferred tax balance was

$664,000

and was treated as a discrete expense for the

three

and

six

months ended

December 31, 2017.

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than

not

to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than

not

that some portion or all of the deferred tax assets will ultimately be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the

three

and

six

months ended

December 31, 2017,

there was

no

change to our valuation allowance.

We are subject to taxation in the U.S., Switzerland and various U.S. state jurisdictions. Our tax returns for the

fiscal years ended

June 

30,

2014

and forward are subject to examination by U.S. tax authorities and for fiscal years ended

June 30,

2007

and forward are subject to examination by state tax authorities. Our tax filings for the fiscal year ended

June 

30,

2015

and forward are subject to examination by Swiss tax authorities.

It is our policy to establish reserves based on management

’s assessment of exposure for certain positions taken in previously filed tax returns that

may

become payable upon audit by tax authorities. Our tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to the reserves. There were

no

adjustments to these reserves in the

three

and

six

months ended

December 31, 2017.