H. Income Taxes

The effective tax rate for the

three

months ended

March 31, 2019

was

18.9%

and the effective tax rate for the

nine

months ended

March 31, 2019

was

20.1%.

The rates differ slightly from the fiscal

2019

U.S. federal statutory rate of

21%

primarily due to the favorable impact of foreign earnings of NAIE, which are taxed at less than the U.S. statutory rate, as well as discrete tax items related to vesting of employee restricted stock.

The effective tax rate for the

three

months ended

March 31, 2018

was

21.1%

and the effective tax rate for the

nine

months ended

March 31, 2018

was

69.4%.

The effective tax rates for the

three

and

nine

months ended

March 31, 2018

differ from our fiscal

2018

U.S. federal statutory rate of

28.06%

primarily due to discrete items related to the Tax Cuts and Jobs Act (“the Tax Act”) enacted in

December 2017.

Our U.S. federal statutory rate for the year ending

June 30, 2018

was

28.06%,

which is a blended rate of the historic

35%

statutory rate and the

21%

rate stipulated by the Act.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which 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 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. There were

significant discrete items for the

three

nine

months ended

March 31, 2019.

Included in our tax expenses for the

three

and

nine

months ended

March 31, 2018,

$3.3

million of discrete tax items related to the Tax Act. The discrete items include:

●

$1.8

million associated with a

one

-time transition tax that was calculated 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 outside the U.S. thereby allowing us to defer recognizing any U.S. income taxes on the amount of such E&P. However, under the Tax Act we are required to pay this tax based on a deemed repatriation into the U.S. of such E&P. In accordance with the provisions of the Tax Act, we elected to pay this tax over an

eight

-year period.

●

As of and since

March 31, 2018,

longer consider undistributed foreign earnings from NAIE earned before

March 31, 2018

to be indefinitely reinvested. As a result, we recorded

$775,000

in estimated foreign withholding taxes on the amounts deemed repatriated under the Act.

●

We remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future. The amount recorded during the

second

quarter of fiscal

2018

was based on whether the amounts were expected to reverse in fiscal

2018

at a blended U.S. rate of

28.06%

or reverse in future periods at a rate of

21%.

This amount was considered provisional under implementation of the Tax Act as we were still analyzing various aspects of the Act. The provision amount recorded during

nine

months ended

March 31, 2018

from the remeasurement of our deferred tax balance was

$664,000.

We record valuation allowances to reduce our deferred tax assets to an amount 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 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

nine

months ended

March 31, 2019,

there was

change to our valuation allowance for our deferred tax assets.

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, 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 as income or expense in the period that includes the enactment date for such new rates.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended

June 30,

2016

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

June 30, 2007,

2008,

2009,

as well as for the fiscal years ended

June 30,

2015

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 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 those reserves. There were

adjustments to reserves in the

three

nine

month periods ended

March 31, 2019.