Note 7.

Income Taxes

The components of income (loss) before income taxes were as follows:

Year Ended June 30,	2015			2014			2013
($000)
U.S. income (loss)	$	(5,326	)	$	(2,863	)	$	19,253
Non-U.S. income		84,438			48,504			58,233
Total Earnings Before Tax	$	79,112		$	45,641		$	77,486

The components of income tax expense (benefit) from continuing operations were as follows:

Year Ended June 30,	2015			2014			2013
($000)
Current:
Federal	$	(146	)	$	(1,067	)	$	2,759
State		86			152			68
Foreign		16,978			12,675			13,977
Total Current	$	16,918		$	11,760		$	16,804
Deferred:
Federal	$	(2,762	)	$	(16	)	$	1,721
State		(251	)		148			113
Foreign		(768	)		(4,567	)		128
Total Deferred	$	(3,781	)	$	(4,435	)	$	1,962
Total Income Tax Expense	$	13,137		$	7,325		$	18,766

Principal items comprising deferred income taxes were as follows:

June 30,	2015			2014
($000)
Deferred income tax assets
Inventory capitalization	$	6,614		$	5,402
Non-deductible accruals		1,902			1,926
Accrued employee benefits		10,297			9,226
Net-operating loss and credit carryforwards		22,232			21,976
Share-based compensation expense		13,222			16,005
Other		1,468			577
Valuation allowances		(2,713	)		(2,212	)
Total deferred income tax assets	$	53,022		$	52,900
Deferred income tax liabilities
Tax over book accumulated depreciation	$	(15,937	)	$	(17,625	)
Intangible assets		(25,132	)		(25,505	)
Tax on unremitted earnings		(1,753	)		(714	)
Other		(2,520	)		(2,072	)
Total deferred income tax liabilities	$	(45,342	)	$	(45,916	)
Net deferred income taxes	$	7,680		$	6,984

The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:

Year Ended June 30,	2015			%			2014			%			2013			%
($000)
Taxes at statutory rate	$	27,689			35		$	15,974			35		$	27,120			35
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit		(196	)		-			254			1			168			-
Taxes on non U.S. earnings		(11,687	)		(15	)		(6,672	)		(15	)		(6,991	)		(9	)
Settlement of unrecognized tax benefits		-			-			-			-			-			-
Research and manufacturing incentive deductions		(2,573	)		(3	)		(2,190	)		(5	)		(1,458	)		(2	)
Other		(96	)		-			(41	)		-			(73	)		-
	$	13,137			17		$	7,325			16		$	18,766			24

During the fiscal years ended June 30, 2015, 2014, and 2013, net cash paid by the Company for income taxes was $13.0 million, $17.2 million, and $11.9 million, respectively.

Our foreign subsidiaries in the Philippines operate under various tax holiday arrangements. The benefits of such arrangements phase out through the fiscal year ended June 30, 2019. The impact of the tax holidays on our effective rate is a reduction in the rate of 0.22%, 0.12% and 0.07% for the fiscal years ended June 30, 2015, 2014 and 2013 respectively.

The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $419 million at June 30, 2015. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an additional deferred tax liability of approximately $83 million would have been required as of June 30, 2015. It is the Company’s intention to permanently reinvest substantially all of its undistributed earnings of its foreign subsidiaries; therefore, no provision has been made for future income taxes on the undistributed earnings of the majority of foreign subsidiaries, as they are considered indefinitely reinvested. The Company has provided a deferred tax liability for future income taxes on the earnings of certain foreign subsidiaries as these earnings are planned to be repatriated.

The sources of differences resulting in deferred income tax expense (benefit) from continuing operations and the related tax effect of each were as follows:

Year Ended June 30,	2015			2014			2013
($000)
Depreciation and amortization	$	(1,844	)	$	(3,581	)	$	(2,825	)
Inventory capitalization		(1,273	)		646			84
Net operating loss and credit carryforwards net of valuation allowances		418			533			4,786
Share-based compensation expense		(1,029	)		(984	)		(3,487	)
Other		(53	)		(1,049	)		3,404
	$	(3,781	)	$	(4,435	)	$	1,962

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2015:

Type	Amount		Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits	$	6,179	June 2019-June 2035
Foreign tax credits		2,396	June 2024-June 2025
State tax credits		2,918	June 2016-June 2034
Operating loss carryforwards:
Loss carryforwards – federal	$	24,766	June 2027-June 2029
Loss carryforwards – state		22,554	June 2017-June 2035
Loss carryforwards – foreign		9,146	June 2016-June 2024

The Company has recorded a valuation allowance against the majority of the foreign loss carryforwards and select state tax credit carryforwards. The Company’s federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulted from the Company’s acquisitions of Photop Aegis and M Cubed and are subject to various annual limitations under Section 382 of the Internal Revenue Code.

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2015, 2014 and 2013 were as follows:

	2015			2014			2013
($000)
Balance at Beginning of Year	$	2,775		$	3,181		$	2,850
Increases in current year tax positions		2,450			298			338
Increases in prior year tax positions		203		2				-
Decreases in prior year tax positions		-			-			(7	)
Settlements		-			-			-
Expiration of statute of limitations		(1,406	)		(706	)		-
Balance at End of Year	$	4,022		$	2,775		$	3,181

The Company classifies all estimated and actual interest and penalties as income tax expense. During the fiscal year 2015, there was a benefit of $0.1 million of interest and penalties within tax expense. There was no interest and penalties within income tax expense for fiscal year 2014. During the fiscal years ended June 30, 2013, the Company recognized $0.1 million of expense for interest and penalties within income tax expense. The Company had $0.1 million, $0.2 million, and $0.2 million of interest and penalties accrued at June 30, 2015, 2014, and 2013, respectively. The increase in the Company’s current year tax positions are the result of certain unrecognized tax benefits associated with transfer pricing. The Company has classified the uncertain tax positions as non-current income tax liabilities as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate was approximately $3.6 million and $2.8 million at June 30, 2015 and 2014, respectively. The Company expects a decrease of $0.7 million of unrecognized tax benefits during the next twelve months due to the expiration of statutes of limitation.

Fiscal years 2012 to 2015 remain open to examination by the Internal Revenue Service, fiscal years 2011 to 2015 remain open to examination by certain state jurisdictions, and fiscal years 2008 to 2015 remain open to examination by certain foreign taxing jurisdictions. The Company’s fiscal years 2011 and 2012 California state income tax returns are currently under examination by the State of California’s Franchise Tax Board. The Company’s fiscal years 2012 and 2013 German income tax returns are currently under examination.